10-K 1 istr20231231_10k.htm FORM 10-K istr20231231_10k.htm
0001602658 Investar Holding Corporation false --12-31 FY 2023 419,283 467,316 20,513 7,922 19,476 22,025 0 0 5,000,000 5,000,000 1.00 1.00 40,000,000 40,000,000 9,748,067 9,748,067 9,901,847 9,901,847 951 12,993 694 67 1 488 0 0 0 0 1,151 1,396 0 1,697 385 0.31 0.365 0.395 1 5 3 7 1 5 0 0 1 2 441 6.8 3.2 40.1 0.1 60.0 0 1.77 1.90 1.70 0 0 0 0 0 20 2.72 38.31 3.56 6.5 4.58 5 2 2 5 5 2 5 2 5 2 21 3 1.0 1.0 5 2 6 65 21 21 0 0 0 0 false false false false Loans individually evaluated that were re-measured during the period had a carrying value of $1.0 million and $4.2 million at September 30, 2023 and December 31, 2022, respectively, with related allowance for credit losses of $0.4 million and $0.2 million as of such dates. Fair values determined through valuation analysis using coupon, yield (discount margin), liquidity and expected repayment dates. 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. For the year ended December 31, 2021, the provision for loan losses includes a $21.6 million impairment recorded for one of the Company’s loan relationships as a result of Hurricane Ida. The corresponding loan balances in the same amount were then charged off. The allowance for credit losses on unfunded loan commitments is included in “Accrued taxes and other liabilities” in the accompanying consolidated balance sheets. The related provision for credit losses on unfunded loan commitments is included in “Provision for credit losses” in the accompanying consolidated statements of income for the year ended December 31, 2023. On January 1, 2023, the Company adopted ASU 2016-13, which introduced a new model known as CECL. Refer to Note 1. Summary of Significant Accounting Policies for more information on the adoption of ASU 2016-13. Amounts as of December 31, 2023 reflect the impact of adopting the CECL accounting standard and the Company’s transition from a probable incurred loss methodology to the current expected credit loss methodology. Prior period amounts represent the allowance for loan losses under the probable incurred loss methodology. For the year ended December 31, 2023, the $2.0 million negative provision for credit losses on the consolidated statement of income includes a $2.0 million negative provision for loan losses and a $36,000 negative provision for unfunded loan commitments. Weighted by relative fair value. 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Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

_____________________________________

 

FORM 10-K

_____________________________________

 

(Mark One)

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

For the fiscal year ended December 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

(State or other jurisdiction of

incorporation or organization)

27-1560715

(I.R.S. Employer

Identification No.)

10500 Coursey Blvd., 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

 

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark whether the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes  ☐    No  ☑

Indicate by check mark whether the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes  ☐    No  ☑

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, 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 has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.

If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. 

Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  ☑

The aggregate market value of the voting stock held by non-affiliates of the registrant, computed by reference to the closing price of the common stock as of June 30, 2023, was approximately$112.0 million.

The number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date, is as follows: Common stock, $1.00 par value per share, 9,781,946 shares outstanding as of March 4, 2024.

 

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Definitive Proxy Statement relating to the 2024 Annual Meeting of Shareholders of Investar Holding Corporation are incorporated by reference into Part III of the Form 10-K. Such Definitive Proxy Statement will be filed with the Securities and Exchange Commission within 120 days after the end of the registrant’s fiscal year ended December 31, 2023.

 

 

 
 

TABLE OF CONTENTS

 

   

Page

 

PART I

 
     

Item 1.

Business

3

Item 1A.

Risk Factors

16

Item 1B.

Unresolved Staff Comments

27

Item 1C.  Cybersecurity 28

Item 2.

Properties

29

Item 3.

Legal Proceedings

29

Item 4.

Mine Safety Disclosures

29

 

PART II

 
     

Item 5.

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

29

Item 6.

[Reserved]

31

Item 7.

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

32

Item 7A.

Quantitative and Qualitative Disclosures about Market Risk

60

Item 8.

Financial Statements and Supplementary Data

61

Item 9.

Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

119

Item 9A.

Controls and Procedures

119

Item 9B.

Other Information

119

Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections 119
 

PART III

 
     

Item 10.

Directors, Executive Officers and Corporate Governance

120

Item 11.

Executive Compensation

120

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

120

Item 13.

Certain Relationships and Related Transactions, and Directors Independence

120

Item 14.

Principal Accountant Fees and Services

120

 

PART IV

 

Item 15.

Exhibit and Financial Statement Schedules

121

Item 16.

Form 10-K Summary

123

     

 

 

PART I

 

 

Item 1. Business

 

General

 

Investar Holding Corporation, a Louisiana corporation incorporated in 2009, is a financial holding company headquartered in Baton Rouge, Louisiana that conducts its operations primarily through its wholly-owned subsidiary, Investar Bank, National Association (the “Bank,” together with Investar Holding Corporation, the “Company,” “we,” “our,” or “us,”), a national bank chartered by the Office of the Comptroller of Currency (“OCC”). The Bank was originally chartered as a Louisiana commercial bank in 2006 and converted to a national bank in July 2019. Through the Bank, the Company offers a wide range of commercial banking products tailored 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. These markets are served from our executive and operations center located in Baton Rouge and from 28 full service branches located throughout our market areas. We have experienced significant growth since the Bank was chartered, completing seven whole-bank acquisitions and establishing additional branches in our market areas.

 

As of December 31, 2023, on a consolidated basis, the Company had total assets of $2.8 billion, net loans of $2.2 billion, total deposits of $2.3 billion, and stockholders’ equity of $226.8 million.

 

During 2023, we pivoted our near-term strategy from primarily a growth strategy to primarily a focus on consistent, quality earnings through the optimization of our balance sheet. Our long-term strategy includes organic growth through high quality loans and growth through acquisitions, including whole-bank acquisitions, strategic branch acquisitions and asset acquisitions. In order to improve efficiencies and leverage our digital initiatives, during the last three fiscal years we closed five branches, sold three tracts of land held for future branch locations, and completed the sale of two branches. In January 2024, we closed a branch in our Alabama market. Consistent with our current strategy, we exited the consumer mortgage origination business in the third quarter of 2023. Over time, management believes that we have significant opportunities for growth and franchise expansion, both organically and through strategic acquisitions. Although the financial services industry is rapidly changing and intensely competitive, and likely to remain so, we believe that the Bank competes effectively as a local community bank and possesses the availability of local access and responsive customer service, coupled with competitively-priced products and services, necessary to successfully compete with other financial institutions for individual and small to medium-sized business customers.

 

All cross-references to the “Notes” in this Form 10-K refer to the Notes to Consolidated Financial Statements contained in Item 8. Financial Statements and Supplementary Data. 

 

The information set forth in this Annual Report on Form 10-K is as of March 7, 2024, unless otherwise indicated herein.

 

Operations

 

General. We offer a full range of commercial and retail lending products throughout our market areas, including business loans to small to medium-sized businesses as well as loans to individuals. Our business lending products include owner-occupied commercial real estate loans, construction loans and commercial and industrial loans, such as term loans, equipment financing and lines of credit, while our loans to individuals include first and second mortgage loans, installment loans, and lines of credit. For business customers, we target small to medium-sized businesses and professional organizations such as law firms, accounting firms and medical practices.

 

Management considers all of our operations to be aggregated in one reportable operating segment, and accordingly, no separate segment disclosures are presented in this report.

 

Lending Activities. Income generated by our lending activities represents a substantial portion of our total revenue. For the years ended December 31, 2023, 2022 and 2021, income from our lending activities comprised 84%, 76%, and 84%, respectively, of our total revenue. Over the last three fiscal years, we have increased our focus on commercial real estate loans and commercial and industrial loans.

 

 

Lending to Businesses. Our lending to small to medium-sized businesses falls into three general categories:

 

 

Commercial real estate loans. Approximately 48% of our total loans at December 31, 2023 were commercial real estate loans, which include multifamily, farmland and commercial real estate loans, with owner-occupied loans comprising approximately 43% of the commercial real estate loan portfolio. Commercial real estate loan terms generally are 10 years or less, although payments may be structured on a longer amortization basis. Interest rates may be fixed or adjustable, although rates typically will not be fixed for a period exceeding 120 months, and we generally charge an origination fee. Risks associated with commercial real estate loans include, among other things, fluctuations in the value of real estate, new job creation trends, tenant vacancy rates, and the quality of the borrower’s management. We attempt to limit risk by analyzing a borrower’s cash flow and collateral value on an ongoing basis. The loans are primarily secured by commercial real estate. Also, we typically require 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. We also manage risk by avoiding concentrations in any one business or industry.

 

 

Commercial and industrial loans. Commercial and industrial loans primarily consist of working capital lines of credit and equipment loans. The terms of these loans vary by purpose and by type of underlying collateral. We make equipment loans for a term of five years or less at fixed or variable rates, with the loan fully amortized over the term and secured by the relevant piece of equipment. Loans to support working capital typically have terms not exceeding one year, and such loans are secured by accounts receivable or inventory. Fixed rate loans are priced based on collateral, term and amortization. The interest rate for floating rate loans is typically tied to the prime rate published in The Wall Street Journal. Commercial and Industrial loans include variable-rate loans to consumer finance lending companies. Loans to consumer finance lending companies accounted for approximately 8% of our total loans at December 31, 2023. Commercial and industrial loans also include public finance loans made to governmental entities, which can be taxable or tax-exempt, for purposes including debt refinancing, economic development, quality of life projects, short-term cash-flow needs, and infrastructure enhancements, among other things. Public finance loans are generally repaid using pledged revenue sources including income tax, property tax, sales tax, and utility revenue, among other sources. Public finance loans comprise less than 5% of our loan portfolio at December 31, 2023. Commercial and industrial loans accounted for approximately 25% of our total loans at December 31, 2023.

 

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. We actively monitor certain financial measures of the borrower, including advance rate, cash flow, collateral value and other appropriate credit factors. We also manage risk by avoiding concentrations in any one business or industry.

 

 

Construction and development loans. Construction and development loans, which consist of loans for the construction of commercial projects, single family residential properties and multifamily properties, accounted for approximately 9% of our total loans at December 31, 2023. Our construction and development loans are made on both a “pre-sold” basis and on a “speculative” basis. Construction and development loans are generally made with a term of 6 to 18 months, with interest accruing at either a fixed or floating rate and paid monthly. These loans are secured by the underlying project being built. For construction loans, loan to value ratios range from 70% to 80% of the developed/completed value, while for development loans our loan to value ratios typically will not exceed 70% to 75% of such value. Speculative loans are based on the borrower’s financial strength and cash flow position, and we disburse funds in installments based on the percentage of completion and only after the project has been inspected by an experienced construction lender or third-party inspector.

 

Construction lending entails significant additional risks compared to commercial real estate or residential real estate lending 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 accurately evaluate the total loan funds required to complete a project and to calculate related loan-to-value ratios. We attempt to minimize the risks associated with construction lending by limiting loan-to-value ratios as described above. In addition, as to speculative development loans, we generally make such loans only to borrowers that have a positive pre-existing relationship with us. We also manage risk by using specific underwriting policies and procedures for these types of loans and by avoiding excessive concentrations in any one business or industry.

 

 

Lending to Individuals. We make the following types of loans to our individual customers:

 

 

Residential real estate. 1-4 family residential real estate loans, including second mortgage loans, comprised approximately 19% of our total loans at December 31, 2023. Second mortgage loans in this category include only loans we make to cover the gap between the purchase price of a residence and the amount of the first mortgage; all other second mortgage loans are considered consumer loans. Loan to value ratios do not typically exceed 80%, although some of the mortgage loans that we retain in our portfolio may have higher loan to value ratios. We use an independent appraiser to establish collateral values. We generate residential real estate mortgage loans through Bank referrals and contacts with real estate agents in our markets. We do not originate subprime residential real estate loans. In the third quarter of 2023, we exited the consumer mortgage origination business. At December 31, 2023, the consumer mortgage portfolio was approximately $261.6 million, substantially all of which is included in the 1-4 family residential real estate loan category. The remaining loans in the category consisted primarily of second mortgages, home equity loans, home equity lines of credit, and business purpose loans secured by 1-4 family residential real estate.

 

 

Consumer loans. Consumer loans represented less than 1% of our total loans at December 31, 2023. We make these loans (which are normally fixed-rate loans) to individuals for a variety of personal, family and household purposes, and secured and unsecured installment and term loans. Because many consumer loans are secured by depreciable assets such as cars, boats and trailers, the loans are amortized over the useful life of the asset. The amortization of second mortgages generally does not exceed 15 years and the rates generally are not fixed for more than 60 months. As a general matter, in underwriting these loans, our credit analysts review a borrower’s past credit history, credit scores, past income level, debt history and, when applicable, cash flow, debt to income ratio, and payment to income, and determine the impact of all these factors on the ability of the borrower to make future payments as agreed. A comparison of the value of the collateral, if any, to the proposed loan amount, is also a consideration in the underwriting process. 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 us for these types of loans.

 

Deposits. We offer a broad base of deposit products and services to our individual and business clients, including savings, checking, and money market accounts, as well as a variety of certificates of deposit and individual retirement accounts. We also offer a reciprocal deposit product, Assured Checking, that allows customers to deposit funds in excess of the Federal Deposit Insurance Corporation’s (“FDIC”) $250,000 insurance limit and have the funds insured by the FDIC. We offer debit cards, internet banking, mobile banking with smartphone deposit capability as well as debit card protection settings. For our business clients, we offer a competitive suite of treasury management products which include, but are not limited to, remote deposit capture, lockbox payment processing, virtual vaults, positive pay, ACH origination, credit card processing, wire transfer, investment sweep accounts, and enhanced business internet banking.

 

Other Banking Services. The Bank’s other banking services include cashiers’ checks, direct deposit of payroll and Social Security checks, night depository, bank-by-mail, automated teller machines with deposit automation, debit cards, corporate credit cards, mobile wallet payment options, electronic statements, electronic banking for consumer and business customers, and Zelle® for consumers, a fast and easy way to send money directly between almost any bank account in the United States (“U.S.”). In addition, the Bank has options for contactless banking including interactive teller machines (“ITMs”), online account opening, and video banking. ITMs are an upgrade on traditional automated teller machine (“ATM”) technology that allow customers to virtually interact directly with Bank staff. Online account opening allows a consumer to open a number of available checking, savings, and certificate of deposit accounts online. Video banking lets customers communicate with Bank staff from a mobile device or computer without visiting a branch. The Bank does not offer trust services or insurance products.

 

 

Acquisition Activity

 

General.From time to time we evaluate potential acquisition opportunities including whole-bank acquisitions and strategic branch acquisitions. We believe there are many banking institutions that continue to face credit challenges, capital constraints and liquidity issues and that lack the scale and management expertise to manage the increasing regulatory burden. Our management team has a long history of identifying targets, assessing and pricing risk and executing acquisitions in a creative, yet disciplined, manner. We seek acquisitions that provide meaningful financial benefits, long-term organic growth opportunities and expense reductions, without compromising our risk profile. Additionally, we seek banking markets with favorable competitive dynamics and potential consolidation opportunities.

 

Recent AcquisitionsAll of our acquisition activity is evaluated and overseen by a standing Mergers and Acquisitions Committee of our board of directors. A discussion of acquisitions completed since January 1, 2020, is set forth under the heading “Certain Events That Affect Year-over-Year Comparability Acquisitions in Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations.

 

Divestiture and Sale or Closure Activity
 

Sale of two branches to First Community Bank. On January 27, 2023, the Bank sold certain assets, deposits and other liabilities associated with its Alice and Victoria, Texas locations to First Community Bank, a Texas state bank located in Corpus Christi, Texas. The Bank sold approximately $13.9 million in loans and $14.5 million in deposits.

 

Branch closures and land sales. During the last three fiscal years, we closed five branches and sold three tracts of land held for future branch locations. Three of the branches had been acquired, and the closures involved anticipated synergies that resulted in significant cost savings. In January 2024, we closed a branch in our Alabama market. We continue to evaluate opportunities to reduce our physical branch footprint and further improve efficiency through digital initiatives.

 

De Novo Branches or Conversion Activity

 

During our last three fiscal years, we have not opened any de novo branches. In the third quarter of 2023, we converted an existing loan and deposit production office in our Alabama market to a cashless branch designed to provide a digital banking experience. We do not expect to open de novo branches in 2024.

 

Competition

 

We face competition in all major product and geographic areas in which we conduct our operations. Through the Bank, we compete for available loans and deposits with state, regional and national banks, as well as savings and loan associations, credit unions, finance companies, mortgage companies, insurance companies, brokerage firms and investment companies. All of these institutions compete in the delivery of services and products through availability, quality and pricing, both with respect to interest rates on loans and deposits and fees charged for banking services. Many of our competitors are larger and have substantially greater resources than we do, including higher total assets and capitalization, greater access to capital markets, and a broader offering of financial services. As larger institutions, many of our competitors can offer more attractive pricing than we can offer and have more extensive branch networks from which they can offer their financial services products.

 

 

While we continually strive to offer competitive pricing for our banking products, we believe that our community bank approach to customers, focusing on quality customer service, and maintaining strong customer relationships affords us the best opportunity to successfully compete with other institutions. In addition, as a smaller institution, we think we can be flexible in developing and implementing new products and services. Further, in recent years there has been consolidation activity involving banks with a presence in our markets. In our view, mergers and other business combinations within our markets provide us with growth opportunities. Many acquisitions, especially when local institutions are acquired by institutions based outside our markets, result not only in customer disruption, but also in a loss of market knowledge and relationships that we believe provide us the opportunity to acquire customers seeking a personalized approach to banking. Furthermore, acquisition activity typically creates opportunities to hire talented personnel from the combining institutions.

 

The following table sets forth certain information about our total deposits, and our share of total deposits, in specified locations, and is shown as of June 30, 2023, which is the latest date for which such information is available.

 

Location

 

Investar Total Deposits

   

Investar Share of Deposits

 
   

(in millions)

         

Baton Rouge, Louisiana

  $ 979       3.7 %

New Orleans, Louisiana

    280       0.6  

Lafayette, Louisiana

    279       3.3  

Evangeline Parish, Louisiana(1)

    165       22.1  

East and West Feliciana Parishes, Louisiana(1)

    129       20.9  

Calcasieu Parish, Louisiana(1)

    27       0.5  

Houston, Texas

    127       0.0  

Sumter County, Alabama(1)

    92       33.8  

Calhoun County, Alabama(1)

    231       9.3  

 

 

(1)

Evangeline Parish, East and West Feliciana Parishes, Calcasieu Parish, Sumter County, and Calhoun County are not included in Metropolitan Statistical Areas but are included in this table to reflect the deposit balances of our branches in these parishes and counties.

 

Supervision and Regulation

 

General. Banking is highly regulated under federal and state law. The following is a brief summary of certain aspects of that regulation which are material to us and does not purport to be a complete description of all regulations that affect us or all aspects of those regulations. To the extent particular statutory and regulatory provisions are described, the description is qualified in its entirety by reference to the particular statute or regulation.

 

We are a financial holding company registered under the Bank Holding Company Act of 1956, as amended, and are subject to supervision, regulation and examination by the Federal Reserve. The Bank is a national bank chartered under the laws of the U.S. by the OCC and is subject to supervision, regulation and examination by the OCC. This system of supervision and regulation establishes a comprehensive framework for our operations and, consequently, can have a material impact on our growth and earnings performance.

 

The primary goals of the bank regulatory scheme are to maintain a safe and sound banking system and to facilitate the conduct of sound monetary policy. This system is intended primarily for the protection of the FDIC’s deposit insurance funds, bank depositors, and the public, rather than our shareholders and creditors. The banking agencies have broad enforcement power over bank holding companies and banks, including the authority, among other things, to enjoin “unsafe or unsound” practices, require affirmative action to correct any violation or practice, issue administrative orders that can be judicially enforced, direct increases in capital, direct the sale of subsidiaries or other assets, limit dividends and distributions, restrict growth, assess civil monetary penalties, remove officers and directors, and, with respect to banks, terminate deposit insurance or place the bank into conservatorship or receivership. In general, these enforcement actions may be initiated for violations of laws and regulations or unsafe or unsound practices.

 

The Dodd-Frank Act. The Dodd-Frank Act, enacted on July 21, 2010, aims to restore responsibility and accountability to the financial system by significantly altering the regulation of financial institutions and the financial services industry. Full implementation of the Dodd-Frank Act has required many new rules to be issued by federal regulatory agencies, and it will continue to profoundly affect how financial institutions will be regulated in the future.

 

 

The Dodd-Frank Act, among other things:

 

 

established the Consumer Financial Protection Bureau (“CFPB” or “Bureau”), an independent bureau within the Federal Reserve System with centralized responsibility for promulgating and enforcing federal consumer protection laws applicable to all entities offering consumer financial products or services;

 

established the Financial Stability Oversight Council, tasked with the authority to identify and monitor institutions and systems that pose a systemic risk to the financial system;

 

changed the assessment base for federal deposit insurance from the amount of insured deposits held by the depository institution to the institution’s average total consolidated assets less tangible equity;

 

increased the minimum reserve ratio for the Deposit Insurance Fund from 1.15% to 1.35%;

 

permanently increased the deposit insurance coverage amount from $100,000 to $250,000;

 

required the federal banking agencies to make their capital requirements for insured depository institutions countercyclical, so that capital requirements increase in times of economic expansion and decrease in times of economic contraction;

 

directed the Federal Reserve to establish interchange fees for debit cards under a restrictive “reasonable and proportional cost” per transaction standard;

 

limited the ability of banking organizations to sponsor or invest in private equity and hedge funds and to engage in proprietary trading;

 

increased regulation of consumer protections regarding mortgage originations, including originator compensation, minimum repayment standards, prepayment consideration, and mortgage servicing;

 

restricted the preemption of select state laws by federal banking law applicable to national banks and disallowed subsidiaries and affiliates of national banks from availing themselves of such preemption;

 

authorized national and state banks to establish de novo branches in any state that would permit a bank chartered in that state to open a branch at that location; and

 

repealed the federal prohibition on the payment of interest on commercial demand deposits, thereby permitting depository institutions to pay interest on business transaction and other accounts.

 

Some of these provisions have had and may continue to have the consequence of increasing our expenses, decreasing our revenues, and changing the activities in which we choose to engage. Many aspects of the Dodd-Frank Act are subject to ongoing implementation (such as the recent final rulemaking discussed below on small business lending data collection); further, in the past certain provisions implemented by federal agencies have been legislatively revised or rescinded. Currently, the U.S. Supreme Court is considering a case challenging the constitutionality of the CFPB’s funding mechanism. If the Court rules that the CFPB’s funding mechanism is unconstitutional, it will likely have significant consequences for the regulations and decisions rendered by the CFPB. While we cannot predict what effect any presently contemplated or future changes in the laws or regulations or their interpretations would have on us, these changes could be materially adverse to our financial condition and results of operations.

 

Small Business Lending Data Collection and Reporting. On March 30, 2023, the CFPB issued a final rule implementing Section 1071 of the Dodd-Frank Act. The final rule requires financial institutions to collect and report data to the CFPB on small business loan applicants, including demographic data, lending decisions and the price and terms of credit. The purpose of the rulemaking is to increase transparency and combat discrimination in small business lending. As of the date of this report, implementation and enforcement of the rule has been enjoined until the U.S. Supreme Court renders its decision on the constitutionality of the CFPB’s funding mechanism.

 

Interchange Fees. As noted above, the Dodd-Frank Act directed the Federal Reserve to establish interchange fees for debit cards under a restrictive “reasonable and proportional cost” per transaction standard (known as the “Durbin Amendment”). The Federal Reserve issued final rules implementing the Durbin Amendment in 2011, which capped interchange fees on debit cards. In October 2023, the Federal Reserve requested comment on a proposal to significantly lower the maximum interchange fee that a debit card issuer can receive for a debit card transaction. The proposed rule also includes a process that would result in automatic revisions to the interchange fee cap every two years without public comment. While the current interchange fee cap on debit cards are, and the proposed rules would be only applicable to banks with over $10 billion in total assets, banks with under $10 billion in total assets such as the Bank could potentially indirectly face fee pressure in operating debit card programs should the proposal be adopted in its current form.

 

The Volcker Rule. On December 10, 2013, the Federal Reserve and the other federal banking regulators as well as the SEC each adopted a final rule implementing Section 619 of the Dodd-Frank Act, commonly referred to as the “Volcker Rule.” Generally speaking, the final rule prohibited a bank and its affiliates from engaging in proprietary trading and from sponsoring certain “covered funds” or from acquiring or retaining any ownership interest in such covered funds. Most private equity, venture capital and hedge funds are considered “covered funds” as are bank trust preferred collateralized debt obligations. The final rule required banking entities to divest disallowed securities by July 21, 2015, subject to extension upon application. The Economic Growth, Regulatory Relief, and Consumer Protection Act which was enacted in 2018 amended Section 619 of the Dodd-Frank Act to exempt from the Volcker Rule any insured depository institution that has $10.0 billion or less in total consolidated assets and whose total trading assets and trading liabilities are 5.0% or less of total consolidated assets; therefore, the Bank is currently exempt from the Volcker Rule.

 

 

Regulatory Capital Requirements

 

Capital Adequacy. The Federal Reserve Board monitors the capital adequacy of the Company, on a consolidated basis, and the OCC monitors the capital adequacy of the Bank. The regulatory agencies use a combination of risk-based guidelines and a leverage ratio to evaluate capital adequacy and consider these capital levels when taking action on various types of applications and when conducting supervisory activities related to safety and soundness. The risk-based capital standards are designed to make regulatory capital requirements more sensitive to differences in risk profiles among financial institutions and their holding companies, to account for off-balance sheet exposure, and to minimize disincentives for holding liquid assets. A financial institution’s assets and off-balance sheet items, such as letters of credit and unfunded loan commitments, are assigned to broad risk categories, each with appropriate risk weights. Regulatory capital, in turn, is classified in one of two tiers. “Tier 1” capital includes two components: (1) common equity Tier 1 capital and (2) additional Tier 1 capital. Common equity Tier 1 capital consists solely of common stock (plus related surplus), retained earnings and limited amounts of minority interests that are in the form of common stock. Additional Tier 1 capital includes other perpetual instruments historically included in Tier 1 capital, such as non-cumulative perpetual preferred stock. “Tier 2” capital includes, among other things, qualifying subordinated debt and allowances for credit losses, subject to limitations. The resulting capital ratios represent capital as a percentage of total risk-weighted assets and off-balance sheet items. Pursuant to the 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.

 

Under the current regulatory framework, we are required to maintain the following minimum regulatory capital ratios:

 

 

A ratio of common equity Tier 1 capital to total risk-weighted assets of at least 4.5%;

 

A ratio of Tier 1 capital to total risk-weighted assets of at least 6.0%;

 

A ratio of Tier 1 capital plus Tier 2 capital to total risk-weighted assets of at least 8.0%; and

 

A leverage ratio (Tier 1 capital to adjusted total assets) of at least 4.0%.

 

In addition to these minimum regulatory capital ratios, the regulations establish a capital conservation buffer with respect to the first three capital ratios listed above. Specifically, banking organizations must hold common equity Tier 1 capital in excess of their minimum risk-based capital ratios by at least 2.5% of risk-weighted assets in order to avoid limits on capital distributions (including dividend payments, discretionary payments on Tier 1 instruments, and stock buybacks) and certain discretionary bonus payments to executive officers. Thus, when including the 2.5% capital conservation buffer, a bank holding company and bank’s minimum ratio of common equity Tier 1 capital to total risk-weighted assets becomes 7%, its minimum ratio of Tier 1 capital to total risk-weighted assets becomes 8.5%, and its minimum ratio of total capital to total risk-weighted assets becomes 10.5%.

 

We were in compliance with all applicable minimum regulatory capital requirements, including the capital conservation buffer, as of December 31, 2023.

 

The required capital ratios set forth above are minimums, and the Federal Reserve and the OCC may determine that a banking organization, based on its size, complexity or risk profile, must maintain a higher level of capital in order to operate in a safe and sound manner. Risks such as concentration of credit risks and the risk arising from non-traditional activities, as well as the institution’s exposure to a decline in the economic value of its capital due to changes in interest rates, and an institution’s ability to manage those risks are important factors that are to be taken into account by the federal banking agencies in assessing an institution’s overall capital adequacy.

 

The federal banking agencies finalized a rule in 2019 that allows bank holding companies and banks with less than $10.0 billion in total consolidated assets, limited amounts of certain assets and off-balance sheet exposures, and a leverage ratio of greater than 9% to elect to use the Community Bank Leverage Ratio (“CBLR”) framework. A community banking organization electing to use the CBLR framework would have a simplified capital regime and would be considered well capitalized as long as it had a leverage ratio of greater than 9%. We have not elected to use the CBLR framework, and it is uncertain if we will elect to use the CBLR framework in the future.

 

Furthermore, the U.S. federal banking agencies have finalized rules that permit bank holding companies and banks to phase-in, for regulatory capital purposes, the day-one impact of the new current expected credit loss accounting rule in retained earnings over a period of three years commencing with time of adoption of the new standard. We did not make the election to phase in the impact of CECL on our regulatory capital calculations because the adoption of CECL did not have a significant impact on our regulatory capital ratios. For further discussion of the new current expected credit loss accounting rule, see Note 1. Summary of Significant Accounting Policies – Accounting Standards Adopted in 2023, and also see “Our allowance for credit losses may prove to be insufficient to absorb losses inherent in our loan portfolio, and we may be required to further increase our provision for credit losses. This risk may be heightened by our adoption of the Current Expected Credit Loss accounting standard effective January 1, 2023. If our actual credit losses exceed our allowance for credit losses, our net income will decrease.” in Item 1A. Risk Factors.

 

 

Prompt Corrective Action Regulations. Under the prompt corrective action regulations, the OCC is required and authorized to take supervisory actions against undercapitalized banks. For this purpose, a bank is placed in one of the following five categories based on its capital: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized. Under the prompt corrective action regulations, as currently in effect, to be well capitalized, a bank must have a leverage capital ratio of at least 5%, a common equity Tier 1 capital ratio of at least 6.5%, a Tier 1 risk-based capital ratio of at least 8%, and a total risk-based capital ratio of at least 10%, and must not be subject to any order or written agreement or directive by a federal banking agency to meet and maintain a specific capital level for any capital measure.

 

Federal banking regulators are required to take various mandatory supervisory actions and are authorized to take other discretionary actions with respect to banks in the three undercapitalized categories that, if undertaken, could have a material adverse effect on the bank's operations or financial condition. The severity of the action depends upon the capital category in which the bank is placed. Generally, subject to a narrow exception, banking regulators must appoint a receiver or conservator for a bank that is critically undercapitalized. The federal banking agencies have specified by regulation the relevant capital level for each category. A bank that is categorized as undercapitalized, significantly undercapitalized, or critically undercapitalized is required to submit an acceptable capital restoration plan to its appropriate federal banking agency. An undercapitalized bank also is generally prohibited from increasing its average total assets, making acquisitions, establishing any branches or engaging in any new line of business, except under an accepted capital restoration plan or with OCC approval. The regulations also establish procedures for downgrading a bank to a lower capital category based on supervisory factors other than capital. Additionally, only a well-capitalized depository bank may accept or renew brokered deposits without prior regulatory approval.

 

Furthermore, a bank holding company must guarantee that a subsidiary depository institution meets its capital restoration plan, subject to various limitations. The controlling holding company’s obligation to fund a capital restoration plan is limited to the lesser of 5% of an undercapitalized subsidiary’s assets at the time it became undercapitalized or the amount required to meet regulatory capital requirements.

 

The capital classification of a bank affects the frequency of regulatory examinations, the bank’s ability to engage in certain activities, and the deposit insurance premiums paid by the bank. As of December 31, 2023, the Bank met the requirements to be categorized as well capitalized under the prompt corrective action framework as currently in effect.

 

Acquisitions by Bank Holding Companies

 

Federal laws, including the Bank Holding Company Act and the Change in Bank Control Act, impose additional prior notice or approval requirements and ongoing regulatory requirements on any investor that seeks to acquire direct or indirect “control” of an FDIC-insured depository institution or bank holding company. We must obtain the prior approval of the Federal Reserve before (1) acquiring more than 5% of the voting stock of any bank or other bank holding company, (2) acquiring all or substantially all of the assets of any bank or bank holding company, or (3) merging or consolidating with any other bank holding company. The Federal Reserve may determine not to approve any of these transactions if it would result in or tend to create a monopoly or substantially lessen competition or otherwise function as a restraint of trade, unless the anti-competitive effects of the proposed transaction are clearly outweighed by the public interest in meeting the convenience and needs of the community to be served. The Federal Reserve is also required to consider the financial and managerial resources and future prospects of the bank holding companies and banks concerned, the convenience and needs of the community to be served, and the record of a bank holding company and its subsidiary bank(s) in combating money laundering activities. In addition, a failure to implement and maintain adequate compliance programs could cause the Federal Reserve or other banking regulators not to approve an acquisition when regulatory approval is required or to prohibit an acquisition even if approval is not required.

 

If the Bank seeks to acquire another depository institution or branches of another depository institution, it is required to obtain the prior approval of the OCC. In reviewing the application, the OCC will consider, among other things, the Bank’s capital level, its financial and managerial resources and future prospects, the impact of the transaction on the Bank’s safety and soundness, the impact of the transaction on competition in the relevant geographic market, its record in combating money laundering activities, the impact on the convenience and needs of the communities served, and the Bank’s record of Community Reinvestment Act performance.

 

Scope of Permissible Bank Holding Company Activities

 

In general, the Bank Holding Company Act limits the activities permissible for bank holding companies to the business of banking, managing or controlling banks, and such other activities as the Federal Reserve has determined to be so closely related to banking as to be properly incident thereto.

 

 

A bank holding company may elect to be treated as a financial holding company and receive expanded powers if it and its depository institution subsidiaries are “well capitalized” and “well managed,” and its subsidiary banks controlled by it have at least a “satisfactory” Community Reinvestment Act rating. We have elected for the Company to be treated as a financial holding company. As a financial holding company, we may engage in a range of activities that are (1) financial in nature or incidental to such financial activity or (2) complementary to a financial activity and which do not pose a substantial risk to the safety and soundness of a depository institution or to the financial system generally. These activities include securities dealing, underwriting and market making, insurance underwriting and agency activities, merchant banking and insurance company portfolio investments. Expanded financial activities of financial holding companies generally will be regulated according to the type of such financial activity: banking activities by banking regulators; securities activities by securities regulators; and insurance activities by insurance regulators.

 

The Bank Holding Company Act does not place territorial limitations on permissible non-banking activities of bank holding companies. The Federal Reserve has the power to order any bank holding company or its subsidiaries to terminate any activity or to terminate its ownership or control of any subsidiary when the Federal Reserve has reasonable grounds to believe that continuation of such activity or such ownership or control constitutes a serious risk to the financial soundness, safety or stability of any bank subsidiary of the bank holding company.

 

Source of Strength Doctrine for Bank Holding Companies

 

Under longstanding Federal Reserve policy which has been codified by the Dodd-Frank Act, we are expected to act as a source of financial strength to, and to commit resources to support, the Bank. This support may be required at times when we may not be inclined to provide it. In addition, any capital loans that we make to the Bank are subordinate in right of payment to deposits and to certain other indebtedness of the Bank. In the event of our bankruptcy, any commitment by us to a federal bank regulatory agency to maintain the capital of the Bank will be assumed by the bankruptcy trustee and entitled to a priority of payment.

 

Dividends

 

As a bank holding company, we are subject to certain restrictions on dividends under applicable banking laws and regulations. The Federal Reserve has issued a policy statement that provides that a bank holding company should not pay dividends unless: (1) its net income over the last four quarters (net of dividends paid) has been sufficient to fully fund the dividends; (2) the prospective rate of earnings retention appears to be consistent with the capital needs, asset quality and overall financial condition of the bank holding company and its subsidiaries; and (3) the bank holding company will continue to meet minimum required capital adequacy ratios. Accordingly, a bank holding company should not pay cash dividends that exceed its net income or that can only be funded in ways that weaken the bank holding company’s financial health, such as by borrowing. The Dodd-Frank Act imposes, and Basel III effected, additional restrictions on the ability of banking institutions to pay dividends (including failure to maintain capital above the Basel III capital conservation buffer). The Federal Reserve may further restrict the payment of dividends by engaging in supervisory action to restrict dividends or by requiring us to maintain a higher level of capital than would otherwise be required under any applicable minimum capital requirements.

 

Our ability to pay dividends depends in part upon the receipt of dividends from the Bank. The Bank is also subject to certain restrictions on dividends under federal laws, regulations and policies. In general, under OCC regulations, the Bank may pay dividends to us without the approval of the OCC only so long as the amount of the dividend does not exceed the Bank’s net income earned during the current year (net of dividends paid) combined with its retained net income (net of dividends paid) of the immediately preceding two years. The Bank must obtain the approval of the OCC for any amount in excess of this threshold. Further, a national bank may not pay a dividend in excess of its undivided profits. In addition, under federal law, the Bank may not pay any dividend to us if it is undercapitalized or the payment of the dividend would cause it to become undercapitalized. The OCC may further restrict the payment of dividends by requiring the Bank to maintain a higher level of capital than would otherwise be required to be adequately capitalized for regulatory purposes. Moreover, if, in the opinion of the OCC, the Bank is engaged in an unsound practice (which could include the payment of dividends even within the legal requirements noted above), the OCC may require the Bank to cease such practice. The OCC has indicated that paying dividends that deplete a depository institution’s capital base to an inadequate level would be an unsafe banking practice.

 

 

Restrictions on Transactions with Affiliates and Loans to Insiders

 

Federal law strictly limits the ability of banks to engage in transactions with their affiliates, including their parent bank holding companies. Sections 23A and 23B of the Federal Reserve Act, and Federal Reserve Regulation W, impose quantitative limits, qualitative standards, and collateral requirements on certain transactions by a bank with, or for the benefit of, its affiliates, and generally require those transactions to be on terms at least as favorable to the bank as transactions with non-affiliates and to be consistent with safe and sound practices. The Dodd-Frank Act significantly expanded the coverage and scope of the limitations on affiliate transactions within a banking organization, including an expansion of the types of transactions that are covered transactions to include credit exposures related to derivatives, repurchase agreements and securities lending arrangements and an increase in the amount of time for which collateral requirements regarding covered transactions must be satisfied.

 

Federal law also limits a bank’s authority to extend credit to its directors, executive officers and 10% shareholders, as well as to entities controlled by such persons. Among other things, extensions of credit to insiders are required to be made on terms that are substantially the same as and follow credit underwriting procedures that are not less stringent than those prevailing for comparable transactions with unaffiliated persons. Also, the terms of such extensions of credit may not involve more than the normal risk of repayment or present other unfavorable features and may not exceed certain limitations on the amount of credit extended to such persons, individually and in the aggregate, which limits are based, in part, on the amount of the bank’s capital.

 

Incentive Compensation Guidance

 

The federal banking agencies have issued comprehensive guidance on incentive compensation policies. This guidance is designed to ensure that a financial institution’s incentive compensation structure does not encourage imprudent risk taking, which may undermine the safety and soundness of the institution. The guidance, which applies to all employees that have the ability to materially affect an institution’s risk profile, either individually or as part of a group, is based upon three primary principles: (1) balanced risk taking incentives; (2) compatibility with effective controls and risk management; and (3) strong corporate governance.

 

An institution’s supervisory ratings will incorporate any identified deficiencies in an institution’s compensation practices, and it may be subject to an enforcement action if the incentive compensation arrangements pose a risk to the safety and soundness of the institution. Further, regulations may limit discretionary bonus payments to bank executives if the institution’s regulatory capital ratios fail to exceed certain thresholds.

 

Deposit Insurance Assessments

 

FDIC insured banks are required to pay deposit insurance assessments to the FDIC. The amount of the assessment is based on the size of the bank’s assessment base, which is equal to its average consolidated total assets less its average tangible equity, and its risk classification under an FDIC risk-based assessment system. Institutions assigned to higher risk classifications (that is, institutions that pose a higher risk of loss to the Deposit Insurance Fund) pay assessments at higher rates than institutions that pose a lower risk. An institution’s risk classification is assigned based on certain financial data and the level of supervisory concern that the institution poses to the regulators. In addition, the FDIC can impose special assessments in certain instances. As noted above, the Dodd-Frank Act changed the way that deposit insurance premiums are calculated. Action by the FDIC to replenish the Deposit Insurance Fund when needed could result in higher assessment rates, which could reduce our profitability or otherwise negatively impact our operations. The FDIC issued a final rule in October 2022 increasing deposit insurance assessments beginning in the first quarterly assessment period of 2023. On November 16, 2023, the FDIC Board of Directors approved a final rule to implement a special assessment on banks with over $5 billion in total assets to recover the loss to the Deposit Insurance Fund associated with protecting uninsured depositors following the closures of Silicon Valley Bank and Signature Bank. The Federal Deposit Insurance Act requires the FDIC to take this action in connection with the systemic risk determination announced on March 12, 2023. While we are not subject to this special assessment, we may be required to pay higher FDIC insurance premiums in the future if there are additional bank or financial institution failures or if the FDIC otherwise determines to increase assessment rates.

 

Branching and Interstate Banking

 

Under federal law, the Bank is permitted to establish additional branch offices within Louisiana, subject to the approval of the OCC. As a result of the Dodd-Frank Act, the Bank may also establish additional branch offices outside of Louisiana, subject to prior regulatory approval, so long as the laws of the state where the branch is to be located would permit a state bank chartered in that state to establish a branch. The Bank may also establish offices in other states by merging with banks or by purchasing branches of other banks in other states, subject to certain restrictions.

 

Community Reinvestment Act

 

The Bank is required under the Community Reinvestment Act, or CRA, and related OCC regulations to help meet the credit needs of its communities, including low and moderate-income borrowers. In connection with its examination of the Bank, the OCC assesses our record of compliance with the CRA. The Bank’s failure to comply with the provisions of the CRA could, at a minimum, result in denial of certain corporate applications, such as branches or mergers, or in restrictions on its or the Company’s activities. The Bank received a “Satisfactory” CRA rating on its most recent CRA Performance Evaluation. The CRA requires all FDIC-insured institutions to publicly disclose their rating. 

 

On October 24, 2023, the federal banking agencies adopted a final rule to modernize the CRA regulations. Under the final rule, (1) the federal banking agencies will evaluate bank performance across the varied activities they conduct and communities in which they operate in order to encourage banks to expand access to credit, investment, and banking services in low- and moderate-income communities, (2) the CRA regulations are updated to evaluate lending outside traditional assessment areas generated by the growth of non-branch delivery systems, such as online and mobile banking, branchless banking, and hybrid models, (3) a new metrics-based approach was adopted to evaluate bank retail lending and community development financing, using benchmarks based on peer and demographic data and (4) CRA evaluations and data collection are tailored according to bank size and type. In addition, the final rule exempts small and intermediate banks from new data requirements that apply to banks with assets of at least $2 billion and limits certain new data requirements to large banks with assets greater than $10 billion. Most of the rule’s requirements will be applicable beginning January 1, 2026. The remaining requirements, including the data reporting requirements, will be applicable on January 1, 2027. We continue to evaluate the new rule and its effects on our operations going forward. The new rules are complex and likely to increase our costs.

 

 

Concentrated Commercial Real Estate Lending Regulations

 

The federal bank regulatory agencies have promulgated guidance governing financial institutions with concentrations in commercial real estate lending. The guidance provides that a bank has a concentration in commercial real estate lending if (i) total reported loans for construction, land development, and other land represent 100% or more of total capital or (ii) total reported loans secured by multifamily and nonfarm nonresidential properties and loans for construction, land development, and other land represent 300% or more of total capital and the bank’s commercial real estate loan portfolio has increased 50% or more during the prior 36 months. Owner-occupied loans are excluded from this second category. If a concentration is present, management must employ heightened risk management practices that address, among other things, board and management oversight and strategic planning, portfolio management, development of underwriting standards, risk assessment and monitoring through market analysis and stress testing, and maintenance of increased capital levels as needed to support the level of commercial real estate lending. At December 31, 2023, the Companydid not have a concentration in commercial real estate as defined by the regulatory guidance.

 

Financial Privacy and Cybersecurity Requirements

 

Federal law and regulations limit a financial institution’s ability to share consumer financial information with unaffiliated third parties. Specifically, these provisions require all financial institutions offering financial products or services to retail customers to provide such customers with the financial institution’s privacy policy and provide such customers the opportunity to “opt out” of the sharing of personal financial information with unaffiliated third parties. The sharing of information for marketing purposes is also subject to limitations. The Bank currently has a privacy protection policy in place.

 

Federal law and regulations also establish certain information security guidelines that require each financial institution, under the supervision and ongoing oversight of its board of directors or an appropriate committee thereof, to develop, implement, and maintain a comprehensive written information security program designed to ensure the security and confidentiality of customer information, to protect against anticipated threats or hazards to the security or integrity of such information, and to protect against unauthorized access to or use of such information that could result in substantial harm or inconvenience to any customer. These federal guidelines require a financial institution to (i) identify reasonably foreseeable internal and external threats that could result in unauthorized disclosure, misuse, alteration, or destruction of customer information or customer information systems, (ii) assess the likelihood and potential damage of these threats, taking into consideration the sensitivity of customer information, and (iii) assess the sufficiency of policies, procedures, customer information systems, and other arrangements in place to control risks. Under the federal guidelines, financial institutions have to provide notice to affected customers of a data breach under certain circumstances.

 

The federal guidelines also impose requirements on financial institutions with respect to overseeing their service providers, including (i) exercising appropriate due diligence in selecting its service providers; (ii) requiring its service providers by contract to implement appropriate measures designed to meet the objectives of the federal guidelines; and (iii) where indicated by its risk assessment, monitor its service providers to confirm that they have satisfied their obligations as required by the guidelines. The federal banking regulations also require a bank to notify its primary Federal regulator within 36 hours of the occurrence of a computer-security incident that rises to the level of a “notification incident.” A “notification incident” is defined as a computer-security incident that has materially disrupted or degraded, or is reasonably likely to materially disrupt or degrade, a banking organization’s (1) ability to carry out banking operations, activities, or processes, or deliver banking products and services to a material portion of its customer base, in the ordinary course of business; (2) business line(s), including associated operations, services, functions, and support, that upon failure would result in a material loss of revenue, profit, or franchise value; or (3) operations, including associated services, functions and support, as applicable, the failure or discontinuance of which would pose a threat to the financial stability of the U.S. A “computer-security incident” is defined as is an occurrence that results in actual harm to the confidentiality, integrity, or availability of an information system or the information that the system processes, stores, or transmits.

 

Federal banking regulators regularly issue guidance regarding cybersecurity intended to enhance cyber risk management. A financial institution is expected to implement multiple lines of defense against cyberattacks. Financial institutions are also expected to implement procedures designed to address the risks posed by potential cyber threats, and to allow the institution to respond and recover effectively after a cyberattack. The Company has adopted procedures designed to comply with the regulatory cybersecurity guidance.

 

Consumer Laws and Regulations

 

The Bank is subject to numerous laws and regulations intended to protect consumers in transactions with the Bank, including, among others, laws regarding unfair, deceptive and abusive acts and practices, usury laws, and other federal consumer protection statutes. These federal laws include the Equal Credit Opportunity Act (the “ECOA”), the Electronic Fund Transfer Act, the Fair Credit Reporting Act, the Fair Debt Collection Practices Act, the Real Estate Settlement Procedures Act of 1974, the S.A.F.E. Mortgage Licensing Act of 2008, the Truth in Lending Act and the Truth in Savings Act, among others. Many states and local jurisdictions have consumer protection laws analogous, and in addition, to those enacted under federal law. These laws and regulations mandate certain disclosure requirements and regulate the manner in which financial institutions must deal with customers when taking deposits, making loans and conducting other types of transactions. Failure to comply with these laws and regulations could give rise to regulatory sanctions, customer rescission rights, action by state and local attorneys general and civil or criminal liability.

 

In addition, the Dodd-Frank Act created the CFPB that has broad authority to regulate and supervise retail financial services activities of banks and various non-bank providers. The Bureau has authority to promulgate regulations, issue orders, guidance and policy statements, conduct examinations and bring enforcement actions with regard to consumer financial products and services. In general, however, banks with assets of $10 billion or less, such as the Bank, will continue to be examined for consumer compliance by their primary federal bank regulator. In October 2022, the U.S. Court of Appeals for the 5th Circuit issued a decision ruling that the CFPB’s funding mechanism violates the separation-of-powers principles embodied in the U.S. Constitution’s Appropriations Clause. This ruling essentially called into question the validity of the Bureau’s authority to issue regulations and pursue enforcement actions. The U.S. Supreme Court agreed to review the case and held oral argument on October 3, 2023. The Court has not yet issued its decision. We believe that the banking industry generally will continue complying with the Bureau’s regulations until clarity is provided.

 

There has been an enhanced focus by federal bank regulatory agencies with respect to industry practices relating to overdraft fees and non-sufficient funds fees. For example, the CFPB issued a Request for Information in January 2022 seeking public input with respect to financial institution practices relating to, among other areas, credit card fees, overdraft fees and non-sufficient funds fees and stated its intent to reduce these types of fees through crafting rules, issuing industry guidance and focusing supervision and enforcement resources to achieve this goal. In October 2022, the Bureau issued guidance with respect to certain practices relating to overdraft fees and bounced check fees. The FDIC issued guidance in August 2022 with respect to bank practices involving charging multiple non-sufficient funds fees on the representment of items on a deposit account. In February 2023, the Bureau issued a proposed rule that would restrict certain practices relating to credit card late fees. On April 26, 2023, the OCC issued guidance addressing risks associated with bank overdraft protection programs. On January 17, 2024, the Bureau issued a proposed rule that would require financial institutions with over $10 billion in total assets to treat overdraft loans like credit cards and other loans as well as to provide clear disclosures and other protections. On January 24, 2024, the Bureau issued a proposed rule that would prohibit non-sufficient funds fees on transactions that financial institutions decline in real time. These types of transactions include declined debit card purchases and ATM withdrawals, as well as some declined peer-to-peer payments.

 

 

Mortgage Lending Rules

 

The Dodd-Frank Act authorized the Consumer Financial Protection Bureau to establish certain minimum standards for the origination of residential mortgages, including a determination of the borrower’s ability to repay. Under the Dodd-Frank Act, financial institutions may not make a residential mortgage loan unless they make a “reasonable and good faith determination” that the consumer has a “reasonable ability” to repay the loan. The Dodd-Frank Act allows borrowers to raise certain defenses to foreclosure but provides a full or partial safe harbor from such defenses for loans that are “qualified mortgages.” The Bureau’s rules, among other things, specify the types of income and assets that may be considered in the ability-to-repay determination, the permissible sources for verification, and the required methods of calculating the loan’s monthly payments. The rules extend the requirement that creditors verify and document a borrower’s income and assets to include all information that creditors rely on in determining repayment ability. The rules also provide further examples of third-party documents that may be relied on for such verification, such as government records and check cashing or funds transfer service receipts. The rules also define “qualified mortgages,” imposing both underwriting standards and limits on the terms of their loans. Points and fees are subject to a relatively stringent cap, and the terms include a wide array of payments that may be made in the course of closing a loan. Certain loans, including interest-only loans and negative amortization loans, cannot be qualified mortgages.

 

Anti-Money Laundering and OFAC

 

Under federal law (including the Bank Secrecy Act and the USA PATRIOT Act), financial institutions must maintain anti-money laundering programs that include: established internal policies, procedures and controls; a designated compliance officer; an ongoing employee training program; and testing of the program by an independent audit function. Financial institutions are also prohibited from entering into specified financial transactions and account relationships and must meet enhanced standards for due diligence and customer identification in their dealings with foreign financial institutions and foreign customers. Financial institutions must take reasonable steps to conduct enhanced scrutiny of account relationships to guard against money laundering and to report any suspicious transactions, and law enforcement authorities have been granted increased access to financial information maintained by financial institutions.

 

The Office of Foreign Assets Control, or OFAC, is responsible for helping to ensure that U.S. entities do not engage in transactions with certain prohibited parties, as defined by various Executive Orders and Acts of Congress. OFAC publishes lists of persons and organizations suspected of aiding, harboring or engaging in terrorist acts, known as Specially Designated Nationals and Blocked Persons. Generally, if the Bank identifies a transaction, account or wire transfer relating to a person or entity on an OFAC list, it must freeze the account or block the transaction, file a suspicious activity report and notify the appropriate authorities.

 

Bank regulators routinely examine institutions for compliance with these obligations and they must consider an institution’s compliance in connection with the regulatory review of applications, including applications for banking mergers and acquisitions. Failure of a financial institution to maintain and implement adequate programs to combat money laundering and terrorist financing and comply with OFAC sanctions, or to comply with relevant laws and regulations, could have serious legal, reputational and financial consequences for the institution.

 

Safety and Soundness Standards

 

Federal bank regulatory agencies have adopted guidelines that establish general standards relating to internal controls and information systems, internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth and compensation, fees and benefits. Additionally, the agencies have adopted regulations that provide the authority to order an institution that has been given notice by an agency that it is not satisfying any of these safety and soundness standards to submit a compliance plan. If, after being so notified, an institution fails to submit an acceptable compliance plan or fails in any material respect to implement an acceptable compliance plan, the agency must issue an order directing action to correct the deficiency and may issue an order directing other actions of the types to which an undercapitalized institution is subject under the “prompt corrective action” provisions of the Federal Deposit Insurance Act. If an institution fails to comply with such an order, the agency may seek to enforce such order in judicial proceedings and to impose civil money penalties.

 

Bank holding companies are also not permitted to engage in unsound banking practices. For example, the Federal Reserve’s Regulation Y requires a holding company to give the Federal Reserve prior notice of any redemption or repurchase of its own equity securities, if the consideration to be paid, together with the consideration paid for any repurchases in the preceding year, is equal to 10% or more of the company’s consolidated net worth. The Federal Reserve may oppose the transaction if it believes that the transaction would constitute an unsafe or unsound practice or would violate any law or regulation. As another example, a holding company could not impair its subsidiary bank’s soundness by causing it to make funds available to non-banking subsidiaries or their customers if the Federal Reserve believed it not prudent to do so. The Federal Reserve has broad authority to prohibit activities of bank holding companies and their nonbanking subsidiaries that represent unsafe and unsound banking practices or that constitute violations of laws or regulations.

 

 

Effect of Governmental Monetary Policies

 

The commercial banking business is affected not only by general economic conditions but also by U.S. fiscal policy and the monetary policies of the Federal Reserve. Some of the instruments of monetary policy available to the Federal Reserve include changes in the discount rate on member bank borrowings, the fluctuating availability of borrowings at the “discount window,” open market operations, the imposition of and changes in reserve requirements against member banks’ deposits and assets of foreign branches, and the imposition of and changes in reserve requirements against certain borrowings by banks and their affiliates. These policies influence to a significant extent the overall growth of bank loans, investments, and deposits and the interest rates charged on loans or paid on deposits. For example, during 2022 and in 2023 the Federal Open Market Committee of the Federal Reserve increased the target rate range for trading in the federal funds market (known as the federal funds target rate or the federal funds rate) multiple times, increasing market interest rates. The federal funds rate is the rate at which commercial banks borrow and lend their excess reserves to each other overnight. We cannot predict the nature of future fiscal and monetary policies and the effect of these policies on our future business and earnings.

 

Future Legislation and Regulatory Reform

 

The OCC announced on September 28, 2023 that its key areas of supervisory strategies for 2024 will include: asset and liability management; credit risk management and allowance for credit losses; cybersecurity; operations; digital ledger technology activities; change management; payments; Bank Secrecy Act/anti-money laundering/countering the financing of terrorism/Office of Foreign Assets Control; consumer compliance, fair lending risk and CRA performance; and climate-related financial risk management.

 

New laws, regulations and policies are regularly proposed that contain wide-ranging proposals for altering the structures, regulations and competitive relationships of financial institutions operating in the U.S. In addition, existing laws, regulations and policies are continually subject to modification or changes in interpretation. We cannot predict whether or in what form any law, regulation or policy will be adopted or modified or the extent to which our operations and activities, financial condition, results of operations, strategic plans or future prospects may be affected by its adoption or modification.

 

The cumulative effect of these laws and regulations adds significantly to the cost of our operations and thus has a negative impact on profitability. There has also been a tremendous expansion in recent years of financial service providers that are not subject to the same level of regulation, examination and oversight as we are. Those providers, because they are not so highly regulated, may have a competitive advantage over us and may continue to draw large amounts of funds away from traditional banking institutions, with a continuing adverse effect on the banking industry in general.

 

Human Capital Resources

 

Our business is built on relationships with our customers, our community, and most of all, our employees. We are committed to providing quality service and products to the consumers and businesses within the markets we serve. We strive to create superior shareholder value by attracting and retaining exceptional employees who are highly motivated and well trained. 

 

Our compensation strategy provides a total rewards structure that reflects position responsibilities, is competitive with the external market, and is capable of attracting, retaining, and motivating our employees. We provide a comprehensive benefits package for eligible employees which includes group health (medical, dental, and vision) insurance including a health savings account option, paid time off, short and long term disability insurance, life insurance and a 401(k) plan in which we provide a matching contribution. We also offer eligible employees participation in our Employee Stock Ownership Plan (“ESOP”) as well as our Long Term Incentive Plan (“LTIP”) in order to better align employee and shareholder interests.

 

We provide employees with robust training programs that promote employee development and effectiveness by providing high-quality curriculums designed to meet individual, departmental and Bank-wide objectives. This includes mentorships, 1-on-1 job shadowing, classroom training, internships, and computer-based training.

 

We believe employing a diverse and inclusive workforce strengthens our ability to serve our customers and our communities, which is a key component of our success. To that end, we are a proud equal opportunity employer committed to attracting, retaining and promoting employees regardless of sex, sexual orientation, gender identity, race, color, national origin, age, religion and physical ability. We do not tolerate illegal discrimination or harassment and encourage employees to immediately report any violations to management and human resources. 

 

As of December 31, 2023, we had 320 full-time and 11 part-time employees. None of our employees are represented by any collective bargaining unit or are parties to a collective bargaining agreement. We believe that our relations with our employees are good.

 

Available Information

 

Our filings with the Securities and Exchange Commission (the “SEC”), including annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments thereto, are available on our website as soon as reasonably practicable after the reports are filed with or furnished to the SEC. Copies can be obtained free of charge in the “Investor Relations” section of our website at www.investarbank.com. Our SEC filings are also available through the SEC’s website www.sec.gov. Copies of these filings are also available by writing to us at the following address:

 

Investar Holding Corporation

P.O. Box 84207

Baton Rouge, Louisiana 70884-4207

 

 

Item 1A. Risk Factors

 

Our business is subject to risk. In addition to the other information contained in this Annual Report on Form 10-K, including managements discussion and analysis of financial condition and results of operations and our financial statements and the notes thereto, investors should consider the following risks when evaluating whether to invest in our common stock. If any of the following risks occur, whether alone or in combination, our business, financial condition, results of operations, cash flows and long-term growth prospects could be materially and adversely affected. Additional risks that we do not presently know of or currently deem immaterial may also adversely affect our business, financial condition, results of operations, cash flows and long-term growth prospects.

 

Risks Related to our Business

 

As a business operating in the financial services industry, our business and operations may be adversely affected by prevailing economic conditions and geopolitical matters.

 

Our financial performance generally, and in particular the ability of borrowers to pay interest on and repay principal of outstanding loans and the value of collateral securing those loans, as well as demand for loans and other products and services we offer, is highly dependent upon the business environment in the primary markets where we operate and in the U.S. as a whole. For example, high inflation in 2021 through 2023 resulted in the Federal Reserve raising target interest rates, on a cumulative basis, by 525 basis points since March 2022, causing increases in the costs of credit, capital and deposits and limitations on the availability of credit and capital. Our business may also be adversely affected by declines in economic growth, business activity, investor or business confidence; declines in real estate values; rising unemployment; rising domestic political tensions; risks of government shutdowns; natural disasters; the emergence or worsening of widespread public health challenges or pandemics such as the COVID-19 pandemic; or a combination of these or other economic, political and business factors.

 

In addition, new or rising geopolitical tensions including those resulting from the wars and violence in Ukraine and Israel and surrounding areas, along with other instances of violence, acts of terrorism and political unrest, can result in disruptions in or volatility in the economy and in financial and commodity markets in the U.S. and globally, disruptions in international trade patterns, and slow growth or declines in economic sectors of the global and U.S. economies.

 

Economic uncertainty and negative events in the economy or in domestic political or geopolitical matters could have a material adverse effect on our business, results of operations and financial condition, including our liquidity position. Among other things, they may result in higher than expected loan delinquencies, a decline in the value of collateral securing our loans, instability in our deposit base, further increases in our costs of capital and deposits, disruptions in our ability to complete acquisitions, and a decline in demand for our products and services. They may cause us to incur losses, including losses on loans beyond those provided for in our allowance for credit losses, and losses in our investment securities portfolio, impairments of assets including goodwill, and may adversely impact our regulatory capital.

 

Increasing and high interest rates in 2022 and 2023 caused interest expense on both deposits and borrowings to increase significantly in 2023; further increases in interest rates could continue to have an adverse effect on our profitability.

 

The majority of our assets and liabilities are monetary in nature and, as a result, we are subject to significant risk from changes in interest rates. Changes in interest rates may affect our net interest income as well as the valuation of our assets and liabilities. We cannot predict with certainty changes in interest rates, which are affected by many factors beyond our control, including inflation, recession, unemployment, money supply, competition for loans and deposits, domestic and international events, changes in the U.S. and other financial markets, and the policies of the Federal Reserve. Inflation increased rapidly during 2021 through June 2022. Since June 2022, the rate of inflation generally has declined; however, it has remained at high levels compared to the Federal Reserve’s target rate of inflation of two percent. In response, the Federal Reserve raised the federal funds target rate multiple times from March 2022 through July 2023, by 525 basis points on a cumulative basis.

 

Our earnings depend significantly on our net interest income, which is the difference between interest income on interest-earning assets, such as loans and securities, and interest expense on interest-bearing liabilities, such as deposits and borrowings. We expect to periodically experience “gaps” in the interest rate sensitivities of our assets and liabilities, meaning that either our interest-bearing liabilities will be more sensitive to changes in market interest rates than our interest-earning assets, or vice versa. In either event, if market interest rates move contrary to our position, this “gap” may work against us, and our earnings may be adversely affected. When interest-bearing liabilities mature or reprice more quickly, or to a greater degree than interest-earning assets in a period, an increase in interest rates could reduce net interest income. Similarly, when interest-earning assets mature or reprice more quickly, or to a greater degree than interest-bearing liabilities, falling interest rates could reduce net interest income.

 

Additionally, an increase in the general level of interest rates may also, among other things, adversely affect our current borrowers’ ability to repay variable rate loans, the demand for and our ability to originate loans, negatively affect the value of our investment securities portfolio, and decrease loan prepayment rates, or could increase the cost of the Company’s deposits and borrowings.

 

Rising and high interest rates in 2022 and 2023 caused interest expense on both deposits and borrowings to increase significantly in 2023, putting pressure on our net interest margin. Our cost of interest-bearing deposits rose to 2.49% in 2023 from 0.42% in 2022, an increase of 207 basis points. Our costs of short-term borrowings rose to 4.93% in 2023 from 3.05% in 2022, an increase of 188 basis points.

 

We may experience additional pressure on our net interest margin during 2024 if our cost of funds increases faster than the yield on our interest-earning assets. Additionally, due in large part to higher interest rates and market volatility during 2022 and 2023, gross unrealized losses in our investment portfolio totaled $57.7 million at December 31, 2023 and $62.5 million at December 31, 2022. These losses may continue or worsen during 2024, and we may experience realized losses in our portfolio.

 

 

A continued high general level of interest rates or any additional increases in such rates could result in increased loan defaults, foreclosures and charge-offs, and also necessitate further increases to the allowance for credit losses. At the same time, the marketability and value of the property securing a loan may be adversely affected by any reduced demand resulting from sustained higher or increased interest rates. Further, when we place a loan on nonaccrual status, we reverse any accrued but unpaid interest receivable, which decreases interest income, but we continue to have a cost to fund the loan, which is reflected as interest expense, without any interest income to offset the associated funding expense. Thus, an increase in the amount of nonperforming assets would have an adverse impact on net interest income.

 

Conversely, a decrease in the general level of interest rates may lead to, among other things, prepayments on our loan and mortgage-backed securities portfolios as borrowers refinance their loans at lower rates, lower rates on new loans, lower rates on existing variable rate loans, and lower yields on investment securities, which could result in decreased yields on earning assets.

 

Although our asset-liability management strategy is designed to control and mitigate exposure to the risks related to changes in the general level of market interest rates, we may not be able to accurately predict the likelihood, nature and magnitude of those changes or how and to what extent they may affect our business. We also may not be able to adequately prepare for or compensate for the consequences of such changes. Significant increases in interest rates, as has occurred during the last two fiscal years, makes our business and our balance sheet more challenging to manage. Any failure to predict and prepare for changes in interest rates or adjust for the consequences of these changes may adversely affect our earnings and capital levels. For additional information, see Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations Risk Management Interest Rate Risk.

 

A lack of liquidity, including due to events outside our control or ineffective liquidity management, could adversely affect our ability to fund operations and meet our obligations as they become due.

 

Liquidity is essential to our business. Liquidity risk is the potential that we will be unable to meet our obligations as they come due because of an inability to liquidate assets or obtain adequate funding. The primary source of the Bank’s funds are customer deposits, loan repayments and investment securities maturities or sales, while borrowings are a secondary source of liquidity. We also use brokered deposits from time to time and our use of brokered deposits increased during 2023. Brokered deposits tend to be more sensitive to changes in interest rates than other types of deposits and therefore can be a more expensive and uncertain source of funds. The Bank’s liquidity could be adversely impacted if rates offered by the Bank were less than those offered by other institutions seeking brokered deposits, or if such depositors were to perceive a decline in the Bank’s safety or soundness. Additionally, we must maintain our well-capitalized status in order to accept brokered deposits without prior regulatory approval. Our access to deposits and other funding sources in adequate amounts and on acceptable terms is affected by a number of factors, including rates paid by competitors, returns available to customers on alternative investments, customer confidence in the safety of uninsured deposits and general economic conditions. Any decline in available funding could adversely impact our ability to originate loans, invest in securities, meet our expenses, pay dividends to our shareholders, or to fulfill obligations such as repaying our borrowings or meeting deposit withdrawal demands, any of which could have a material adverse impact on our business, financial condition, results of operations and long-term growth prospects.

 

The highly-publicized failures of Silicon Valley Bank, Signature Bank and First Republic Bank during the first half of 2023 caused significant disruptions in the banking industry. These industry developments negatively impacted overall customer confidence in the safety of their deposits, particularly uninsured deposits, at some regional banks. As a result, some customers moved deposits to, or maintained deposits with, larger financial institutions or moved funds to investment alternatives outside the banking industry. The rapid failures of these large banks 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. Regulators and the largest U.S. banks took steps designed to increase liquidity at regional banks and strengthen depositor confidence in the broader banking industry, including the Bank Term Funding Program discussed elsewhere in this report and measures to protect uninsured deposits from loss; however, there are no guarantees that such steps would be implemented in the future if a similar disruption in the industry were to occur. For more information on the Company’s deposits and 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.” Concerns about liquidity in the banking industry and the safety of uninsured deposits that may result from similar events in the future may materially adversely impact our liquidity, cost of funds, loan funding capacity, net interest margin, capital and results of operations.

 

Inflation and rising prices may continue to adversely affect our results of operations and financial condition.

 

As noted above, inflation increased rapidly during 2021 and continued rising through June 2022. Since June 2022, the rate of inflation generally has declined; however, it has remained at high levels compared to the Federal Reserve’s target rate of inflation of two percent. Inflation increases our borrowers’ costs of living and costs of doing business, which may make it more difficult for them to repay their loans, increasing our credit risk. Inflation also increases many of our operating costs, including the costs of goods and services we purchase and the costs of salaries and benefits. We believe that higher rates resulting from inflation and related factors led to constrained loan demand during 2023. When the rate of inflation accelerates, there is an erosion of consumer and customer purchasing power. Accordingly, if the rate of inflation accelerates in the future, 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 and related higher rates have led and may continue to lead to lower loan re-financings. In addition, inflation has led to the Federal Reserve raising interest rates during 2022 and 2023, as discussed above.

 

Our allowance for credit losses may prove to be insufficient to absorb losses inherent in our loan portfolio, and we may be required to further increase our provision for credit losses. This risk may be heightened by our adoption of the Current Expected Credit Loss accounting standard effective January 1, 2023. If our actual credit losses exceed our allowance for credit losses, our net income will decrease.

 

Our business depends on our ability to successfully measure and manage credit risk. As a lender, we are exposed to the risk that the principal of and interest on a loan will not be paid timely or at all, and that the value of any collateral supporting a loan will be insufficient to cover any exposure to loss on a loan. Management maintains an allowance for credit losses, which is a reserve established through a provision for credit losses charged to expense, to absorb credit losses in the loan portfolio. The determination of the appropriate level of the allowance is inherently subjective, involves a high degree of judgment and complexity, and requires us to make significant estimates, all of which are subject to material changes.

 

In June 2016, the Financial Accounting Standards Board (“FASB”) issued a new accounting standard (Accounting Standards Update “ASU” 2016-13), referred to as Current Expected Credit Loss (“CECL”) that requires that the measurement of all expected credit losses for financial assets held at the reporting date be based on historical experience, current conditions, and reasonable and supportable forecasts, and requires enhanced disclosures related to the significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an organization’s portfolio. In addition, the new standard amends the accounting for credit losses on purchased financial assets with credit deterioration. ASU 2016-13 became effective for us, as a smaller reporting company, on January 1, 2023. Please refer to Note 1. Summary of Significant Accounting Policies – Recent Accounting Pronouncements, for additional discussion.

 

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 quarter 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. Our ongoing estimates of expected credit losses will depend upon our models and assumptions, existing and forecasted macroeconomic conditions and the credit quality, composition and other characteristics of our loan and other applicable portfolios. We believe these factors are likely to cause variability in our expected credit losses under CECL compared to previous GAAP, and therefore an increase in the variability of our period-to-period net income. We believe that CECL is also likely to reduce comparability across financial services companies due to the ability to adopt different measurement approaches for expected credit losses and different economic assumptions used in each of the companies’ models.

 

Commercial and industrial and commercial real estate loans generally are viewed as having more risk of default than residential real estate loans or other loans or investments. These types of loans are also typically larger than residential real estate loans and other consumer loans. Because our loan portfolio contains a significant number of commercial and industrial and commercial real estate loans with relatively large balances, the deterioration of a material amount of these loans may cause a significant increase in our allowance for credit losses, non-performing assets, and/or past due loans. An increase in our allowance for credit losses, non-performing assets, and/or past due loans could result in a loss of earnings, or an increase in loan charge-offs, which would have an adverse impact on our results of operations and financial condition.

 

 

Inaccurate management assumptions, including with respect to economic conditions affecting borrowers, new information regarding existing loans, identification of additional problem loans and other factors, both within and outside of our control, may require us to increase our allowance for credit losses. In addition, bank regulatory agencies periodically review the allowance for credit losses and may require an increase in the provision for credit losses or the recognition of further loan charge-offs, based on judgments different than those of management. Finally, if actual charge-offs in future periods exceed the allowance for credit losses, we will need additional provisions to increase the allowance for credit losses. Any increases in the allowance for credit losses will result in a decrease in net income and, possibly, capital and may have a material adverse effect on our business, financial condition, and results of operations. If our actual credit losses exceed our allowance for credit losses, our net income will decrease.

 

Our pivot during 2023 from primarily a growth strategy to a near-term strategy focused primarily on consistent, quality earnings through the optimization of our balance sheet may not be successful in increasing our profitability.

 

During 2023, we pivoted our near-term strategy from primarily a growth strategy to primarily a focus on consistent, quality earnings through the optimization of our balance sheet, as described elsewhere in this report. Our new strategy may not be successful in increasing our profitability.

 

Our long-term business strategy includes the continuation of our multi-state growth plans, and our financial condition and results of operations could be negatively affected if we fail to grow or fail to manage our growth effectively.

 

In addition to organic growth, we have grown our business through de novo branching and through the acquisition of other financial institutions and branch locations. We have completed seven whole-bank acquisitions since 2011 and regularly review acquisition opportunities. We have also expanded our operations outside our historical south Louisiana base and into Texas and Alabama. Over the long-term, we intend to pursue a multi-state growth strategy for our business primarily through attractive acquisition opportunities as well as continue to pursue organic growth throughout our franchise. Our long-term growth prospects must be considered in light of the risks, expenses and difficulties frequently encountered by companies when expanding their franchise, including the following:

 

 

De Novo Branching; Branch Acquisitions. There are considerable costs involved in opening or acquiring branches, and de novo branches generally do not generate sufficient revenues to offset their costs until they have been in operation for at least a year or more. We have not opened a de novo branch since 2020, except that in the third quarter of 2023 we converted an existing loan and deposit production office in Tuscaloosa, Alabama to a cashless branch designed to provide a digital banking experience. We do not expect to open de novo branches in 2024.

 

 

Expansion into New Markets. We operated exclusively in Louisiana until we acquired financial institutions in Texas and Alabama in 2019. The financial services industry in these areas is highly competitive, and the challenges of continuing to operate in new markets and multiple states may be greater than we anticipate. During 2023, we completed the sale of certain assets, deposits and other liabilities associated with two branches that we previously acquired in Texas, in order to focus more on our core markets. Of our Bank’s branch network, these two locations were geographically the most distant from our Louisiana headquarters.

 

 

Acquisition and Integration Risks. An acquisition strategy involves substantial risks and uncertainties including:

 

 

the time and costs of evaluating potential acquisition candidates and new markets, negotiating transactions, and related diversion of management’s attention from day-to-day operations;

 

our ability to continue to finance acquisitions and possible dilution to our existing shareholders;

 

potential for acquisition agreements, once signed, not to be completed due to inability to obtain required regulatory approvals, third-party litigation, lack of shareholder approval if required, failure of other conditions to closing, agreement of the parties, or other reasons;

 

unanticipated difficulties in integrating acquired businesses, including potential losses of customers and employees, higher than expected integration costs, and inability to maintain and increase market share at new locations; and

 

potential differences between management’s expectations regarding how an acquired business will perform and actual results once acquired, which may result in lower than expected revenues, inability to achieve expected cost savings and synergies, higher than expected liabilities and costs, impairments of goodwill, and losses.

 

 

Organic Growth Risks. As we continue to pursue organic growth at our existing and new or acquired locations, we may be unable to successfully maintain loan quality, obtain deposits at attractive rates, attract and retain personnel to implement and oversee such growth, or maintain an efficient overhead cost structure. We may also introduce new products and services that do not produce projected profits and may result in losses.

 

Failure to successfully address these issues relating to our long-term growth strategy could have a material adverse effect on our financial condition and results of operations. Also, if our long-term growth occurs more slowly than anticipated or declines, our operating results could be materially adversely affected.

 

Changes in retail distribution strategies and consumer behavior may adversely impact our business, financial condition and results of operations.

 

We have significant investments in our physical branch network, including in bank premises and equipment as well as in our branch work force. Advances in technology as well as changing customer preferences for remote methods of accessing our products and services could decrease the value of our branch network and may cause us to further change our retail distribution strategy, and close, consolidate or sell certain branches or parcels of land held for future branch locations. These actions could lead to losses on these assets or adversely impact the carrying value of long-lived assets and may lead to expenditures to reconfigure remaining branches. Any changes in our branch network strategy could adversely impact our business if it results in the loss of customers.

 

In recent periods, we have focused on enhancing our online banking platform and plan to continue to introduce new technologies, with the goal of delivering products and services more efficiently with fewer branches and people. We closed five branches during our last three fiscal years. Three of the branches had been acquired, and the closures involved anticipated synergies that resulted in significant cost savings. In 2022, we sold five former branch locations and three tracts of land that were being held for future branch locations. In January 2023, we completed the sale of certain assets, deposits and other liabilities associated with two of our Texas branches 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. During the third quarter of 2023, we ceased operation of 14 ATMs and in January 2024 we closed a branch in our Alabama market. We could incur material losses in the future due to the closure or consolidation of branches or sale of land held for future branch locations.

 

 

Our business is concentrated in southern Louisiana, southeast Texas, and Alabama, and an economic downturn affecting these areas may magnify the adverse effects and consequences to us.

 

We currently conduct our operations primarily in southern Louisiana, and more specifically, in the Baton Rouge, New Orleans, Lafayette and Lake Charles metropolitan areas, in the greater Houston, Texas area, and in Alabama. As of December 31, 2023, our primary markets were south Louisiana (approximately 80% of our total deposits of $2.3 billion), southeast Texas (approximately 5% of our total deposits) and Alabama (approximately 15% of our total deposits). At December 31, 2023, approximately 60%, 5%, and 5% of the secured loans in our total loan portfolio were secured by properties and other collateral located in Louisiana, Texas and Alabama, respectively.

 

This geographic concentration imposes a greater risk to us than to our competitors in the area who maintain significant operations outside of our selected markets. Accordingly, any regional or local economic downturn, or natural or man-made disaster, that affects southern Louisiana, southeast Texas, Alabama, or existing or prospective property or borrowers in such areas may affect us and our profitability more significantly and more adversely than our more geographically diversified competitors.

 

Much of our business development and marketing strategy is directed toward fulfilling the banking and financial services needs of small to medium-sized businesses. Such businesses generally have fewer financial resources in terms of capital or borrowing capacity than larger entities. If economic conditions negatively impact our selected markets and these businesses are adversely affected, our financial condition and results of operations may be negatively affected.

 

Adverse economic factors affecting particular industries could have a negative effect on our customers and their ability to make payments to us.

 

Certain industry-specific economic factors may also adversely affect us. For example, the energy sector, which is historically cyclical, has experienced significant volatility in oil and gas prices. While we consider our direct exposure to the energy sector not to be significant, comprising approximately 2.0% of total loans at December 31, 2023, continued oil price volatility could have further negative impacts on general economic conditions, particularly in our south Louisiana and southeast Texas markets, which could have a material adverse effect on our business, financial condition, and results of operations.

 

We have a significant number of loans secured by real estate, and a downturn in the real estate market could result in losses and negatively impact our profitability.

 

At December 31, 2023, approximately 75% of our total loan portfolio had real estate as a primary or secondary component of the collateral securing the loan. The real estate provides an alternate source of repayment in the event of a default by the borrower, but its value may deteriorate during the time the credit is extended. Declines in real estate values in our markets could significantly impair the value of the particular collateral securing our loans and our ability to sell the collateral upon foreclosure for an amount necessary to satisfy the borrower’s obligations to us. Furthermore, in a declining real estate market, we often will need to further increase our allowance for credit losses to address the deterioration in the value of the real estate securing our loans. Any of the foregoing could have a material adverse effect on our business, financial condition, results of operations, and cash flows.

 

 

Commercial real estate loans may expose us to greater risks than our other real estate loans.

 

Our loan portfolio includes commercial real estate loans, which are secured by owner-occupied and nonowner-occupied commercial properties. As of December 31, 2023, our owner-occupied commercial real estate loans totaled $449.6 million, or 20.3% of our total loan portfolio and our nonowner-occupied commercial real estate loans totaled $488.1 million, or 22.1% of our total loan portfolio.

 

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. Cash flows, which may include proceeds from sales of commercial real estate, may be affected significantly by general economic conditions. Weak economic conditions may impair the borrower’s business operations and typically slow the execution of new leases. Such economic conditions may also lead to existing lease turnover. As a result of these factors, vacancy rates for retail, office and industrial space may increase. High vacancy rates could also result in rents falling. The combination of these factors could result in deterioration in the fundamentals underlying the commercial real estate market and the deterioration in value of some of our loans. These loans expose a lender to greater credit risk than loans secured by residential real estate because the collateral securing these loans typically cannot be liquidated as easily as residential real estate. If we foreclose on these loans, our holding period for the collateral typically is longer than for a 1-4 family residential property because there are fewer potential purchasers of the collateral. Additionally, nonowner-occupied commercial real estate loans generally involve relatively large balances to single borrowers or related groups of borrowers. Accordingly, charge-offs on nonowner-occupied commercial real estate loans may be larger on a per loan basis than those incurred with our residential or consumer loan portfolios. Unexpected deterioration in the credit quality of our commercial real estate loan portfolio would require us to increase our provision for loan losses, which would reduce our profitability and could materially adversely affect our business, financial condition, results of operations, and cash flows.

 

Commercial and industrial loans may expose us to greater risk than other loans.

 

Commercial and industrial loans primarily consist of working capital lines of credit and equipment loans, typically secured by accounts receivable or inventory, or the relevant equipment. 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 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 and industrial 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. Additionally, as of December 31, 2023 52% of our commercial and industrial loans were variable rate loans; rising interest rates increase interest payments due on such loans and may increase the risk of default by the borrower.

 

We have been increasing the proportion of commercial and industrial loans in our loan portfolio. Our commercial and industrial loans represented 16.6%, 20.7% and 24.6% of total loans as of December 31, 2021, 2022 and 2023, respectively. The increase from year-end 2022 to year-end 2023 was caused primarily by our purchase of commercial and industrial revolving lines of credit which, at the time of the loan purchase agreement, had an unpaid principal balance of approximately $163 million and total commitments of approximately $238 million, as described in more detail elsewhere in this report. The acquired loans are to consumer finance lending companies. The repayment of consumer finance loans depends primarily on the creditworthiness and projected cash flow of the borrower (and any guarantors). Thus, the primary risks associated with these types of loans are the general business conditions of the local economy, and the ability to generate sufficient operating revenue to repay us under the agreed upon terms and conditions. Loans to consumer finance lending companies accounted for approximately 8% of our total loans at December 31, 2023. The increase from year-end 2021 to year-end 2022 was driven primarily by an increase in public finance loans and loan production by our Commercial and Industrial Division. 

 

Commercial and industrial loans include public finance loans made to governmental entities, which can be taxable or tax-exempt, for purposes including debt refinancing, economic development, quality of life projects, short-term cash-flow needs, and infrastructure enhancements, among other things. Public finance loans generally are repaid using pledged revenue sources including income tax, property tax, sales tax, and utility revenue, among other sources. Accordingly, repayment depends upon the financial stability and tax or revenue generating capacity of the particular revenue source. Public finance loans comprise less than 5% of our loan portfolio as of December 31, 2023.

 

Loss of our senior executive officers or other key employees and our inability to recruit or retain suitable replacements could adversely affect our business, results of operations and ability to successfully execute our business strategy.

 

Our success depends significantly on the continued service and skills of our executive management team. The implementation of our business strategies also depends significantly on our ability to retain employees with experience and business relationships within their respective market areas, as well as on our ability to attract, motivate and retain highly qualified senior and middle management. Competition for employees is intense. We could have difficulty replacing key employees with personnel with the combination of skills and attributes required to execute our business strategies and who have ties to the communities within our market areas. The loss of any of our key personnel could therefore have a material adverse effect on our business, financial condition, results of operations and ability to successfully execute our business strategy.

 

 

Hurricanes or other adverse weather conditions, as well as man-made disasters, could negatively affect our local markets or disrupt our operations, which may adversely affect our business and results of operations.

 

Our business is concentrated in southern Louisiana, in southeast Texas, and in Alabama. Our selected markets are susceptible to major hurricanes, floods, tropical storms, tornadoes and other natural disasters and adverse weather, the nature and severity of which can be difficult to predict. These natural disasters can disrupt our operations, cause widespread property damage, and severely depress the local economies in which we operate. For example, the historic flooding of Baton Rouge and surrounding areas in August 2016 had significant impacts in several markets in which we conduct business. Hurricane Harvey caused significant damage and flooding in Texas when it made landfall in August 2017. Hurricane Ida, which made landfall as a category 4 hurricane in Louisiana in August 2021, caused significant damage in the southern part of the state and also disrupted operations for certain of our customers. We recognized a material impairment related to a lending relationship with a group of related borrowers (the “Borrower”), collateralized by commercial real estate, inventory, and equipment. As a result of Hurricane Ida, the Borrower’s business operations were disrupted, and due to this impact on the Borrower’s operations, certain of the collateral supporting the loan relationship experienced a significant reduction in value. The severity and impact of future severe weather events are difficult to predict and may be exacerbated by global climate change. The 2010 Deepwater Horizon oil spill in the Gulf of Mexico illustrated that man-made disasters can also adversely affect economic activity in the markets in which we operate. Any economic decline as a result of a natural disaster, adverse weather, oil spill or other man-made disaster can reduce the demand for loans and our other products and services.

 

Such events could also affect the stability of our deposit base, impair the ability of borrowers to repay outstanding loans (resulting in increased delinquencies, foreclosures and loan losses), impair the value of collateral securing such loans, cause significant property damage, result in loss of revenue and/or cause us to incur additional expenses. The occurrence of any such event could, therefore, result in decreased revenue and loan losses that have a material adverse effect on our business, financial condition, results of operations and ability to successfully execute our business strategy.

 

Climate related events and legislative and societal responses regarding climate change present risks to our business.

 

Climate change may intensify severe weather events such as hurricanes and rainstorms that recur in our market areas, which may adversely impact our locations and business and those of our customers and suppliers. In addition, there has been an increased focus among businesses, consumers and investors regarding transitioning to renewable energy and a net zero economy. If we fail to adequately anticipate and address these changing preferences, our business could be adversely impacted. We are also subject to risks relating to potential new climate change-related legislation or regulations, which could increase our and our customers’ costs. The risks associated with these matters are continuing to evolve rapidly and the ultimate impact on our business is difficult to predict with any certainty.

 

Our failure to effectively implement new technologies could adversely affect our operations and financial condition.

 

Our industry is undergoing rapid technological changes with frequent introductions of new technology-driven products and services, including those using artificial intelligence. Our ability to compete successfully to some extent depends on whether we can implement new technologies to provide products and services to our customers more efficiently while avoiding significant operational challenges that increase our costs or delay full implementation, especially relative to our peers, many of which have greater resources to devote to technological improvements.

 

We rely on information technology and telecommunications systems, many of which are provided by third-party vendors.

 

The successful and uninterrupted functioning of our information technology and telecommunications systems is critical to our business. We outsource many of our major systems, such as data processing and deposit processing. If one of these third-party service providers terminates their relationship with us or fails to provide services to us for any reason or provides such services poorly, our business may be materially and adversely affected. In addition, we may be forced to replace such vendors, which could interrupt our operations and result in a higher cost to us.

 

Cyberattacks or other security breaches could adversely affect our operations, net income or reputation.

 

The financial services industry is particularly at risk for cybersecurity concerns because of the proliferation of new and emerging technologies, and the use of the internet and telecommunications technologies to conduct financial transactions. Additionally, increased use of internet and mobile banking products, and applications and plans to use or develop additional remote connectivity solutions increase our cybersecurity risks and exposure. In recent years we have increased our offerings of online and mobile banking services, including on-line bill payment, on-line funds transfers, mobile deposits, mobile wallets, video banking and Zelle®. These risks are heightened when customers use near real-time money transfer solutions such as Zelle®, where fraudulent and scam transactions can be more difficult to detect, prevent and recover. Additionally, as part of our banking business, we and certain of our third-party vendors collect, use and hold sensitive data concerning individuals and businesses with whom we have a banking relationship. Threats to data security, including unauthorized access and cyberattacks, rapidly emerge and change and are becoming increasingly sophisticated, exposing us to additional costs to secure our data in accordance with customer expectations and statutory and regulatory requirements. We could also experience a breach by intentional or negligent conduct on the part of our employees or other internal sources or by merchants using our customers’ debit and credit cards, software bugs, other technical malfunctions, or other causes. As a result of any of these threats, our computer systems and/or our customer accounts could become vulnerable to misappropriation of confidential information, account takeover schemes, ransomware, or cyberfraud. A ransomware attack could potentially shut down our data processing system and prevent us from accessing critical information. Our systems and those of our third-party vendors may become vulnerable to damage or disruption due to circumstances beyond our or their control, such as from catastrophic events, power anomalies or outages, natural disasters, network failures, and viruses and malware. Events may occur that increase our and other companies’ vulnerability with respect to cybersecurity risks, such as a sudden and substantial increase in remote work by employees as occurred during the early stages of the pandemic or may occur during adverse weather events, and as a result of increased cyberattacks by foreign actors, including in connection with the wars and violence in Ukraine and Israel and surrounding areas.

 

 

A breach of security that results in unauthorized access to our data could result in violations of applicable privacy and other laws and expose us to disruptions in our daily operations as well as to data loss, litigation, damages, fines and penalties, regulatory sanctions, customer notification requirements, significant increases in compliance and insurance costs, increases in costs for measures to minimize and remediate these risks and breaches, loss of confidence in our security measures, and reputational damage, any of which could individually or in the aggregate have a material adverse effect on our business, results of operations, financial condition, prospects, and shareholder value.

 

We have attempted to address these concerns by backing up our systems as well as retaining qualified third-party vendors to test and audit our network. However, there can be no guarantees that our efforts and those of our third-party vendors will be successful in avoiding material problems with our information technology and telecommunications systems. We may not be able to anticipate all cyber security breaches or implement effective preventative measures against such breaches.

 

Changes in deposit mix have increased our funding costs, which could continue, and loss of deposits could also increase our funding costs.

 

Deposits have historically been a low cost and stable source of funding. We compete with banks and other financial institutions for deposits. Funding costs could increase if the Company loses deposits and replaces them with more expensive sources of funding, if customers shift their deposits into higher cost products, or if the Company needs to raise its interest rates to avoid losing deposits. Higher funding costs reduce the Company’s net interest margin, net interest income and net income. As interest rates began to rise significantly during 2022, competition for deposits increased, and the Bank raised rates it offered on deposits to remain competitive in its markets. During 2023, as interest rates continued to rise and remain high, customers continued to shift into interest-bearing deposit products and we also utilized brokered time deposits, which increased our total costs of deposits by 207 basis points from 2022 to 2023. Disruptions in the banking industry during the first half of 2023 discussed elsewhere in this report highlighted the speed at which deposits can be moved from bank to bank or outside the banking system, heightening liquidity concerns of traditional banks. Any further increases in interest rates, sustained high interest rates or any new events producing concerns among customers about the safety of uninsured deposits could further increase our cost of deposits or cause us to lose deposits, which would increase our costs of funds and reduce net income.

 

We may need to raise additional capital in the future to execute our long-term business strategy or to comply with regulatory requirements.

 

In addition to the liquidity that we require to conduct our day-to-day operations, the Company, on a consolidated basis, and the Bank, on a stand-alone basis, must meet regulatory requirements. Also, we may need capital to finance our long-term growth, including through acquisitions. For example, in 2019, we sold $25.0 million of subordinated notes structured to qualify as Tier 2 capital, and $30.0 million of common stock, in part to fund acquisitions. If the Bank’s regulators deemed its capital levels to be too low for safety and soundness reasons or if the Bank were to be designated as “undercapitalized” or in a lower capitalization category than “undercapitalized,” it could be required to raise additional capital. For additional information, see Item 1. Business - Regulatory Capital Requirements - Prompt Corrective Action Regulations.

 

Our ability to raise additional capital depends on conditions in the capital markets, economic conditions and a number of other factors, including investor perceptions regarding the banking industry, market conditions and governmental activities, and on our financial condition and performance. Rising interest rates as experienced during 2022 and 2023 increased our costs of short-term borrowings and long-term debt. Further increases in interest rates would increase the costs of our variable rate borrowings. There can be no assurances that we will be able to raise additional capital if needed or on terms acceptable to us. If we fail to maintain capital to meet regulatory requirements, our business, financial condition, results of operations and long-term growth prospects could be materially and adversely affected.

 

Competition in our industry is intense, which could adversely affect our profitability and long-term growth.

 

We face substantial competition in all areas of our operations from a variety of different competitors, many of which are larger and have substantially greater resources than we have, including higher total assets and capitalization, a more extensive and established branch network, greater access to capital markets and a broader offering of financial services. Such competitors primarily include national, regional and community banks within the various markets in which we operate. Because of their scale, many of these competitors can be more aggressive than we can on loan and deposit pricing. We also face competition from many other types of financial institutions, including savings and loans, credit unions, finance companies, brokerage firms, insurance companies, factoring companies and other financial intermediaries. Many of these entities have fewer regulatory constraints and may have lower cost structures than we do. There has been an increasing trend of credit unions acquiring banks. Credit unions are tax-exempt entities which provides an advantage when pricing loans and deposits. The acquisition of banks by credit unions may increase competition for customers and acquisitions.

 

Our industry could become even more competitive as a result of legislative and regulatory changes, as well as continued consolidation. Finally, technology has lowered barriers to entry and made it possible for non-banks to offer products and services traditionally provided by banks, such as automatic transfer and automatic payment systems, including Venmo and PayPal, and such as bitcoin and other types of cryptocurrencies. The process of eliminating banks as intermediaries, known as “disintermediation,” could result in the loss of fee income, as well as the loss of customer deposits and related income from those deposits. Disintermediation can also impact our lending business because of the growth of fintech companies delivering lending and other financial services. We may also lose employees to these competitors. Our ability to compete successfully depends on a number of factors, including customer convenience, quality of service, personal contacts, pricing and range of products. If we are unable to successfully compete, our business, financial condition, and results of operations will be materially adversely affected.

 

 

If the goodwill that we record in connection with a business acquisition becomes impaired, it could require charges to earnings, which would have a negative impact on our financial condition and results of operations.

 

Goodwill represents the amount by which the cost of an acquisition exceeded the fair value of net assets we acquired in connection with the purchase of another financial institution. We review goodwill for impairment at least annually, or more frequently if events or changes in circumstances indicate that the carrying value of the asset might be impaired.

 

We determine impairment by comparing the implied fair value of the reporting unit goodwill with the carrying amount of that goodwill. If the carrying amount of the reporting unit goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to that excess. Any such adjustments are reflected in our results of operations in the periods in which they become known. As of December 31, 2023, our goodwill totaled $40.1 million. While we have not recorded any such impairment charges since we initially recorded the goodwill, there can be no assurance that our future evaluations of goodwill will not result in findings of impairment and related write-downs, which may have a material adverse effect on our financial condition and results of operations.

 

The value of the securities in our investment portfolio may decline in the future, and we may incur losses with respect to our investment securities.

 

Our investment securities portfolio may be impacted by market conditions beyond our control, including fluctuations in interest rates, rating agency downgrades of the securities, credit deterioration or default of issuers of the securities, and inactivity or instability in the credit markets. For example, during 2022, increases in interest rates had a negative effect, particularly on the value of our available for sale investment securities portfolio, which we carry at fair value on our consolidated balance sheets. As of December 31, 2023, gross unrealized losses in our investment portfolio, primarily reflected in accumulated other comprehensive loss on the consolidated balance sheets, totaled $57.7 million. If investment securities in an unrealized loss position are sold, such losses would become realized, which would adversely affect our results of operations. We evaluate our investment securities on at least a quarterly basis, and more frequently if economic and market conditions warrant, to determine whether any decline in fair value below amortized cost is the result of an other-than-temporary impairment. The process for determining impairment and any credit losses with respect to our investment securities often requires complex, subjective judgments about the future financial performance. In addition, market volatility may make it difficult to value certain securities. Subsequent valuations, in light of factors prevailing at that time, may result in significant changes in the values of these securities in future periods. Any of these factors could require us to recognize losses or impairments in the value of our securities portfolio, which may have an adverse effect on our results of operations in future periods.

 

We face significant fraud, operational and other risks related to our activities, which could expose us to negative publicity, litigation and/or regulatory action.

 

We are exposed to many types of operational risks, including, particularly as a financial institution, fraud risks and human error. Our fraud risks include fraud committed by external parties against the Company or our customers, fraud committed internally by our associates and fraud committed by customers. Certain fraud risks, including identity theft and account takeover, may increase as a result of customers’ accounts or personally identifiable information being obtained through breaches of retailers’ or other third parties’ networks. Fraud attacks against us and other companies in the financial services industry, and against our customers when engaged in financial transactions, have increased in recent years and have become more sophisticated and more difficult to detect. We expect that detecting and preventing fraud, and remediating losses caused by fraud, will continue to require ongoing and potentially increased attention and investment. There are inherent limitations to our risk management strategies, as there may exist, or develop in the future, risks that we have not appropriately anticipated, monitored or identified. If our risk management framework proves ineffective, we could suffer unexpected losses, we may have to expend resources detecting and correcting the failure in our systems and we may be subject to potential claims from third parties and government agencies. We may also suffer severe reputational damage. Any of these consequences could materially and adversely affect our business, financial condition or results of operations.

 

Because the nature of the financial services industry involves a high volume of transactions, certain systems or human errors may be repeated or compounded before they are discovered and successfully rectified. The Company’s necessary dependence upon automated systems to record and process our transaction volume may further increase the risk that technical flaws or associate tampering or manipulation of those systems will result in losses that are difficult to detect. The Company is further exposed to the risk that our third-party vendors may be unable to fulfill their contractual obligations or will be subject to the same risk of fraud or systems or human errors as we are. These risks include the cybersecurity risks discussed above.

 

 

Risks Related to Our Industry

 

We operate in a highly regulated environment, which could restrain our growth and profitability.

 

We are subject to extensive regulation and supervision under federal and state banking laws and regulations that govern almost all aspects of our operations, including, among other things, our lending practices, deposit-taking practices, capital structure, investment practices, dividend policy, operations and growth. The level of regulatory scrutiny that we are subject to may fluctuate over time, based on numerous factors, including as a result of changes in the political administrations. These laws and regulations, and the supervisory framework that oversees the administration of these laws and regulations, are primarily intended to protect consumers, depositors, the Deposit Insurance Fund and the banking system as a whole, and not shareholders and counterparties. Furthermore, new proposals for legislation continue to be introduced in the U.S. Congress that could further substantially increase regulation of the financial services industry, and impose restrictions on our operations and our ability to conduct business consistent with historical practices, which could have a material adverse effect on our business, financial condition, results of operations and growth prospects. Our efforts to comply with new laws, regulations and standards typically result in increased expenses and a diversion of management time and attention. The information under the heading “Supervision and Regulation” in Item 1. Business, provides more information regarding the regulatory environment in which we and the Bank operate.

 

Federal regulators periodically examine our business, and we may be required to remediate adverse examination findings.

 

The financial services industry is subject to intense scrutiny from bank supervisors in the examination process and aggressive enforcement of regulations on both the federal and state levels. The Federal Reserve and the OCC periodically examine our business, including our compliance with laws and regulations. If, as a result of an examination, a federal banking agency were to determine that our financial condition, capital resources, asset quality, earnings prospects, management, liquidity, or other aspects of any of our operations had become unsatisfactory, or that we were in violation of any law or regulation, it may take a number of different remedial actions as it deems appropriate. These actions include the power to enjoin “unsafe or unsound” practices, to require affirmative action to correct any conditions resulting from any violation or practice, to issue an administrative order that can be judicially enforced, to direct an increase in our capital, to restrict our growth, to assess civil monetary penalties against our officers or directors, to remove officers and directors and, if it is concluded that such conditions cannot be corrected or there is an imminent risk of loss to depositors, to terminate our deposit insurance and place us into receivership or conservatorship. If we become subject to any regulatory actions, it could have a material adverse effect on our business, results of operations, financial condition and growth prospects. Failure to comply with any applicable regulations and supervisory expectations related thereto could result in fines, penalties, lawsuits, regulatory sanctions, damage to our reputation or restrictions on business.

 

We are subject to numerous laws designed to protect consumers, including the Community Reinvestment Act and fair lending laws, and failure to comply with these laws could lead to a wide variety of sanctions.

 

The ECOA, the Fair Housing Act and other fair lending laws and regulations impose nondiscriminatory lending requirements on financial institutions. The Department of Justice and other federal agencies enforce these laws and regulations, but private parties may also have the ability to challenge an institution’s performance under fair lending laws in private class action litigation. If an institution’s performance under the fair lending laws and regulations is found to be deficient, the institution could be subject to damages and civil money penalties, injunctive relief, restrictions on mergers and acquisitions activity, restrictions on expansion, and restrictions on entering new business lines, among other sanctions. In addition, the OCC’s assessment of our compliance with the Community Reinvestment Act (“CRA”) is taken into account when evaluating any application we submit for, among other things, approval of the acquisition or establishment of a branch or other deposit facility, an office relocation, a merger or the acquisition of another financial institution. Our failure to satisfy our CRA obligations could, at a minimum, result in the denial of such applications and limit our growth.

 

We face a risk of noncompliance and enforcement action with the Bank Secrecy Act and other anti-money laundering statutes and regulations.

 

The Bank Secrecy Act, the USA PATRIOT Act of 2001, and other laws and regulations require financial institutions, among other duties, to institute and maintain an effective anti-money laundering program and file suspicious activity and currency transaction reports as appropriate. The federal Financial Crimes Enforcement Network is authorized to impose significant civil money penalties for violations of those requirements and has recently engaged in coordinated enforcement efforts with the individual federal banking regulators, as well as the U.S. Department of Justice, Drug Enforcement Administration and Internal Revenue Service. We are also subject to increased scrutiny of compliance with the rules enforced by the Office of Foreign Assets Control. If our policies, procedures and systems are deemed deficient, we would be subject to liability, including fines and regulatory actions, which may include restrictions on our ability to pay dividends and the necessity to obtain regulatory approvals to proceed with certain aspects of our business plan, including our acquisition plans. Failure to maintain and implement adequate programs to combat money laundering and terrorist financing could also have serious reputational consequences for us. Any of these results could materially and adversely affect our business, financial condition, results of operations and growth prospects.

 

 

In addition, bank regulatory agencies consider the effectiveness of a financial institution’s anti-money laundering activities and other regulatory compliance matters when reviewing bank mergers and bank holding company acquisitions. Accordingly, non-compliance with the applicable regulations could materially impair the Company’s ability to enter into or complete mergers and acquisitions.

 

Our success depends on our ability to respond to the threats and opportunities of fintech innovation.

 

Fintech developments, such as bitcoin or other types of cryptocurrency and the development of alternative payment systems such as Venmo and PayPal, have the potential to disrupt the financial industry and change the way banks do business. Our success depends on our ability to adapt to the pace of the rapidly changing technological environment, which is crucial to retention and acquisition of customers. On July 31, 2018, the OCC announced it would grant limited-purpose national bank charters to fintech companies that offer bank products and services. The federal charter would allow fintech companies to operate nationwide under a single set of national standards, without needing to seek state-by-state licenses or joining with brick-and-mortar banks, which could have the effect of allowing fintech companies to more easily compete with us for financial products and services in the communities we serve. At present, the future of the OCC limited-purpose fintech charter is unclear. To date, the OCC has not approved any such charters and each application for a charter has been met with a lawsuit challenging the OCC’s authority to issue such charters.

 

We may be required to pay significantly higher FDIC deposit insurance premiums in the future.

 

The deposits of Investar Bank are insured by the FDIC up to legal limits and, accordingly, subject it to the payment of FDIC deposit insurance assessments. We are generally unable to control the amount of premiums that we are required to pay for FDIC deposit insurance. A bank’s regular assessments are determined by its risk classification, which is based on certain financial information and the level of supervisory concern that it poses. In order to maintain a strong funding position and restore the reserve ratios of the Deposit Insurance Fund, the FDIC has, in the past, increased deposit insurance assessment rates and charged a special assessment to all FDIC-insured financial institutions. While the FDIC’s special assessment in 2023 generally only applied to banks with over $5 billion in total assets, further increases in assessment rates or special assessments that apply to all banks may occur in the future, especially if there are significant financial institution failures. Any future special assessments, increases in assessment rates or required prepayments in FDIC insurance premiums could reduce our profitability or limit our ability to pursue certain business opportunities, which could have an adverse effect on our business, financial condition and results of operations.

 

Our use of third-party vendors and our other ongoing third-party business relationships are subject to increasing regulatory requirements and attention.

 

We regularly use third-party vendors as part of our business. We also have substantial ongoing business relationships with other third parties. These types of third-party relationships are subject to increasingly demanding regulatory requirements and attention by our federal bank regulators. Regulation requires us to perform due diligence and ongoing monitoring and control over our third-party vendors and other ongoing third-party business relationships. In certain cases, we may be required to renegotiate our agreements with these vendors to meet these requirements, which could increase our costs. We expect that our regulators will hold us responsible for deficiencies in our oversight and control of our third-party relationships and in the performance of the parties with which we have these relationships. As a result, if our regulators conclude that we have not exercised adequate oversight and control over our third-party vendors or other ongoing third-party business relationships or that such third parties have not performed appropriately, we could be subject to enforcement actions, including civil money penalties or other administrative or judicial penalties or fines as well as requirements for customer remediation, any of which could have a material adverse effect our business, financial condition or results of operations.

 

 

Risks Related to an Investment in our Common Stock

 

The market price of our common stock may be volatile, which may make it difficult for investors to sell their shares at the volume, prices and times desired.

 

The market price of our common stock may fluctuate substantially due to a variety of factors, many of which are beyond our control, including, without limitation:

 

 

actual, anticipated, or unanticipated variations in our quarterly and annual operating results, financial condition or asset quality;

 

changes in general economic or business conditions, both domestically and internationally;

 

the effects of, and changes in, trade, monetary and fiscal policies, including the interest rate policies of the Federal Reserve, or in laws and regulations affecting us;

 

changes in the credit, mortgage and real estate markets;

 

the number of securities analysts covering us;

 

our creditworthiness;

 

publication of research reports about us, our competitors, or the financial services industry generally, or changes in, or failure to meet, securities analysts’ estimates of our financial and operating performance, or lack of research reports by industry analysts or ceasing of coverage;

 

changes in market valuations or earnings of companies that investors deemed comparable to us;

 

the average daily trading volume of our common stock;

 

future issuances of our common stock or other securities;

 

changes in dividends on our common stock;

 

additions or departures of key personnel;

 

perceptions in the marketplace regarding our competitors and/or us;

 

significant acquisitions or business combinations, strategic partnerships, joint ventures or capital commitments by or involving our competitors or us; and

 

other news, announcements or disclosures (whether by us or others) related to us, our competitors, our markets or the financial services industry.

 

The stock market and, in particular, the market for financial institution stocks have experienced significant fluctuations in recent years. In addition, significant fluctuations in the trading volume in our common stock may cause significant price variations to occur. Increased market volatility may materially and adversely affect the market price of our common stock, which may make it difficult for investors to sell their shares at the volume, prices and times desired.

 

Shares eligible for future sale and shares we may issue in the future could adversely affect market prices of our common stock.

 

Shares of our common stock eligible for future sale, including those that may be issued in any private or public offering of our common stock, as consideration in acquisition transactions, or as incentives under incentive plans, could adversely affect market prices for our common stock. As of December 31, 2023, we had 9,748,067 shares outstanding and 326,605 shares subject to options granted under our incentive plan. Because our outstanding shares of common stock either were issued in an offering registered under the Securities Act of 1933, as amended (the “Securities Act”) or have been held for more than one year, such shares are freely tradable, except for shares held by our affiliates (approximately 6% of shares outstanding as of December 31, 2023) and 336,749 shares that represent unvested restricted shares under our incentive plan. Shares issued under our incentive plan will be available for sale into the public market, except for shares held by our affiliates. Shares held by our affiliates may be resold subject to the restrictions in Rule 144 of the Securities Act. In the future, we may issue additional shares of common stock to raise capital for growth or as consideration in acquisition transactions or for other purposes, and such shares may be registered under the Securities Act and freely tradable or may be issued in a private placement and registered for resale under the Securities Act.

 

 

Our dividend policy may change without notice, and our future ability to pay dividends is subject to restrictions.

 

Holders of our common stock are entitled to receive only such cash dividends as our board of directors may declare out of funds legally available for the payment of dividends. We have no obligation to continue paying dividends, and we may change our dividend policy at any time without notice to our shareholders. 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 our parent company 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 as “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. 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.

 

Since the Company’s primary asset is its stock of Investar Bank, we are dependent upon dividends from the Bank to pay our operating expenses, satisfy our obligations and to pay dividends on the Company’s common stock. Accordingly, any declaration and payment of dividends on common stock will substantially depend upon the Bank’s earnings and financial condition, liquidity and capital requirements, the general economic and regulatory climate and other factors deemed relevant by our board of directors. Furthermore, consistent with our strategic plans, capital availability, projected liquidity needs, and other factors, we have made, and will continue to make, capital management decisions and policies that could adversely impact the amount of dividends, if any, paid to our common shareholders.

 

In addition, there are numerous laws and banking regulations that limit our and Investar Bank’s ability to pay dividends. For further discussion of the regulatory restrictions on our ability to pay dividends, see Item 1. Business Supervision and Regulation Dividends.

 

Our Restated Articles of Incorporation and By-laws, and certain banking laws applicable to us, could have an anti-takeover effect that decreases our chances of being acquired, even if our acquisition is in our shareholders best interests.

 

Certain provisions of our restated articles of incorporation and our by-laws, as amended, and federal banking laws, including regulatory approval requirements, could make it more difficult for a third party to acquire control of our organization or conduct a proxy contest, even if those events were perceived by many of our shareholders as beneficial to their interests. These provisions, and the corporate and banking laws and regulations applicable to us:

 

 

enable our board of directors to issue additional shares of authorized, but unissued capital stock. In particular, our board may issue “blank check” preferred stock with such designations, rights and preferences as may be determined from time to time by the board;

 

enable our board of directors to increase the size of the board and fill the vacancies created by the increase;

 

enable our board of directors to amend our by-laws without shareholder approval;

 

require advance notice for director nominations and other shareholder proposals; and

 

require prior regulatory application and approval of any transaction involving control of our organization.

 

These provisions may discourage potential acquisition proposals and could delay or prevent a change in control, including circumstances in which our shareholders might otherwise receive a premium over the market price of our shares.

 

Our issuance of preferred stock could adversely affect holders of our common stock and discourage a takeover.

 

Our shareholders authorized our board of directors to issue up to 5,000,000 shares of preferred stock without any further action on the part of our shareholders. The board also has the power, without shareholder approval, to set the terms of any series of preferred stock that may be issued, including voting rights, dividend rights, preferences over our common stock with respect to dividends or in the event of a dissolution, liquidation or winding up and other terms. In the event that we issue preferred stock in the future that has preference over our common stock with respect to payment of dividends or upon our liquidation, dissolution or winding up, or if we issue preferred stock with voting rights that dilute the voting power of our common stock, the rights of the holders of our common stock or the market price of our common stock could be adversely affected. In addition, the ability of our board of directors to issue shares of preferred stock without any action on the part of our shareholders may impede a takeover of us and prevent a transaction perceived to be favorable to our shareholders.

 

An investment in our common stock is not an insured deposit and is subject to risk of loss.

 

Our common stock is not a bank deposit and, therefore, is not insured against loss by the FDIC, any deposit insurance fund or by any other public or private entity. Investment in our common stock is inherently risky for the reasons described in this “Risk Factors” section and elsewhere in this Annual Report on Form 10-K and is subject to the same market forces that affect the price of common stock in any company. As a result, an investor may lose some or all of his or her investment in our common stock.

 

Item 1B. Unresolved Staff Comments

 

Not applicable.

 

 

 

Item 1C. Cybersecurity

 

Risk Management and Strategy 

 

As a financial institution, we believe that the risk of cybersecurity incidents is a significant, increasing, and always evolving risk for our business. Federal law and regulations require us to maintain a comprehensive written information security program, and federal banking regulators regularly issue guidance regarding cybersecurity threats intended to enhance our cybersecurity risk management. Accordingly, we have developed and implemented processes for assessing, identifying and managing material risks from cybersecurity threats designed to comply with federal law and regulations and protect against cybersecurity threats to our business. Our program is supported by management and the Company’s Board of Directors (the “Board of Directors”). The Company maintains an active cyber insurance policy to enhance protections against material data intrusions or loss of privacy. For an overview of the federal banking laws and regulations that govern our management and oversight of cybersecurity risks, refer to Item 1. Business – Supervision and Regulation – “Financial Privacy and Cybersecurity Requirements,” incorporated by reference into this Item 1C.

 

The Company’s Information Security Program (the “Program”) is comprised of five pillars: the Information Security Policy, the Enterprise Information Security Risk Assessment, the Incident Response Plan, a formalized Security Awareness Campaign, and an enterprise monitoring and reporting program.

 

 

The Information Security Policy contains numerous distinct administrative and technical controls that govern data security for the organization and is based on the National Institute of Standards and Technology (“NIST”) Cybersecurity Framework. The policy is reviewed and approved by the Board of Directors annually.

 

The Enterprise Information Security Risk Assessment quantifies risk criteria utilizing the same impact measures, including financial, strategic, operational, and reputational, set forth by the Enterprise Risk Committee. The risk assessment is reviewed and approved by the Board of Directors annually. The Enterprise Risk Committee includes members of management from various departments and members of the Board of Directors and oversees the overall risk management of the Company. The Enterprise Risk Committee meets as often as appropriate to perform its responsibilities, but no less than once per calendar quarter and reports findings and provides recommendations to the Board of Directors on a routine basis.

 

The Incident Response Plan (“IRP”) includes procedures for responding to actual or potential cybersecurity incidents, including providing timely notice to customers and our bank regulatory agencies when appropriate. The IRP is based on the NIST Cybersecurity Framework. The plan is tested annually through tabletop exercises.

 

The Security Awareness Campaign is designed with the goal that employees are educated on policy, threats, and best practices from onboarding and throughout their tenure at the Company. This effort includes an onboarding training program, annual attestation and training, and weekly communication designed to help instill in employees a security mindset through repetition.

 

The Company maintains an enterprise monitoring and reporting program, which identifies key risk indicators for tracking and identifying trends. The key risk indicators are presented to the Company’s Information Technology Committee (“IT Committee”) and the Board of Directors on a monthly basis.

 

The Program is monitored each year through various internal and external audits, as well as OCC regulatory exams. Vulnerability and penetration testing are also conducted at least annually by an independent third party to supplement the vulnerability and patching program routinely performed by internal staff. Third-party vendors supplement the Company’s internal patching program as necessary. The Company also utilizes a third-party “SOC as a Service” to monitor extended detection and response logs and network traffic.

 

Third-party service provider risk is evaluated prior to and throughout the relationship. Third-party service providers must meet a minimum set of baseline security standards prior to being onboarded. During onboarding, the third party and the services they provide are added to the Information Security Risk Assessment, including consideration of inherent risk factors and mitigating controls. Alternative vendors and the effort to transition between vendors are identified during onboarding as well as in the event that the selected provider may fail in providing contracted services at any time. After a third party is onboarded, they are subject to the annual third-party risk management program, specific to their assigned risk criticality. This effort includes the review of service organization controls reports, business continuity and disaster recovery efforts, insurance certificates, and other compliance related concerns when applicable.

 

During the last three years we have not experienced any cybersecurity incidents that have materially affected our Company, including our business, strategy, results of operations or financial condition. For a discussion of how risks from cybersecurity threats may be reasonably likely to materially affect us, refer to Item 1A. Risk Factors – Risks Related to our Business – “We rely on information technology and telecommunications systems, many of which are provided by third-party vendors” and – “Cyberattacks or other security breaches could adversely affect our operations, net income or reputation,” incorporated by reference into this Item 1C. 

 

Governance

 

The Board of Directors is responsible for oversight of risks from cybersecurity threats. Oversight of cybersecurity risk management is performed primarily by the Board of Directors and the IT Committee. The IT Committee consists of members of the Board of Directors and key members of management. The IT Committee’s primary purpose is to assist the Board of Directors in its oversight of technology and innovation strategies, plans and operations related to cybersecurity, data privacy, and third-party technology risk management. The Chief Information Security Officer (“CISO”) provides monthly information security reports on cybersecurity programs, policies and controls, key risk indicators and trends including responses to any cybersecurity events, and efforts to improve security. Annually, the CISO provides security training to the Board of Directors. The CISO also provides the Board of Directors with an annual Information Security Program Summary Report in compliance with federal banking guidelines.

 

The program is managed by the CISO who reports to the Chief Operations Officer and is reviewed by regulators as well as internal auditors. The Chief Information Officer (“CIO”) and information technology staff support the CISO in cybersecurity operations as necessary to mitigate risks to the Company's technology infrastructure. The CISO holds two cybersecurity industry leading certifications (CISSP, CCSP) and has more than 20 years of technology experience. Information technology staff are generally subject to professional education, experience, and certification requirements, and receive education and mentoring from the CISO and CIO.

 

 

Item 2. Properties

 

Our main office, which serves as our executive and operations center, is located at 10500 Coursey Boulevard in Baton Rouge, Louisiana. In addition, we operate 28 full-service branches. Our 20 branches in Louisiana are located in Ascension (1), East Baton Rouge (3), West Baton Rouge (1), Jefferson (2), Lafayette (2), Livingston (1), Orleans (1), St. Tammany (1), Tangipahoa (1), East Feliciana (2), West Feliciana (1), Evangeline (3) and Calcasieu (1) Parishes. Our two branches in Texas are located in Galveston (1) and Harris (1) Counties, and one loan and deposit production office is located in Montgomery County. Our six branches in Alabama are located in Calhoun (3), Sumter (2), and Tuscaloosa (1) Counties. We also have one stand-alone ITM in Morgan City, Louisiana.

 

We own the building, known as Investar Tower, in which our main office is located, and all of our branch offices, with the exception of two leased branch locations in Louisiana, and two leased branch locations and one loan and deposit production office in Texas. As lessor, we lease space on the first floor of our main office building to multiple tenants, and we also lease a portion of one of our branch locations. Each of our owned branch facilities is a stand-alone building with on-site parking and drive-up access, the majority of which are equipped with an ATM or ITM. We believe that our facilities are in good condition and are adequate to meet our operating needs for the foreseeable future.

 

We also own a tract of land in each of the following Louisiana parishes: East Baton Rouge Parish; St. Mary Parish; and Ascension Parish. Each tract of land has been designated as either a future branch or stand-alone ITM location. The timing of the development of these tracts of land is uncertain.

 

Item 3. Legal Proceedings

 

From time to time we are party to ordinary routine litigation matters incidental to the conduct of our business. We are not presently party to, and none of our property is the subject of, any legal proceedings, the resolution of which we believe would have a material adverse effect on our business, financial condition, results of operations, cash flows, growth prospects or capital levels, nor were any such proceedings terminated during the fourth quarter of 2023.

 

Item 4. Mine Safety Disclosures

 

Not applicable.

 

PART II

 

Item 5. Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

 

Market Information

 

Our common stock is listed on the Nasdaq Global Market (the “Nasdaq”) under the symbol “ISTR.” As of March 4, 2024, there were approximately 712 holders of record of our common stock including participants in security position listings.

 

Dividend Policy

 

The Company has paid a quarterly dividend since 2011 and intends to continue to declare dividends on a quarterly basis. The declaration of dividends is at the discretion of our board of directors and will depend on our financial performance, future prospects, regulatory requirements and other factors deemed relevant by the board of directors.

 

Since we are a holding company with no material business activities, our ability to pay dividends is substantially dependent upon the ability of Investar 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. See Item 1. Business – Supervision and Regulation – Dividends, above for a discussion of the restrictions on dividends under federal banking laws and regulations. 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 corporations’ 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 our parent company 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.

 

These restrictions do not, and are not expected in the future to, materially limit the Company’s ability to pay dividends to its shareholders in an amount consistent with the Company’s history of paying dividends.

 

 

Stock Performance Graph

 

totalreturngraph.jpg

 

The above graph compares the cumulative total shareholder return on the Company’s common stock over a measurement period beginning at the market close on the last trading day of 2018, with (i) the cumulative total return on the stocks included in the Russell 3000 Index and (ii) the cumulative total return on the stocks included in the S&P United States SmallCap Banks Index, which includes banks with market capitalizations of $250 million to $1 billion. The performance graph assumes that the value of the investment in our common stock, the Russell 3000 Index and the S&P United States SmallCap Banks Index was $100 at December 31, 2018 and that all dividends were reinvested.

 

Index

 

12/31/2018

   

6/30/2019

   

12/31/2019

   

6/30/2020

 

Investar Holding Corporation

  $ 100.00     $ 96.39     $ 97.72     $ 59.36  

Russell 3000

    100.00       118.71       131.02       126.47  

S&P US SmallCap Banks

    100.00       114.88       125.46       85.84  
   

12/31/2020

   

6/30/2021

   

12/31/2021

   

6/30/2022

 

Investar Holding Corporation

  $ 68.61     $ 95.61     $ 77.51     $ 93.00  

Russell 3000

    158.39       182.32       199.03       157.04  

S&P US SmallCap Banks

    113.94       144.29       158.62       133.49  
   

12/31/2022

   

6/30/2023

   

12/31/2023

         

Investar Holding Corporation

  $ 92.27     $ 52.68     $ 65.91          

Russell 3000

    160.80       186.80       202.54          

S&P US SmallCap Banks

    139.85       108.62       140.55          

 

There can be no assurance that our common stock performance will continue in the future with the same or similar trends depicted in the performance graph above. We will not make or endorse any predictions as to future stock performance.

 

The information provided under the heading Stock Performance Graph shall not be deemed to be soliciting material or to be filed with the SEC or subject to its proxy regulations or to the liabilities of Section 18 of the Securities Exchange Act of 1934, as amended, other than as provided in Item 201 of Regulation S-K. The information provided in this section shall not be deemed to be incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended.

 

 

Unregistered Sales of Equity Securities

 

Not applicable.

 

Issuer Purchases of Equity Securities

 

Period

 

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

   

(b) Average Price Paid per Share (or Unit)(2)

   

(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(3)

 

October 1, 2023 to October 31, 2023

    22,000     $ 10.67       22,000       524,032  

November 1, 2023 to November 30, 2023

    9,794       9.89       9,766       514,266  

December 1, 2023 to December 31, 2023

                      514,266  
      31,794     $ 10.43       31,766       514,266  

 

 

(1)

Includes 28 shares surrendered to cover the payroll taxes due upon the vesting of restricted stock.

  (2) The average price paid per share does not include the effect of excise tax expense incurred on net stock repurchases.
  (3) The Company has had a stock repurchase program since 2015. On July 19, 2023, the Company announced that its board of directors authorized the repurchase of an additional 350,000 shares of the Company’s common stock under its stock repurchase plan. As of December 31, 2023, the Company had 514,266 shares remaining available under the program.

 

Securities Authorized for Issuance under Equity Compensation Plans

 

Please refer to the information under the heading “Securities Authorized for Issuance under Equity Compensation Plans” in Item 12, Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters, for a discussion of the securities authorized for issuance under the Company’s equity compensation plans.

 

Item 6. [Reserved]

 

 

 

Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations

 

This section presents management’s perspective on the financial condition and results of operations of Investar Holding Corporation and its wholly-owned subsidiary, Investar Bank, National Association (the “Bank,” together with Investar Holding Corporation, the “Company,” “we,” “our,” or “us”). The following discussion and analysis should be read in conjunction with the Company’s consolidated financial statements and related notes and other supplemental information included herein. Certain risks, uncertainties and other factors, including those set forth under Item 1A. Risk Factors in Part I, and elsewhere in this Annual Report on Form 10-K, may cause actual results to differ materially from those projected results discussed in the forward-looking statement appearing in this discussion and analysis.

 

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

This annual report on Form 10-K, both in Management’s Discussion and Analysis of Financial Condition and Results of Operations, and elsewhere, contains forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These forward-looking statements include statements relating to our projected growth, anticipated future financial performance, changes in our allowance for credit losses including due to the adoption of ASU 2016-13, anticipated future credit quality and our potential ability to achieve performance and strategic goals, as well as statements relating to the anticipated effects of these factors on our business, financial condition and results of operations. These statements can typically be identified through the use of words or phrases such as “may,” “should,” “could,” “predict,” “potential,” “believe,” “think,” “will likely result,” “expect,” “continue,” “will,” “anticipate,” “seek,” “estimate,” “intend,” “plan,” “projection,” “would” and “outlook,” or the negative version of those words or other comparable words or phrases of a future or forward-looking nature.

 

Our forward-looking statements contained herein are based on assumptions and estimates that management believes to be reasonable in light of the information available at this time. However, many of these statements are inherently uncertain and beyond our control and could be affected by many factors. Factors that could have a material effect on our business, financial condition, results of operations, cash flows and future growth prospects can be found in Item 1A. Risk Factors. 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;
changes in inflation, interest rates, yield curves and interest rate spread relationships that affect our loan and deposit pricing;
our ability to continue to successfully execute the pivot of our near-term strategy from primarily a growth strategy to a strategy primarily focused on consistent, quality earnings through the optimization of our balance sheet, and our ability to successfully execute a long-term growth strategy;

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

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 be caused by, among other things, disruptions in the banking industry similar to those that occurred in early 2023 that caused bank depositors to move uninsured deposits to other banks or alternative investments outside the banking industry;

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

our adoption on January 1, 2023 of 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;
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;

 

 

increasing costs of complying with new and potential future regulations;
new or increasing geopolitical tensions, including resulting from wars in Ukraine and Israel and surrounding areas;
the emergence or worsening of widespread public health challenges or pandemics including COVID-19;

concentration of credit exposure;

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

fluctuations in the price of oil and natural gas;

data processing system failures and errors;

risks associated with our digital transformation process, including increased risks of cyberattacks and other security breaches and challenges associated with addressing the increased prevalence of artificial intelligence;
risks of losses resulting from increased fraud attacks against us and others in the financial services industry;

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;

hurricanes, tropical storms, tropical depressions, floods, winter storms, droughts and other adverse weather events, all of which have affected our market areas from time to time; other natural disasters; oil spills and other man-made disasters; acts of terrorism; other international or domestic calamities; acts of God; and other matters beyond our control; and

other circumstances, many of which are beyond our control.

 

The foregoing factors should not be construed as exhaustive and should be read together with the other cautionary statements included herein. If one or more events related to these or other risks or uncertainties materialize, or if our underlying assumptions prove to be incorrect, actual results may differ materially from what we anticipate. Accordingly, you should not place undue reliance on any such forward-looking statements.

 

Any forward-looking statement speaks only as of the date on which it is made, and we do not undertake any obligation to publicly update or review any forward-looking statement, whether as a result of new information, future developments or otherwise. New factors emerge from time to time, and it is not possible for us to predict which will arise. In addition, we cannot assess the impact of each factor on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. We qualify all of our forward-looking statements by these cautionary statements.

 

 

Overview

 

Through our wholly-owned subsidiary Investar Bank, National Association, 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 (approximately 80% of our total deposits as of December 31, 2023), 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. As of March 7, 2024, 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. 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.

 

During 2023, we pivoted our near-term strategy from primarily a growth strategy to primarily a focus on consistent, quality earnings through the optimization of our balance sheet. Our long-term strategy includes organic growth through high quality loans and growth through acquisitions, including whole-bank acquisitions, strategic branch acquisitions and asset acquisitions. We have completed seven whole-bank acquisitions since 2011 and regularly review acquisition opportunities. Our most recent whole bank acquisition was completed in April 2021. During our last three fiscal years, we have not opened any de novo branch locations; however, in the third quarter of 2023, we converted an existing loan and deposit production office in Tuscaloosa, Alabama to a cashless branch designed to provide a digital banking experience. During the third and fourth quarters of 2023, we purchased commercial and industrial revolving lines of credit with an unpaid principal balance of $162.7 million in two tranches.

 

We have continued to evaluate opportunities to improve our branch network efficiency, leverage our digital initiatives, and further reduce costs. We closed five branches during our last three fiscal years, and one in Alabama during the first quarter of 2024. Three of the branches had been acquired, and the closures involved anticipated synergies that resulted in significant cost savings. In 2022, we sold five former branch locations and three tracts of land that were being held for future branch locations. On January 27, 2023, we completed the 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. During the third quarter of 2023, we ceased operation of 14 ATMs.

 

In an effort to focus more on our core business and optimize profitability, in the third quarter of 2023, we made the strategic decision to exit the consumer mortgage origination business. Consumer mortgage loan products are typically long-term and fixed-rate and generally require a higher relative allowance for credit losses than other loan products. Consumer mortgage volumes have decreased to historical lows due to the combination of rising housing prices and interest rates and constriction of housing supply. As a result of this decision, we further optimized our workforce and will continue to dedicate resources to our more profitable business lines. Related severance expense was $0.1 million. Substantially all of the consumer mortgage portfolio is included in the 1-4 family loan category.

 

Our principal business is lending to and accepting deposits from individuals and small to medium-sized businesses in our areas of operation. As a financial holding company operating through one reportable segment, 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.

 

 

For certain GAAP performance measures, see “Certain Performance Indicators” below. We also monitor changes in our tangible equity, tangible assets, tangible book value per share, and our efficiency ratio, shown in the section “Certain Performance Indicators: Non-GAAP Financial Measures” below.

 

Certain Performance Indicators

 

   

As of and for the years ended December 31,

(In thousands, except share data)

 

2023(1)

 

2022

 

2021(2)

 

2020(2)

  2019(2)

Financial Information

                                       

Total assets

  $ 2,815,155     $ 2,753,807     $ 2,513,203     $ 2,321,181     $ 2,148,916  

Total stockholders' equity

    226,768       215,782       242,598       243,284       241,976  

Net interest income

    74,520       89,785       83,814       73,534       64,818  

Net income

    16,678       35,709       8,000       13,889       16,839  

Diluted earnings per share

    1.69       3.50       0.76       1.27       1.66  
                                         

Performance Ratios

                                       

Return on average assets

    0.60 %     1.37 %     0.31 %     0.61 %     0.85 %

Return on average equity

    7.63       15.63       3.22       5.77       8.21  

Net interest margin

    2.83       3.67       3.53       3.49       3.51  

Dividend payout ratio

    23.37       10.31       40.26       19.69       13.55  
                                         

Capital Ratios

                                       

Total equity to total assets

    8.06 %     7.84 %     9.65 %     10.48 %     11.26 %

Tangible equity to tangible assets(3)

    6.65       6.37       8.04       9.22       9.96  

 

  (1) During 2023 we purchased commercial and industrial lines of credit with an unpaid principal balance of $162.7 million. We also sold certain assets, deposits, and other liabilities associated with two branches in Texas previously acquired from PlainsCapital Bank.
 

(2)

The following acquisitions are included from the date of each acquisition: On March 1, 2019, the Company acquired Mainland Bank, by merger with and into the Bank. On November 1, 2019, the Company acquired Bank of York, by merger with and into the Bank. On February 21, 2020, the Bank acquired two branches from PlainsCapital Bank. On April 1, 2021, the Company acquired Cheaha Financial Group, Inc. and its wholly-owned subsidiary Cheaha Bank, by merger with and into the Company and Bank, respectively.

  (3) Non-GAAP financial measure. See reconciliation below.

 

Certain Performance Indicators: Non-GAAP Financial Measures

 

Our accounting and reporting policies conform to accounting principles generally accepted in the United States, or GAAP, and the prevailing practices in the banking industry. However, we also evaluate our performance based on certain additional metrics. The efficiency ratio, tangible book value per share, and the ratio of tangible equity to tangible assets are not financial measures recognized under GAAP and, therefore, are considered non-GAAP financial measures.

 

 

Our management, banking regulators, financial analysts and investors use these non-GAAP financial measures to compare the capital adequacy of banking organizations with significant amounts of preferred equity and/or goodwill or other intangible assets, which typically stem from the use of the purchase accounting method of accounting for mergers and acquisitions. Tangible equity, tangible assets, tangible book value per share or related measures should not be considered in isolation or as a substitute for total stockholders’ equity, total assets, book value per share or any other measure calculated in accordance with GAAP. Moreover, the manner in which we calculate tangible equity, tangible assets, tangible book value per share and any other related measures may differ from that of other companies reporting measures with similar names. The following table reconciles, as of the dates set forth below, stockholders’ equity (on a GAAP basis) to tangible equity and total assets (on a GAAP basis) to tangible assets and calculates both our tangible book value per share and efficiency ratio (dollars in thousands).

 

   

As of and for the years ended December 31,

 
   

2023

   

2022

   

2021

   

2020

   

2019

 

Total stockholders’ equity - GAAP

  $ 226,768     $ 215,782     $ 242,598     $ 243,284     $ 241,976  

Adjustments:

                                       

Goodwill

    40,088       40,088       40,088       28,144       26,132  

Core deposit intangible

    2,132       2,959       3,848       3,988       4,803  

Trademark intangible

    100       100       100       100       100  

Tangible equity

  $ 184,448     $ 172,635     $ 198,562     $ 211,052     $ 210,941  
                                         

Total assets - GAAP

  $ 2,815,155     $ 2,753,807     $ 2,513,203     $ 2,321,181     $ 2,148,916  

Adjustments:

                                       

Goodwill

    40,088       40,088       40,088       28,144       26,132  

Core deposit intangible

    2,132       2,959       3,848       3,988       4,803  

Trademark intangible

    100       100       100       100       100  

Tangible assets

  $ 2,772,835     $ 2,710,660     $ 2,469,167     $ 2,288,949     $ 2,117,881  
                                         

Total shares outstanding

    9,748,067       9,901,847       10,343,494       10,608,869       11,228,775  

Book value per share

  $ 23.26     $ 21.79     $ 23.45     $ 22.93     $ 21.55  

Effect of adjustments

    (4.34 )     (4.36 )     (4.25 )     (3.04 )     (2.76 )

Tangible book value per share

  $ 18.92     $ 17.43     $ 19.20     $ 19.89     $ 18.79  

Total equity to total assets

    8.06 %     7.84 %     9.65 %     10.48 %     11.26 %

Effect of adjustments

    (1.41 )     (1.47 )     (1.61 )     (1.26 )     (1.30 )

Tangible equity to tangible assets

    6.65 %     6.37 %     8.04 %     9.22 %     9.96 %
                                         

Efficiency ratio(1)

                                       

Noninterest expense

  $ 62,630     $ 60,865     $ 63,062     $ 57,131     $ 48,168  

Net interest income

    74,520       89,785       83,814       73,534       64,818  

Noninterest income

    6,538       18,350       12,042       12,096       6,216  

Efficiency ratio

    77.26 %     56.29 %     65.79 %     66.72 %     67.81 %

 

 

(1)

Calculated as noninterest expense divided by the sum of net interest income (before provision for credit losses) and noninterest income.

 

Critical Accounting Estimates

 

The preparation of our consolidated financial statements in accordance with GAAP requires us to make estimates and judgments that affect our reported amounts of assets, liabilities, income and expenses and related disclosure of contingent assets and liabilities. Although independent third parties are often engaged to assist us in the estimation process, management evaluates the results, challenges assumptions used and considers other factors which could impact these estimates. Actual results may differ from these estimates under different assumptions or conditions.

 

For more detailed information about our accounting policies, please refer to Note 1. Summary of Significant Accounting Policies. The following discussion presents our critical accounting estimates, which are those estimates made in accordance with GAAP that involve a significant level of estimation uncertainty and have had or are reasonably likely to have a material impact on our financial condition or results of operations. We believe that the judgments, estimates and assumptions that we use in the preparation of our consolidated financial statements are appropriate.

 

Allowance for Credit Losses. In June 2016, the Financial Accounting Standards Board (“FASB”) issued a new accounting standard (Accounting Standards Update “ASU” 2016-13), referred to as the Current Expected Credit Loss (“CECL”) standard, which became effective for us, as a smaller reporting company, on January 1, 2023. 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. Results for reporting periods beginning prior to January 1, 2023 are presented in accordance with ASU 2016-13 while prior period amounts continue to be reported in accordance with previously applicable U.S. GAAP.

 

For reporting periods beginning on and after January 1, 2023, reflecting the adoption of ASU 2016-13:

 

On January 1, 2023, we adopted Accounting Standards Codification (“ASC”) Topic 326, “Financial Instruments—Credit Losses,” commonly referred to as Current Expected Credit Losses (“CECL”), on a modified retrospective basis. The provisions of this guidance required a material change to the manner in which the Company estimates and reports losses on financial instruments, including loans and unfunded lending commitments, select investment securities, and other assets carried at amortized cost. 

 

The allowance is sensitive to external factors including the general health of the economy, as evidenced by changes in interest rates, gross domestic product, unemployment rates, and changes in real estate demand and values. Management considers these variables and all other available information when establishing the final level of the allowance. These variables and others have the ability to result in actual loan losses that differ from the originally estimated amounts. Changes in the factors used by management to determine the appropriateness of the allowance or the availability of new information could cause the allowance to be increased or decreased in future periods.

 

The Company’s management considers available forecasts, current events not captured and our specific portfolio characteristics and applies weights to the scenario output based on a best estimate of likely outcomes. Changing economic conditions have introduced enhanced estimation uncertainty in the forecasts used to estimate expected credit loss. Our credit loss models were built using historical data that may not correlate to existing economic conditions. Such forecasted information is inherently uncertain, therefore, actual results may differ significantly from management’s estimates.

 

The quantitative loss rate analysis is supplemented by a review of qualitative factors that considers whether conditions differ from those existing during the historical periods used in the development of the credit loss models. Such factors include, but are 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. While quantitative data for these factors is used where available, there is significant judgment applied in these processes.

 

For credits that are individually evaluated, a specific allowance is calculated as the shortfall between the credit’s value and the Bank’s exposure. The loan’s value is measured by either the fair value of the collateral of the loan based on third-party appraisals if it is collateral dependent, or based on a discounted cash flow methodology. Collateral on impaired loans may include, but is not limited to, commercial and residential real estate and accounts receivable. Values for impaired credits are highly subjective and based on information available at the time of valuation and the current resolution strategy. These values are difficult to assess and have heightened uncertainty resulting from current market conditions. Actual results could differ from these estimates.

 

Management considers the appropriateness of these critical assumptions as part of its allowance review and believes the allowance for credit loss level is appropriate based on information available through the financial statement date. Please refer to Note 3. Loans and Allowance for Credit Losses, and Note 1. Summary of Significant Accounting Policies – Allowance for Credit Losses and – Accounting Standards Adopted in 2023, for additional discussion. 

 

For reporting periods prior to January 1, 2023, prior to the adoption of ASU 2016-13:

 

The allowance for loan losses was established as losses were estimated through a provision for loan losses charged to earnings. Through December 31, 2022, the allowance for loan losses was based on the amount that management believed would be adequate to absorb probable losses inherent in the loan portfolio based on, among other things, evaluations of the collectability of loans and prior loan loss experience. The evaluations took into consideration such factors as changes in the nature and volume of the loan portfolio, overall portfolio quality, review of specific problem loans, and current economic conditions that may affect borrowers’ ability to pay. Another component of the allowance was losses on loans assessed as impaired under FASB Accounting Standards Codification (“ASC”) Topic 310,“Receivables (“ASC 310”). The balance of the loans determined to be impaired under ASC 310 and the related allowance was included in management’s estimation and analysis of the allowance for loan losses. Allowances for impaired loans were generally determined based on collateral values or the present value of estimated cash flows.

 

 

The determination of the appropriate level of the allowance was inherently subjective as it requires estimates that are susceptible to significant revision as more information became available. We had an established methodology to determine the adequacy of the allowance for loan losses that assessed the risks and losses inherent in our portfolio and portfolio segments. We have an internally developed model that required significant judgment to determine the estimation method that fit the credit risk characteristics of the loans in our portfolio and portfolio segments. Qualitative and environmental factors that may not be directly reflected in quantitative estimates include: asset quality trends, changes in loan concentrations, new products and process changes, changes and pressures from competition, changes in lending policies and underwriting practices, trends in the nature and volume of the loan portfolio, and national and regional economic trends. Changes in these factors were considered in determining changes in the allowance for loan losses. The impact of these factors on our qualitative assessment of the allowance for loan losses could change from period to period based on management’s assessment of the extent to which these factors were already reflected in historic loss rates. The uncertainty inherent in the estimation process was also considered in evaluating the allowance for loan losses.

 

Acquisition Accounting. We account for our acquisitions under ASC Topic 805,Business Combinations(“ASC 805”), which requires the use of the purchase method of accounting. All identifiable assets acquired, including loans, are recorded at fair value (which is discussed below). The excess purchase price over the fair value of net assets acquired is recorded as goodwill. If the fair value of the net assets acquired exceeds the purchase price, a bargain purchase gain is recognized.

 

For reporting periods beginning on and after January 1, 2023, reflecting the adoption of ASU 2016-13:

 

ASU 2016-13 amended the accounting model for purchased financial assets and replaced the guidance for purchased credit impaired (“PCI”) financial assets with the concept of purchased credit deteriorated (“PCD”) assets. 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. We 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 met the criteria of PCD assets as of the date of adoption.

 

Please refer to Note 1. Summary of Significant Accounting Policies – Acquisition Accounting and – Accounting Standards Adopted in 2023, for additional discussion. 

 

For reporting periods prior to January 1, 2023, prior to the adoption of ASU 2016-13:

 

Because the fair value measurements incorporated assumptions regarding credit risk, no allowance for loan losses related to acquired loans was recorded on the acquisition date. The fair value measurements of acquired loans were based on estimates related to expected prepayments and the amount and timing of undiscounted expected principal, interest and other cash flows. The fair value adjustment was amortized over the life of the loan using the effective interest method.

 

Through December 31, 2022, we accounted for acquired impaired loans under ASC Topic 310-30. An acquired loan was considered impaired when there was evidence of credit deterioration since origination and it was probable at the date of acquisition that we would be unable to collect all contractually required payments. ASC 310-30 prohibited the carryover of an allowance for loan losses for acquired impaired loans. Over the life of the acquired loans, we continually estimated the cash flows expected to be collected on individual loans or on pools of loans sharing common risk characteristics. As of the end of each fiscal quarter, we evaluated the present value of the acquired loans using the effective interest rates. For any increases in cash flows expected to be collected, we adjusted the amount of accretable yield recognized on a prospective basis over the loan’s or pool’s remaining life, while we recognized a provision for loan loss in the consolidated statement of operations if the cash flows expected to be collected had decreased.

 

Overview of Financial Condition and Results of Operations

 

Net income for the year ended December 31, 2023 totaled $16.7 million, or $1.69 per diluted share, compared to $35.7 million, or $3.50 per diluted share, for the year ended December 31, 2022. This represents a $19.0 million, or a 53.3%, decrease in net income.

 

Net income decreased primarily due to a $15.3 million decrease in net interest income and an $11.8 million decrease in noninterest income, partially offset by a $2.0 million negative provision for credit losses in 2023 compared to a provision for credit losses of $2.9 million in 2022. The decrease in net interest income was a result of a $43.9 million increase in interest expense partially offset by a $28.6 million increase in interest income, as the Bank experienced margin compression due to rising market interest rates. The decrease in noninterest income is mainly attributable to $8.1 million of swap termination fees and $1.4 million of income from insurance proceeds recorded during the year ended December 31, 2022 and the loss on sale or disposition of fixed assets of $1.3 million during the year ended December 31, 2023, primarily resulting from the sale of the Alice and Victoria, Texas branches, compared to a loss on sale or disposition of fixed assets of $0.3 million for the year ended December 31, 2022. The negative provision for credit losses of $2.0 million for the year ended December 31, 2023 was primarily due to net recoveries of $2.3 million in 2023. At December 31, 2023, the Company and the Bank each were in compliance with all regulatory capital requirements, and the Bank was considered “well-capitalized” under prompt corrective action regulations.

 

Additional key components of the Company’s performance during the year ended December 31, 2023 are summarized below.

 

 

Credit quality metrics improved as nonperforming loans were 0.26% of total loans at December 31, 2023 compared to 0.54% at December 31, 2022.

 

 

We recognized net recoveries of $2.3 million in the loan portfolio during the year ended December 31, 2023 primarily attributable to recoveries on one loan relationship that became impaired in the third quarter of 2021 as a result of Hurricane Ida.

 

 

We recognized interest recoveries of $1.5 million during the year ended December 31, 2023, $1.1 million of which are attributable to one commercial and industrial oil and gas loan relationship.

 

 

Total deposits were $2.3 billion at December 31, 2023, an increase of $173.4 million, or 8.3%, compared to deposits of $2.1 billion at December 31, 2022. Noninterest-bearing deposits decreased $132.0 million, or 22.7%, to $448.8 million compared to $580.7 million at December 31, 2022. Time deposits and brokered time deposits increased, and other deposit categories decreased. At December 31, 2023, estimated uninsured deposits represented approximately 32% of our total deposits. 

 

 

Total loans increased $105.9 million, or 5.0% to $2.2 billion at December 31, 2023, compared to $2.1 billion at December 31, 2022. Excluding approximately $13.9 million in loans associated with the Alice and Victoria, Texas branches sold in January 2023 and approximately $162.7 million in revolving lines of credit purchased during 2023, total loans decreased $43.0 million, or 2.1%, to $2.05 billion at December 31, 2023, compared to $2.09 billion at December 31, 2022.

 

 

On January 1, 2023, Investar adopted ASU 2016-13. Also referred to as the 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. Our allowance for credit losses to total loans was 1.38% at December 31, 2023.

 

 

Net interest income for the year ended December 31, 2023 was $74.5 million, a decrease of $15.3 million, or 17.0%, compared to $89.8 million for the year ended December 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 during 2022 and 2023, and we raised rates offered on deposits and incurred higher costs on our borrowings. For the year ended December 31, 2023 our net interest margin was 2.83%, compared to 3.67% for the year ended December 31, 2022

 

 

Return on average assets decreased to 0.60% for the year ended December 31, 2023, compared to 1.37% for the year ended December 31, 2022. Return on average equity was 7.63% for the year ended December 31, 2023 compared to 15.63% for the year ended December 31, 2022.

 

 

We repurchased 222,448 shares of our common stock at an average price of $13.47 per share during 2023 and repurchased 518,978 shares of our common stock at an average price of $20.27 per share during 2022. We increased dividends by 8% to $0.395 per share for 2023 from $0.365 per share for 2022.

 

 

Stockholders’ equity increased 5.1% to $226.8 million at December 31, 2023, compared to December 31, 2022, due to net income for 2023 and a decrease in accumulated other comprehensive loss due to an increase in the fair value of the Bank’s AFS securities portfolio, partially offset by the cumulative effect adjustment as a result of the adoption of ASU 2016-13 reflected in retained earnings.

 

 

Certain Events That Affect Year-over-Year 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 increased rapidly during 2021 through June 2022. Since June 2022, the rate of inflation generally has declined; however, it has remained at high levels compared to recent historical periods. In response, the Federal Reserve raised the federal funds target rate multiple times from March 2022 through July 2023. Through these incremental increases to the target rate, the Federal Reserve has raised, on a cumulative basis, the target rate from 0% to 0.25% by 525 basis points to 5.25% to 5.50%.

 

Disruptions in the Banking Industry in 2023. 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. Reports indicated 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 addition, we took steps to inform our customers about our financial position, liquidity and insured deposit products. During the second quarter of 2023, we utilized the BTFP and reduced Federal Home Loan Bank (“FHLB”) advances. The Bank utilized this source of funding due to its lower rate, the ability to prepay the obligations without penalty, and as a means to lock in funding. During the fourth quarter of 2023 and again in the first quarter of 2024, the Bank refinanced its BTFP borrowings with new borrowings under the program due to more favorable rates. In January 2024, the Federal Reserve announced that it will cease making new loans under the BTFP on March 11, 2024. As of December 31, 2023, estimated uninsured deposits represented approximately 32% of our total deposits. For additional information, see “Discussion and Analysis of Financial Condition – Deposits, Borrowings, Liquidity and Capital Resources” and Part I. Item 1A. Risk Factors.

 

Hurricane Ida. On August 29, 2021, Hurricane Ida hit the Louisiana coast as a category 4 hurricane. Though Hurricane Ida did not cause significant physical damage to our branch locations, the storm devastated some of our market areas. The Company set up programs to help employees and customers experiencing financial difficulty as a result of the hurricane, including a deferral program. Additionally, the Company recorded an impairment charge of $21.6 million in the third quarter of 2021 related to a lending relationship with related borrowers (collectively, the “Borrower”) consisting of multiple loans secured by various types of collateral, including real estate, inventory, and equipment. As a result of Hurricane Ida’s impact on the Borrower’s business operations, some of the collateral securing the loan relationship, including real estate, inventory, and equipment, experienced a significant reduction in value. Since the third quarter of 2021, as of December 31, 2023, we have recorded net recoveries related to this loan relationship of $2.5 million, substantially all of which were in 2023.

 

COVID-19 Pandemic. In March 2020, COVID-19 was declared a pandemic by the World Health Organization. Our business remained open through the pandemic, although it was significantly disrupted in the early stages of the pandemic as we adjusted to various and changing government and voluntary restrictions on activities. The pandemic generally slowed business lending activity from the level we would otherwise have expected, particularly in 2020, except for our participation in the Paycheck Protection Program (“PPP”) under which we made loans to qualified borrowers that under specified conditions were subject to forgiveness and repayment by the federal government. We began participating in the PPP in the second quarter of 2020 and made loans totaling $178.0 million, almost all of which had been repaid by the end of 2022. The pandemic and the PPP created excess liquidity in the market, contributing to increases in our noninterest and interest-bearing demand deposits, and in money market deposit accounts and savings accounts in 2021. We took actions to protect our customers and employees throughout the pandemic, including increasing our remote banking and working options. We recorded an increased provision for loan losses during 2020 as a result of the impact of the pandemic. Market conditions generally improved during 2021 and 2022 compared to 2020, as vaccines became available and government restrictions lessened. The federal government declared an end to the COVID-19 public health emergency in May 2023.

 

Acquisitions. On April 1, 2021, the Company completed its acquisition of Cheaha Financial Group, Inc. (“Cheaha”) and its wholly-owned subsidiary, Cheaha Bank, an Alabama state bank headquartered in Oxford, Alabama that served the residents of Calhoun Country, Alabama through four branch locations. All of the issued and outstanding shares of Cheaha were converted into aggregate cash merger consideration of $41.1 million. On the date of the acquisition, Cheaha had total assets with a fair value of $240.8 million, including $120.4 million in loans, and we assumed $207.0 million in deposits. The Company recorded a core deposit intangible and goodwill of $0.8 million and $11.9 million, respectively, related to the acquisition of Cheaha.

 

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.

 

Loan Purchase Agreement. In August 2023, we entered into a loan purchase agreement to acquire commercial and industrial revolving lines of credit, and related accrued interest, with an unpaid principal balance of $162.7 million and total commitments of $237.8 million in two tranches. The first and second tranches consist of unpaid principal balances of $35.8 million and $127.0 million, respectively, and total commitments of $61.1 million and $176.7 million, respectively. The purchase of the first tranche was completed on September 15, 2023, and the purchase of the second tranche was completed on October 3, 2023. The revolving lines of credit are variable-rate and shorter-term in nature with varying renewal terms. The loans are to consumer finance lending companies that possess a history of high credit quality and that we believe provide us with opportunities to deepen the relationships through our services such as treasury management. We also hired two individuals with significant experience in lending in this area.

 

Sale of Two Branches to First Community Bank. On January 27, 2023, we completed the 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.

 

Exit from Consumer Mortgage Origination Business. In the third quarter of 2023, we made the strategic decision to exit the consumer mortgage origination business. For additional discussion, see “Overview.”

 

Branch Closures. We closed one branch location in Prairieville, Louisiana in April 2021 and one branch location in Dickinson, Texas in October 2021. We closed one branch location in Baton Rouge, Louisiana and one branch location in Westlake, Louisiana in May 2022. We closed one branch location in Central, Louisiana in March 2023. We sold the land and buildings relating to five locations during 2022. During 2022, we also sold three tracts of land that were held for future branch locations. In the first quarter of 2024, we closed one branch in Alabama. We continue to evaluate opportunities to reduce our physical branch footprint and further improve efficiency through digital initiatives. 

 

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.

 

Discussion and Analysis of Financial Condition

 

Total assets were $2.82 billion at December 31, 2023, an increase of $61.3 million, or 2.2%, compared to total assets of $2.75 billion at December 31, 2022. The growth experienced since December 31, 2022 can mainly be attributed to growth in loans of $105.9 million primarily due to the purchase of commercial and industrial revolving lines of credit, partially offset by a decrease of $43.2 million in the available for sale securities portfolio.

 

 

Loans

 

General. Loans, constitute our most significant asset, comprising 79% and 76%, of our total assets at December 31, 2023 and 2022, respectively. Loans increased $105.9 million, or 5.0%, to $2.2 billion at December 31, 2023 from $2.1 billion at December 31, 2022. The increase in loans was primarily the result of the purchase of approximately $162.7 million in revolving lines of credit during 2023 as described in Certain Events that Affect Year-Over-Year Comparability Loan Purchase Agreement, partially offset by lower demand and the sale of approximately $13.9 million in loans associated with the sale of the Alice and Victoria, Texas branches. Given the elevated interest rate environment, we are emphasizing origination of high margin loans that promote long-term profitability and proactively exiting credit relationships that do not fit this strategy.

 

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).

 

   

December 31,

 
   

2023

 

2022

   

Amount

   

Percentage of Total Loans

   

Amount

   

Percentage of Total Loans

 

Mortgage loans on real estate

                               

Construction and development

  $ 190,371       8.6 %   $ 201,633       9.6 %

1-4 Family

    413,786       18.7       401,377       19.1  

Multifamily

    105,946       4.8       81,812       3.9  

Farmland

    7,651       0.4       12,877       0.6  

Commercial real estate

                               

Owner-occupied

    449,610       20.3       445,148       21.1  

Nonowner-occupied

    488,098       22.1       513,095       24.4  

Commercial and industrial

    543,421       24.6       435,093       20.7  

Consumer

    11,736       0.5       13,732       0.6  

Total loans

  $ 2,210,619       100 %   $ 2,104,767       100 %

 

At December 31, 2023, the Company’s total business lending portfolio, which consists of loans secured by owner-occupied commercial real estate properties and commercial and industrial loans, was $993.0 million, an increase of $112.8 million, or 12.8%, compared to the business lending portfolio of $880.2 million at December 31, 2022. The increase in the business lending portfolio as of December 31, 2023 is primarily driven by the purchase of commercial and industrial revolving lines of credit described above, partially offset by lower loan demand due to higher rates. Largely as a result of the loan portfolio purchase, our variable-rate loans as a percentage of total loans increased to 27% at December 31, 2023 compared to 22% at December 31, 2022. We continue to focus on a relationship-driven banking strategy and have increased our emphasis on originating higher margin commercial and industrial and owner-occupied commercial real estate loans. 

 

Nonowner-occupied loans totaled $488.1 million at December 31, 2023, a decrease of $25.0 million, or 4.9% compared to $513.1 million at December 31, 2022, primarily due to a reclassification of approximately $24.1 million nonowner-occupied loans to multifamily loans due to a change to the primary use of the property.

 

As discussed above under “Overview,” during the third quarter of 2023 we exited the consumer mortgage loan origination business to transition into shorter duration, higher risk-adjusted return asset classes, in an effort to focus more on our core business and optimize profitability. The consumer mortgage portfolio was approximately $261.6 million at December 31, 2023, substantially all of which is included in the 1-4 family category. The remaining loans in the category consisted primarily of second mortgages, home equity loans, home equity lines of credit, and business purpose loans secured by 1-4 family residential real estate.

 

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 December 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.

 

 

The following table sets forth loans outstanding at December 31, 2023, which, based on remaining scheduled repayments of principal, are due in the periods indicated, as well as the amount of loans with fixed and variable rates in each maturity range. 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

 

Mortgage loans on real estate:

                                               

Construction and development

  $ 104,701     $ 51,251     $ 17,390     $ 9,106     $ 7,923     $ 190,371  

1-4 Family

    51,591       85,021       38,047       21,224       217,903       413,786  

Multifamily

    5,386       82,147       16,780       522       1,111       105,946  

Farmland

    1,496       4,552       1,603                   7,651  

Commercial real estate

                                               

Owner-occupied

    35,807       100,426       196,837       107,946       8,594       449,610  

Nonowner-occupied

    34,408       250,717       161,603       41,159       211       488,098  

Commercial and industrial

    300,972       84,165       91,887       64,944       1,453       543,421  

Consumer

    2,794       7,558       910       384       90       11,736  

Total loans

  $ 537,155     $ 665,837     $ 525,057     $ 245,285     $ 237,285     $ 2,210,619  
                                                 

Loans with fixed rates:

                                               

Mortgage loans on real estate:

                                               

Construction and development

  $ 13,752     $ 50,801     $ 17,390     $ 9,106     $ 7,923     $ 98,972  

1-4 Family

    13,875       79,989       38,047       21,224       217,903       371,038  

Multifamily

    3,786       79,151       6,472       522       1,111       91,042  

Farmland

    592       3,994       1,603                   6,189  

Commercial real estate

                                               

Owner-occupied

    16,882       96,894       159,033       88,321       2,136       363,266  

Nonowner-occupied

    30,242       226,060       137,006       23,408       211       416,927  

Commercial and industrial

    28,637       73,257       91,887       64,944       1,453       260,178  

Consumer

    2,108       7,558       910       384       90       11,050  

Total loans with fixed rates

  $ 109,874     $ 617,704     $ 452,348     $ 207,909     $ 230,827     $ 1,618,662  
                                                 

Loans with variable rates:

                                               

Mortgage loans on real estate:

                                               

Construction and development

  $ 90,949     $ 450     $     $     $     $ 91,399  

1-4 Family

    37,716       5,032                         42,748  

Multifamily

    1,600       2,996       10,308                   14,904  

Farmland

    904       558                         1,462  

Commercial real estate

                                               

Owner-occupied

    18,925       3,532       37,804       19,625       6,458       86,344  

Nonowner-occupied

    4,166       24,657       24,597       17,751             71,171  

Commercial and industrial

    272,335       10,908                         283,243  

Consumer

    686                               686  

Total loans with variable rates

  $ 427,281     $ 48,133     $ 72,709     $ 37,376     $ 6,458     $ 591,957  

 

 

Investment Securities

 

We purchase investment securities primarily to provide a source for meeting liquidity needs, with return on investment as a secondary consideration. We also use investment securities as collateral for certain deposits and other types of borrowings. Investment securities represented 14% of our total assets and totaled $382.4 million at December 31, 2023, a decrease of $31.1 million, or 7.5%, from $413.5 million at December 31, 2022. The decrease in investment securities at December 31, 2023 compared to December 31, 2022 was driven primarily by a $20.3 million decrease in residential mortgage-backed securities, a $9.8 million decrease in obligations of the U.S. Treasury and U.S. government agencies and corporations, and an $8.4 million decrease in commercial mortgage-backed securities, partially offset by an $11.0 million increase in obligations of state and political subdivisions. Due in large part to higher interest rates and market volatility, net unrealized losses in our investment portfolio totaled $57.3 million at December 31, 2023 and $62.1 million at 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).

 

   

December 31,

 
   

2023

   

2022

 
   

Balance

   

Percentage of Portfolio

   

Balance

   

Percentage of Portfolio

 

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

  $ 20,043       5.2 %   $ 29,805       7.2 %

Obligations of state and political subdivisions

    34,866       9.1       23,916       5.8  

Corporate bonds

    26,356       6.9       29,942       7.2  

Residential mortgage-backed securities

    234,354       61.3       254,618       61.6  

Commercial mortgage-backed securities

    66,771       17.5       75,191       18.2  

Total investment securities

  $ 382,390       100 %   $ 413,472       100 %

 

The investment portfolio consists of available for sale (“AFS”) and held to maturity (“HTM”) securities. We do not hold any investments classified as trading. We classify debt securities as HTM if management has the positive intent and ability to hold the securities to maturity. HTM securities are stated at amortized cost. Securities not classified as HTM are classified as AFS and are stated at fair value. At December 31, 2023, AFS securities comprised 95% of our total investment portfolio.

 

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.

 

During the year ended December 31, 2023, we purchased $14.1 million of HTM securities classified as obligations of state and political subdivisions. There were no purchases of HTM securities during the year ended December 31, 2022. During the year ended December 31, 2023, we purchased $107.9 million of AFS investment securities, compared to $181.6 million during the year ended December 31, 2022. Proceeds from maturities, prepayments and calls of AFS investment securities were $140.7 million in 2023 compared to $60.2 million in 2022, and we sold $15.0 million of AFS investment securities in 2023 compared to none in 2022.

 

U.S. Treasury and U.S. government agencies and corporations securities represented 96% and 9% of the AFS securities we purchased in 2023 and 2022, respectively. We utilized excess funds in the third quarter of 2023 to purchase $40.0 million in obligations of the U.S. Treasury and U.S. government agencies and corporations, which matured in October 2023. Mortgage-backed securities represented 4% and 84% of the AFS securities we purchased in 2023 and 2022, respectively. We did not purchase any other investment type in 2023. Of the remaining AFS securities purchased in 2022, 5% were corporate bonds and 2% were municipal securities. We only purchase corporate bonds that are investment grade securities issued by seasoned corporations.

 

 

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 as of December 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 states and political subdivisions

  $ 960       4.90 %   $ 2,556       5.31 %   $ 4,647       4.62 %   $ 10,000       5.82 %

Residential mortgage-backed securities

                                        2,309       3.09  

Available for sale:

                                                               

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

    605       2.88       9,942       5.44       9,836       6.28              

Obligations of states and political subdivisions

    27       2.92       1,412       2.37       9,459       2.57       7,870       2.63  

Corporate bonds

    350       3.55       12,439       3.98       14,558       4.38       2,750       2.80  

Residential mortgage-backed securities

                            6,692       2.93       268,258       2.24  

Commercial mortgage-backed securities

    52       4.00       4,827       4.11       3,089       3.25       67,117       3.62  
    $ 1,994             $ 31,176             $ 48,281             $ 358,304          

 

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%.

 

Premises and Equipment

 

Bank premises and equipment decreased $5.4 million, or 10.9%, to $44.2 million at December 31, 2023 from $49.6 million at December 31, 2022. The decrease was primarily attributable to the sale of the Alice and Victoria, Texas locations and the closure of one branch and one stand-alone ATM in Louisiana, which decreased bank premises and equipment by $1.4 million and $1.7 million, respectively. The remaining decrease was primarily attributable to depreciation.

 

Deferred Tax Asset

 

At December 31, 2023, the net deferred tax asset was $16.9 million, compared to $16.4 million at December 31, 2022. The increase in the deferred tax asset at December 31, 2023 compared to December 31, 2022 was primarily driven by the adoption of ASU 2016-13, partially offset by a decrease in the net unrealized losses of the Bank’s AFS securities portfolio. 

 

The Bank acquired net operating loss carryforwards as a result of acquisitions. At December 31, 2023, we held approximately $4,000 and $0.3 million in net operating loss carryforwards that expire in 2033 and 2039, respectively. U.S. tax law imposes annual limitations under Internal Revenue Code Section 382 on the amount of net operating loss carryforwards that may be used to offset federal taxable income. Under these laws, we may apply up to approximately $0.6 million to offset our taxable income each year. In addition to this limitation, our ability to utilize net operating loss carryforwards depends upon the Company generating taxable income. Given the substantial amount of time before our net operating loss carryforwards begin to expire, we currently expect to utilize these net operating loss carryforwards in full before their expiration.

 

 

Deposits

 

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

 

   

December 31,

 
   

2023

   

2022

 
   

Amount

   

Percentage of Total Deposits

   

Amount

   

Percentage of Total Deposits

 

Noninterest-bearing demand deposits

  $ 448,752       19.9 %   $ 580,741       27.9 %

Interest-bearing demand deposits

    489,604       21.7       565,598       27.1  

Money market deposit accounts

    179,366       8.0       208,596       10.0  

Savings accounts

    137,606       6.1       155,176       7.5  

Brokered time deposits

    269,102       11.9       9,990       0.5  

Time deposits

    731,297       32.4       562,264       27.0  

Total deposits

  $ 2,255,727       100 %   $ 2,082,365       100 %

 

Total deposits were $2.26 billion at December 31, 2023, an increase of $173.4 million, or 8.3%, from total deposits of $2.08 billion at December 31, 2022. Time deposits and brokered time deposits increased, and other deposit categories decreased. The majority of the increase in time deposits at December 31, 2023 compared to December 31, 2022 is due to organic growth and existing customer funds migrating from other deposit categories as a result of rising interest rates. Brokered time deposits increased to $269.1 million at December 31, 2023 from $10.0 million December 31, 2022. We utilize brokered time deposits, entirely in denominations of less than $250,000, to secure fixed cost funding and reduce short-term borrowings. We utilized shorter term brokered time deposits, which were laddered in duration to provide flexibility, to fund a portion of the purchase of commercial and industrial revolving lines of credit in 2023. At December 31, 2023, the balance of brokered time deposits remained below 10% of total assets, and the remaining weighted average duration was approximately 12 months with a weighted average rate of 5.18%. 

 

The Company had no brokered demand deposits at December 31, 2023 and 2022 or at December 31, 2021. Prior to December 31, 2021, the Bank utilized brokered demand deposits to satisfy the borrowings under its interest rate swap agreements due to more favorable pricing. In the third quarter of 2021, we voluntarily terminated multiple swap agreements, the borrowings for which matured in October 2021. During 2022, we voluntarily terminated our remaining interest rate swap agreements.

 

Estimated uninsured deposits were $720.1 million and $701.1 million at December 31, 2023 and 2022, respectively. The estimates are based on the same methodologies and assumptions used for our regulatory reporting requirements. The insured deposit data for 2023 and 2022 does not reflect an evaluation of all of the account ownership category distinctions that would determine the availability of deposit insurance to individual accounts based on FDIC regulations.

 

The following table shows scheduled maturities of time deposits in excess of the FDIC insurance limit of $250,000 at December 31, 2023 and 2022 (dollars in thousands).

 

   

December 31,

 

Time remaining until maturity:

 

2023

   

2022

 

Three months or less

  $ 68,638     $ 63,006  

Over three months through six months

    27,536       13,610  

Over six months through twelve months

    77,471       58,672  

Over twelve months

    20,793       14,228  

Total

  $ 194,438     $ 149,516  

 

Borrowings

 

Total borrowings include securities sold under agreements to repurchase, federal funds purchased, advances from the Federal Home Loan Bank (“FHLB”), borrowings under the BTFP, subordinated debt issued in 2019 and 2022, and junior subordinated debentures assumed through acquisitions. We also maintain unsecured lines of credit with First National Bankers Bank (“FNBB”) and The Independent Bankers Bank (“TIB”) totaling $60.0 million, which are federal funds lines of credit used for overnight borrowing only. We had no outstanding balances drawn on the unsecured lines of credit at December 31, 2023 or 2022.

 

Our advances from the FHLB were $23.5 million at December 31, 2023a decrease of $363.5 million 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. Based on original maturities, at December 31, 2023, all of our $23.5 million of FHLB advances were long-term, compared to $333.5 million short-term and $53.5 million long-term FHLB advances at December 31, 2022. We utilized federal funds purchased during 2023 and 2022 although none were outstanding at year-end. We had $8.6 million of securities sold under agreements to repurchase at December 31, 2023 compared to none at December 31, 2022. The carrying value of the subordinated debt was $44.3 million and $44.2 million at December 31, 2023 and December 31, 2022, respectively. Junior subordinated debt of $8.6 million and $8.5 million at December 31, 2023 and 2022, respectively, represents the junior subordinated debentures that we assumed in connection with our acquisitions of Cheaha in 2021, BOJ Bancshares, Inc. in 2017 (“BOJ”), and First Community Bank in 2013. 

 

On March 12, 2023, the Federal Reserve established the BTFP. The BTFP is a one-year program which provides additional liquidity through borrowings for a term of up to one year secured by the pledging of certain qualifying securities and other assets valued at par. Beginning in the second quarter, we utilized the BTFP to secure fixed rate funding for a one-year term and reduce short-term FHLB advances, which are priced daily. We utilized this source of funding due to its lower rate and the ability to prepay the obligations without penalty. The rates on the borrowings under the BTFP are fixed for one year from the day each borrowing is made. During the fourth quarter of 2023 and again in the first quarter of 2024, we refinanced all of our borrowings under the BTFP with new loans under the BTFP with a one-year term due to more favorable rates. At December 31, 2023, outstanding borrowings under the BTFP were $212.5 million with a weighted average rate of 4.83%.

 

Typically, the main source of our short-term borrowings are advances from the FHLB; however, during 2023, our primary source of short-term borrowings were borrowings under the BTFP due to more favorable rates. The rate charged for advances from the FHLB is directly tied to the Federal Reserve’s federal funds target rate. As previously discussed, the Federal Reserve raised the federal funds target rate multiple times in 2022 and 2023. As of December 31, 2023, the federal funds target rate was 5.25% to 5.50%.

 

 

The average balances and cost of short-term borrowings for the years ended December 31, 2023, 2022 and 2021 are summarized in the table below (dollars in thousands).

 

   

Average Balances

   

Cost of Short-term Borrowings

 
   

December 31,

   

December 31,

 
   

2023

   

2022

   

2021

   

2023

   

2022

   

2021

 

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

  $ 124,191     $ 132,703     $ 3,242       4.93 %     3.08 %     0.20 %

Borrowings under BTFP

    131,952                   5.09              

Securities sold under agreements to repurchase

    4,587       1,489       6,081       0.13       0.15       0.21  

Total short-term borrowings

  $ 260,730     $ 134,192     $ 9,323       4.93 %     3.05 %     0.20 %

 

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 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. 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 for general corporate purposes.

 

2029 Notes. On November 12, 2019, the Company issued $25.0 million in aggregate principal amount of its 5.125% Fixed-to-Floating Rate Subordinated 2029 Notes due 2029 (“2029 Notes”) at 100% of their face amount in a private placement to certain institutional and other accredited investors. The 2029 Notes have a maturity date of December 30, 2029. From and including the date of issuance to, but excluding December 30, 2024, the 2029 Notes will bear interest at an initial fixed rate of 5.125% per annum, payable semi-annually in arrears. From and including December 30, 2024 and thereafter, the 2029 Notes will bear interest at a floating rate equal to the then-current three-month LIBOR as calculated on each applicable date of determination, or an alternative rate determined in accordance with the terms of the 2029 Notes if the three-month LIBOR cannot be determined, plus 3.490%, payable quarterly in arrears.

 

The Company may redeem the 2029 Notes, in whole or in part, on or after December 30, 2024 or, in whole but not in part, under certain limited circumstances set forth in the 2029 Notes. Any redemption by the Company 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 2029 Notes are not subject to acceleration, except upon certain bankruptcy-related events. The 2029 Notes are unsecured, subordinated obligations of the Company and rank junior in right of payment to the Company’s current and future senior indebtedness and to the Company’s obligations to its general creditors. The 2029 Notes are obligations of the Company only and are not obligations of, and are not guaranteed by, any of the Company’s subsidiaries. The 2029 Notes are intended to qualify as Tier 2 capital for regulatory capital purposes.

 

2027 Notes. On March 24, 2017, the Company issued $18.6 million in aggregate principal amount of its 2027 Notes due March 20, 2027 at 100% of the aggregate principal amount.

 

From and including the date of issuance, but excluding March 30, 2022, the 2027 Notes bore interest at an initial fixed rate of 6.00% per annum, payable semi-annually. From and including March 30, 2022 and thereafter, the 2027 Notes bore interest at a floating rate equal to the then-current three-month LIBOR (but not less than zero) as calculated on each applicable date of determination, plus 3.945%, payable quarterly.

 

The Company could, beginning with the interest payment date of March 30, 2022, and on any interest payment date thereafter, redeem the 2027 Notes, in whole or in part, at a redemption price equal to 100% of the principal amount of the 2027 Notes to be redeemed plus accrued and unpaid interest to but excluding the date of redemption. The 2027 Notes were intended to qualify as Tier 2 capital for regulatory capital purposes.

 

In June 2022, we redeemed the 2027 Notes in full in accordance with their terms at a redemption price equal to 100% of the outstanding principal balance plus accrued and unpaid interest up to but excluding the June 30, 2022 redemption date (“Redemption Date”). The aggregate redemption price, excluding accrued interest, totaled $18.6 million. Interest on the 2027 Notes no longer accrued on or after the Redemption Date.

 

Stockholders’ Equity

 

Stockholders’ equity was $226.8 million at December 31, 2023, an increase of $11.0 million, or 5.1%, compared to December 31, 2022. The increase in stockholders’ equity is primarily attributable to net income for fiscal year 2023 and a decrease in accumulated other comprehensive loss due to an increase in the fair value of the Bank’s AFS securities portfolio, partially offset by the cumulative effect adjustment as a result of the adoption of ASU 2016-13, reflected in retained earnings.

 

 

Results of Operations

 

Performance Summary

 

2023 vs. 2022. For the year ended December 31, 2023, net income was $16.7 million, or $1.69 per basic and diluted common share, compared to net income of $35.7 million, or $3.54 per basic common share and $3.50 per diluted common share, for the year ended December 31, 2022. The primary drivers of the decrease in net income are a $15.3 million decrease in net interest income and an $11.8 million decrease in noninterest income, partially offset by a $2.0 million negative provision for credit losses in 2023 compared to a provision for credit losses of $2.9 million in 2022. The decrease in net interest income was a result of a $43.9 million increase in interest expense partially offset by a $28.6 million increase in interest income, as the Bank experienced margin compression due to rising market interest rates. The decrease in noninterest income is mainly attributable to $8.1 million of swap termination fees and $1.4 million of income from insurance proceeds recorded during the year ended December 31, 2022 and the loss on sale or disposition of fixed assets of $1.3 million during the year ended December 31, 2023, primarily resulting from the sale of the Alice and Victoria, Texas branches, compared to a loss on sale or disposition of fixed assets of $0.3 million for the year ended December 31, 2022. The negative provision for credit losses of $2.0 million for the year ended December 31, 2023 was primarily due to net recoveries of $2.3 million in 2023 primarily attributable to recoveries on one loan relationship that became impaired in the third quarter of 2021 as a result of Hurricane Ida. Return on average assets decreased to 0.60% for the year ended December 31, 2023 from 1.37% for the year ended December 31, 2022. Return on average equity was 7.63% for the year ended December 31, 2023 compared to 15.63% for the year ended December 31, 2022. The decrease in both return on average assets and return on average equity is mainly attributable to the $19.0 million decrease in net income.

 

2022 vs. 2021. For the year ended December 31, 2022, net income was $35.7 million, or $3.54 per basic common share and $3.50 per diluted common share, compared to net income of $8.0 million, or $0.77 per basic common share and $0.76 per diluted common share, for the year ended December 31, 2021. The primary driver of the increase in net income is related to a decrease in provision for loan losses due to the $21.6 million impairment charge recorded during the third quarter of 2021 as a result of Hurricane Ida. As shown on the consolidated statement of income for the year ended December 31, 2022, a provision for loan losses of $2.9 million was recorded, compared to a provision for loan losses of $22.9 million for the year ended December 31, 2021. We had record annual net income in 2022 primarily as a result of increases in interest income and noninterest income as well as a decrease in noninterest expense compared to 2021. Return on average assets increased to 1.37% for the year ended December 31, 2022 from 0.31% for the year ended December 31, 2021. Return on average equity was 15.63% for the year ended December 31, 2022 compared to 3.22% for the year ended December 31, 2021. The increase in both return on average assets and return on average equity is mainly attributable to the $27.7 million increase in net income.

 

Net Interest Income and Net Interest Margin

 

Net interest income, our principal source of earnings, is the difference between the interest income generated by 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 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 earning assets, and the interest rate environment. Net interest margin is the ratio of net interest income to average interest-earning assets.

 

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. On March 3, 2020, the Federal Reserve lowered the federal funds target rate to 1.00% to 1.25%, which the Federal Reserve stated was in response to the evolving risks to economic activity posed by the coronavirus. In a measure aimed at lessening the economic impact of COVID-19, the Federal Reserve reduced the federal funds target rate to 0% to 0.25% on March 16, 2020, where it remained until March 2022 when the Federal Reserve began increasing the federal funds target rate a total of seven times during 2022 and four times during 2023 to 5.25% to 5.50% as discussed in Certain Events That Affect Year-over-Year Comparability Rising Inflation and Interest Rates.

 

2023 vs. 2022. Net interest income decreased 17.0% to $74.5 million for the year ended December 31, 2023 from $89.8 million for the same period in 2022. Net interest margin was 2.83% for the year ended December 31, 2023, a decrease of 84 basis points from 3.67% for the year ended December 31, 2022. The decrease in net interest income resulted primarily from an increase in the rates paid on interest-bearing deposits and short-term borrowings partially offset primarily by an increase in the yield earned on loans. Average time deposits increased $272.2 million primarily due to organic growth and customer funds migrating from other deposit categories due to higher rates offered, which along with higher rates paid, resulted in a $20.6 million increase in interest expense compared to the year ended December 31, 2022. Average short-term borrowings increased $126.5 million, as we utilized advances from the FHLB and borrowings under the BTFP to fund loan growth and investment activity, which along with higher rates paid, resulted in an $8.8 million increase in interest expense compared to the year ended December 31, 2022. Average interest-bearing demand deposits decreased $211.6million but increases in rates led to a $6.5 million increase in interest expense compared to the year ended December 31, 2022. Average brokered time deposits were $163.9 million during the year ended December 31, 2023 compared to $0.1 million during the year ended December 31, 2022, which along with higher rates paid added $8.2 million to interest expense. Average noninterest-bearing deposits decreased $111.1 million. Average loans increased $186.0 million primarily due to organic growth and the purchase of commercial and industrial revolving lines of credit which, in addition to higher loan yields, resulted in a $24.5 million increase in interest income compared to the year ended December 31, 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.

 

We experienced margin pressure beginning late in 2022, which continued in 2023. We raised rates offered on deposits and incurred higher costs on our borrowings, compared to the year ended December 31, 2022. We may experience additional pressure on our net interest margin during 2024 if our cost of funds increases faster than the yield on our interest-earning assets.

 

 

Interest income was $133.2 million for the year ended December 31, 2023 compared to $104.6 million for the same period in 2022. Loan interest income made up substantially all of our interest income for the years ended December 31, 2023 and 2022, although interest on investment securities contributed 9.8% of interest income for the years ended December 31, 2023 and 2022. Interest on our commercial real estate loans, commercial and industrial loans, and 1-4 family residential real estate loans constituted the three largest components of our loan interest income for both of the years ended December 31, 2023 and 2022 at 84% total interest income on loans. The overall yield on interest-earning assets increased 78 basis points to 5.06% for the year ended December 31, 2023 compared to 4.28% for the same period in 2022. The loan portfolio yielded 5.55% for the year ended December 31, 2023 compared to 4.82% for the year ended December 31, 2022. The increase in yield on our loan portfolio was driven primarily by higher yields on commercial real estate loans and commercial and industrial loans. In addition, the yield on the investment portfolio was 2.78% for the year ended December 31, 2023 compared to 2.23% for the year ended December 31, 2022.

 

Interest expense was $58.7 million for the year ended December 31, 2023, an increase of $43.9 million compared to interest expense of $14.8 million for the year ended December 31, 2022. The increase in interest expense is primarily attributable to the increase in the rates paid for interest-bearing liabilities, primarily interest-bearing deposits, and to a lesser extent the increase in the volume of interest-bearing liabilities for the year ended December 31, 2023 compared to December 31, 2022. For the year ended December 31, 2023, the cost of interest-bearing deposits increased 207 basis points to 2.49% and the cost of short-term borrowings increased 188 basis points to 4.93% primarily due to increases in the federal funds target rate. As previously discussed, the federal funds target rate increased from 0% to 0.25% to 4.25% to 4.50% during 2022 and to 5.25% to 5.50% during 2023, which affects the rate the Company pays for deposits, immediately available overnight funds, borrowings under the BTFP, and long-term borrowings. For the year ended December 31, 2023, the cost of interest-bearing liabilities increased 205 basis points to 2.89% compared to the same period in 2022. 

 

2022 vs. 2021. For a detailed discussion of our net interest income and net interest margin performance for 2022 compared to 2021, see our annual report on Form 10-K for the year ended December 31, 2022, Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations Results of Operations Performance Summary and Net Interest Income and Net Interest Margin –2022 vs. 2021, and – Volume/Rate Analysis.

 

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 as of and for the years ended December 31, 2023, 2022 and 2021. Averages presented below are daily averages (dollars in thousands).

 

   

As of and for the year ended December 31,

 
   

2023

   

2022

   

2021

 
           

Interest

                   

Interest

                   

Interest

         
    Average     Income/     Yield/     Average     Income/     Yield/     Average     Income/     Yield/  
   

Balance

   

Expense(1)

   

Rate(1)

   

Balance

   

Expense(1)

   

Rate(1)

   

Balance

   

Expense(1)

   

Rate(1)

 

Assets

                                                                       

Interest-earning assets:

                                                                       

Loans

  $ 2,123,234     $ 117,892       5.55 %   $ 1,937,255     $ 93,373       4.82 %   $ 1,902,070     $ 90,230       4.74 %

Securities:

                                                                       

Taxable

    447,442       12,372       2.76       442,767       9,796       2.21       275,963       3,948       1.43  

Tax-exempt

    22,051       693       3.14       18,746       482       2.57       20,259       552       2.73  

Interest-earning balances with banks

    38,561       2,244       5.82       45,542       918       2.02       176,349       812       0.46  

Total interest-earning assets

    2,631,288       133,201       5.06       2,444,310       104,569       4.28       2,374,641       95,542       4.02  

Cash and due from banks

    29,142                       34,327                       39,262                  

Intangible assets

    42,695                       43,588                       41,299                  

Other assets

    86,712                       103,711                       138,096                  

Allowance for credit losses

    (30,242 )                     (22,093 )                     (20,704 )                

Total assets

  $ 2,759,595                     $ 2,603,843                     $ 2,572,594                  

Liabilities and stockholders’ equity

                                                                       

Interest-bearing liabilities:

                                                                       

Deposits:

                                                                       

Interest-bearing demand deposits

  $ 688,786     $ 8,941       1.30 %   $ 900,405     $ 2,411       0.27 %   $ 858,660     $ 2,398       0.28 %

Brokered demand deposits

                      1,773       7       0.42       77,432       715       0.92  

Savings deposits

    134,817       534       0.40       173,460       79       0.05       168,194       247       0.15  

Brokered time deposits

    163,873       8,224       5.02       82       4       4.80                    

Time deposits

    699,648       24,373       3.48       427,416       3,749       0.88       508,954       4,127       0.81  

Total interest-bearing deposits

    1,687,124       42,072       2.49       1,503,136       6,250       0.42       1,613,240       7,487       0.46  

Short-term borrowings(2)

    260,730       12,845       4.93       134,192       4,093       3.05       9,323       19       0.20  

Long-term debt

    82,844       3,764       4.54       127,288       4,441       3.49       129,318       4,222       3.26  

Total interest-bearing liabilities

    2,030,698       58,681       2.89       1,764,616       14,784       0.84       1,751,881       11,728       0.67  

Noninterest-bearing demand deposits

    489,175                       600,286                       553,083                  

Other liabilities

    21,220                       10,425                       18,852                  

Stockholders’ equity

    218,502                       228,516                       248,778                  

Total liabilities and stockholders’ equity

  $ 2,759,595                     $ 2,603,843                     $ 2,572,594                  

Net interest income/net interest margin

          $ 74,520       2.83 %           $ 89,785       3.67 %           $ 83,814       3.53 %

 

 

(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.

 

Nonaccrual loans were included in the computation of average loan balances but carry a zero yield. The yields include the effect of loan fees of $2.0 million, $3.6 million and $3.0 million for the years ended December 31, 2023, 2022 and 2021, respectively, and discounts and premiums that are amortized or accreted to interest income or expense.

 

 

Volume/Rate Analysis. The following tables set forth a summary of the changes in interest earned and interest paid resulting from changes in volume and rates for the year ended December 31, 2023 compared to the year ended December 31, 2022 and the year ended December 31, 2022 compared to the year ended December 31, 2021 (dollars in thousands).

 

   

Year ended December 31, 2023 vs.

 
   

Year ended December 31, 2022

 
   

Volume

   

Rate

   

Net(1)

 

Interest income:

                       

Loans

  $ 8,964     $ 15,555     $ 24,519  

Securities:

                       

Taxable

    103       2,473       2,576  

Tax-exempt

    85       126       211  

Interest-earning balances with banks

    (140 )     1,466       1,326  

Total interest-earning assets

    9,012       19,620       28,632  

Interest expense:

                       

Interest-bearing demand deposits

    (567 )     7,097       6,530  

Brokered demand deposits

    (7 )           (7 )

Savings deposits

    (18 )     473       455  

Brokered time deposits

    7,870       350       8,220  

Time deposits

    2,388       18,236       20,624  

Short-term borrowings

    3,860       4,892       8,752  

Long-term debt

    (1,551 )     874       (677 )

Total interest-bearing liabilities

    11,975       31,922       43,897  

Change in net interest income

  $ (2,963 )   $ (12,302 )   $ (15,265 )

 

   

Year ended December 31, 2022 vs.

 
   

Year ended December 31, 2021

 
   

Volume

   

Rate

   

Net(1)

 

Interest income:

                       

Loans

  $ 1,669     $ 1,474     $ 3,143  

Securities:

                       

Taxable

    2,386       3,462       5,848  

Tax-exempt

    (41 )     (29 )     (70 )

Interest-earning balances with banks

    (602 )     708       106  

Total interest-earning assets

    3,412       5,615       9,027  

Interest expense:

                       

Interest-bearing demand deposits

    117       (104 )     13  

Brokered demand deposits

    (699 )     (9 )     (708 )

Savings deposits

    8       (176 )     (168 )

Brokered time deposits

    4             4  

Time deposits

    (665 )     287       (378 )

Short-term borrowings

    255       3,819       4,074  

Long-term debt

    (66 )     285       219  

Total interest-bearing liabilities

    (1,046 )     4,102       3,056  

Change in net interest income

  $ 4,458     $ 1,513     $ 5,971  

 

 

(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 call or sale of investment securities, gains and losses on sales or dispositions of fixed assets and other real estate owned, swap termination fee income, gain on sale of loans, servicing fees and fee income on serviced loans, interchange fees, income from bank owned life insurance, changes in the fair value of equity securities, and income from insurance proceeds. We expect to continue to develop new products that generate noninterest income, and enhance our existing products, in order to diversify our revenue sources.

 

2023 vs. 2022. Total noninterest income decreased $11.8 million, or 64.4%, to $6.5 million for the year ended December 31, 2023 compared to $18.4 million for the year ended December 31, 2022. The decrease is mainly attributable to $8.1 million of swap termination fees and $1.4 million of income from insurance proceeds recorded during the year ended December 31, 2022 and the loss on sale or disposition of fixed assets of $1.3 million during the year ended December 31, 2023, primarily resulting from the sale of the Alice and Victoria, Texas branches, compared to a loss on sale or disposition of fixed assets of $0.3 million for the year ended December 31, 2022.

 

Service charges on deposit accounts include maintenance fees on accounts, account enhancement charges for additional deposit account features, per item charges, overdraft fees, and treasury management charges. Service charges on deposit accounts were $3.1 million for both of the years ended December 31, 2023 and 2022.

 

There was a $0.3 million loss on call or sale of investment securities for the year ended December 31, 2023 compared to a de minimis gain for the year ended December 31, 2022. We sold approximately $15.0 million of securities during the year ended December 31, 2023 compared to no sales and de minimis calls during the year ended December 31, 2022. 

 

Loss on sale or disposition of fixed assets for the year ended December 31, 2023 increased to $1.3 million from $0.3 million for the year ended December 31, 2022. During 2023, a loss on sale or disposition of fixed assets of $1.3 million was recorded as a result of the sale of the Alice and Victoria, Texas branches, the disposition of ATMs, and a reclassification of bank premises and equipment to other real estate owned. During 2022, a loss on sale or disposition of fixed assets of $0.5 million was recorded as a result of the Bank closing two branches in Louisiana, which was partially offset by a gain on sale or disposition of fixed assets as a result of the sale of three tracts of land that were being held for future branch locations.

 

There was a $0.1 million loss on sale of other real estate owned for the year ended December 31, 2023 compared to a de minimis gain for the year ended December 31, 2022. We sold approximately $1.5 million of other real estate owned during the year ended December 31, 2023 compared to $5.8 million of sales during the year ended December 31, 2022. 

 

No swap termination fee income was recorded during the year ended December 31, 2023. Swap termination fee income of $8.1 million was recorded for the year ended December 31, 2022 when we voluntarily terminated a number of our interest rate swap agreements during the first and second quarters of 2022 in response to market conditions.

 

 

There was a $0.1 million gain on sale of loans for the year ended December 31, 2023 as a result of the sale of the Alice and Victoria, Texas branches, compared to no gain or loss for the year ended December 31, 2022.

 

Servicing fees and fee income on serviced loans decreased $60,000, or 81.1%, to $14,000 for the year ended December 31, 2023. This decrease is a result of the Bank exiting the indirect auto loan origination business at the end of 2015. Since the Bank did not originate auto loans for sale during the years ended December 31, 2023 and 2022, the servicing portfolio, which experienced regularly scheduled paydowns, was not replaced with new loans. We expect servicing fees and fee income on serviced loans to decrease over time until all serviced loans are paid off.

 

Interchange fees, which are fees earned on the usage of the Bank’s credit and debit cards, decreased $0.3 million, or 16.7%, to $1.7 million for year ended December 31, 2023 from $2.0 million for the year ended December 31, 2022. The decrease in interchange fees can primarily be attributed to the decrease in the volume of debit and credit card transactions.

 

Income from bank owned life insurance increased $0.1 million to $1.4 million for the year ended December 31, 2023 from $1.3 million for the year ended December 31, 2022. This increase reflects increased interest earned on the Company’s bank owned life insurance policies.

 

No income from insurance proceeds was recorded for the year ended December 31, 2023. Income from insurance proceeds totaled $1.4 million for the year ended December 31, 2022Nontaxable income related to an insurance policy for the former Chief Financial Officer of the Company and the Bank of $1.4 million was recorded during the fourth quarter of 2022.

 

Other operating income includes, among other things, credit card, ATM and wire fees, derivative fee income, changes in the net asset value of other investments and rental income. The $0.6 million decrease in other operating income for the year ended December 31, 2023 is primarily attributable to a $0.5 million decrease in derivative fee income compared to the year ended December 31, 2022. 

 

2022 vs. 2021. For a detailed discussion of our noninterest income for 2022 compared to 2021, see Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations Results of Operations Noninterest Income  2022 vs. 2021 in our annual report on Form 10-K for the year ended December 31, 2022.

 

Noninterest Expense

 

Noninterest expense includes salaries and employee benefits and other costs associated with the conduct of our operations. Our goal is to manage our costs within the framework of our near-term operating strategy of generating consistent, quality earnings.

 

2023 vs. 2022. Total noninterest expense was $62.6 million for the year ended December 31, 2023, an increase of $1.8 million, or 2.9%, from $60.9 million for the year ended December 31, 2022. This increase was primarily driven by the increases in salaries and employee benefits and other operating expenses, partially offset by a decrease in depreciation and amortization.

 

Salaries and employee benefits increased $2.2 million, or 6.2%, to $37.1 million for the year ended December 31, 2023, compared to $35.0 million for the year ended December 31, 2022. Included in salaries and employee benefits for the year ended December 31, 2022 is a $2.3 million employee retention credit (“ERC”) recognized as a credit to payroll taxes, which decreased salaries and employee benefits reported for 2022. The increase in salaries and employee benefits is mainly attributable to increases in health insurance claims and payroll taxes, partially offset by decreases in incentive-based compensation and severance. Salaries and employee benefits for 2022 also included $0.6 million of severance due to the separation agreement with the former Chief Financial Officer of the Company and the Bank. Please refer to Note 1. Summary of Significant Accounting Policies – Employee Retention Credit, for additional discussion regarding the ERCs. As of December 31, 2023, we had 320 full-time and 11 part-time employees, compared to 331 full-time and seven part-time employees as of December 31, 2022. 

 

Depreciation and amortization decreased $0.7 million, or 14.8%, to $3.8 million for the year ended December 31, 2023, compared to $4.4 million for the year ended December 31, 2022. The decrease in depreciation and amortization is primarily driven by the sale of the Alice and Victoria, Texas branches and the closure of one branch during the first quarter of 2023 and two branches during 2022.

 

Data processing decreased $0.1 million, or 3.3%, to $3.5 million for the year ended December 31, 2023 from $3.6 million for the same period in 2022. We did not complete any acquisitions, which typically drive higher data processing expenses, during the years ended December 31, 2023 and 2022. We regularly review existing contracts with the goal of negotiating favorable terms to offset the increased variable cost components of our data processing costs, such as new accounts and increased transaction volume.

 

Occupancy expense increased $0.1 million, or 2.7%, to $3.0 million for the year ended December 31, 2023 from $2.9 million for the year ended December 31, 2022. This increase is primarily attributable to $0.4 million in occupancy expense recorded primarily to terminate remaining contractually obligated lease payments due under non-cancelable operating leases, partially offset by a decrease in building rent, both as a result of the sale the Alice and Victoria, Texas branches in January 2023.

 

 

Other operating expenses include security, business development, FDIC and OCC assessments, bank shares and property taxes, collection and repossession, charitable contributions, repair and maintenance costs, personnel training and development, filing fees, and other costs related to the operation of our business. Other operating expenses increased $0.3 million, or 2.5%, to $13.0 million for the year ended December 31, 2023 from $12.7 million for the year ended December 31, 2022. The increase in other operating expenses was primarily due to increases in FDIC assessments, other real estate expense, and bank shares taxes, partially offset by a decrease in collection and repossession expenses, the majority of which was related to one impaired loan relationship impacted by Hurricane Ida.

 

2022 vs. 2021. For a detailed discussion of our noninterest expense for 2022 compared to 2021, see Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations Results of Operations Noninterest Expense  2022 vs. 2021 in our annual report on Form 10-K for the year ended December 31, 2022.

 

Income Tax Expense

 

Income tax expense for the years ended December 31, 2023, 2022 and 2021 was $3.8 million, $8.6 million, and $1.9 million, respectively. The effective tax rates for the years ended December 31, 2023, 2022 and 2021 were 18.4%, 19.5%, and 19.3%, respectively. For the years ended December 31, 2023 and 2021, the effective tax rate differs from the statutory rate of 21% primarily due to tax-exempt interest income earned on certain loans and investment securities and income from bank owned life insurance. For the year ended December 31, 2022, the effective tax rate differs from the statutory rate of 21% primarily due to nontaxable income from insurance proceeds and tax-exempt interest income earned on certain loans and investment securities and income from bank owned life insurance.

 

Risk Management

 

The primary risks associated with our operations are credit, interest rate and liquidity risk. Higher inflation also presents risks. 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 risk categories, which are consistent with the definitions used in guidance promulgated by federal banking regulators are Pass (grades 1-6), Special Mention (grade 7), Substandard (grade 8), Doubtful (grade 9) and Loss (grade 10). For additional information, see Note 3. Loans and Allowance for Credit Losses – Credit Quality Indicators.

 

 

At December 31, 2023 and December 31, 2022, there were no loans classified as loss, while there were no loans and $0.2 million of loans, respectively, classified as doubtful, $12.0 million and $15.0 million, respectively, of loans classified as substandard, and $10.8 million and $12.8 million, respectively, of loans classified as special mention as of such dates. Of our aggregate $22.9 million and $28.0 million doubtful, substandard and special mention loans at December 31, 2023 and December 31, 2022, respectively, $2.3 million and $4.7 million, respectively, were acquired and marked to fair value at the time of their acquisition.

 

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 sold at public auction for fair market value (based upon recent appraisals), 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 at December 31, 2023, an increase compared to $24.4 million at December 31, 2022 and $20.9 million at December 31, 2021, respectively. 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 through a provision for credit losses for changes in the expected lifetime credit losses.

 

For the years ended December 31, 2023, 2022 and 2021, the provision for credit losses on loans was negative $2.0 million, $2.9 million, and $22.9 million, respectively. The negative provision for credit losses for the year ended December 31, 2023 was primarily driven by net recoveries of $2.3 million in the loan portfolio primarily attributable to recoveries on one loan relationship that became impaired in the third quarter of 2021 as a result of Hurricane Ida. The provision for loan losses for the year ended December 31, 2022 reflects provisioning related to our organic loan growth. The provision for loan losses for the year ended December 31, 2021 includes a $21.6 million impairment charge related to one loan relationship impacted by Hurricane Ida, as discussed in Certain Events That Affect Year-over-Year Comparability – Hurricane Ida.

 

Refer to Note 1. Summary of Significant Accounting Policies – Allowance for Credit Losses and – 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. Refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Estimates” for further discussion.

 

 

The following table presents the allocation of the allowance for credit losses by loan category as of the dates indicated (dollars in thousands).

 

   

December 31,

 
   

2023

   

2022

   

2021

 
   

Allowance for Credit Losses

   

% of Loans in each Category to Total Loans

    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

  $ 2,471       8.6 %   $ 2,555       9.6 %   $ 2,347       10.9 %

1-4 Family

    9,129       18.7       3,917       19.1       3,337       19.4  

Multifamily

    1,124       4.8       999       3.9       673       3.2  

Farmland

    2       0.4       113       0.6       383       1.1  

Commercial real estate

    10,691       42.4       10,718       45.5       9,354       47.9  

Commercial and industrial

    6,920       24.6       5,743       20.7       4,411       16.6  

Consumer

    203       0.5       319       0.6       354       0.9  

Total

  $ 30,540       100 %   $ 24,364       100 %   $ 20,859       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.

 

   

December 31,

 
   

2023

   

2022

   

2021

 

Mortgage loans on real estate:

                       

Construction and development

    0.11 %     0.12 %     0.12 %

1-4 Family

    0.41       0.18       0.18  

Multifamily

    0.05       0.05       0.04  

Farmland

          0.01       0.02  

Commercial real estate

    0.49       0.51       0.50  

Commercial and industrial

    0.31       0.27       0.23  

Consumer

    0.01       0.02       0.02  

Total

    1.38 %     1.16 %     1.11 %

 

 

As discussed above, the balance in the allowance for credit losses is principally influenced by the provision for credit losses and by net loan loss experience. Additions to the allowance are charged to the provision for credit losses. 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 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).

 

   

Year ended December 31,

 
   

2023

   

2022

   

2021

 

Allowance for credit losses at beginning of period

  $ 24,364     $ 20,859     $ 20,363  

ASU 2016-13 adoption impact

    5,865              

Provision for credit losses on loans(1)

    (1,964 )     2,922       22,885  

Net recoveries (charge-offs)(2)

    2,275       583       (22,389 )

Allowance for credit losses at end of period

  $ 30,540     $ 24,364     $ 20,859  

Total loans - period end

    2,210,619       2,104,767       1,872,012  

Nonaccrual loans - period end

    5,770       9,986       29,495  
                         

Key Ratios:

                       

Allowance for credit losses to total loans - period end

    1.38 %     1.16 %     1.11 %

Allowance for credit losses to nonaccrual loans - period end

    529 %     244 %     71 %

Nonaccrual loans to total loans - period end

    0.26 %     0.47 %     1.58 %

 

 

(1)

For the year ended December 31, 2023, the negative provision for credit losses of $2.0 million on the consolidated statement of income includes a negative provision for loan losses of $2.0 million and a negative provision for unfunded loan commitments of $36,000.

  (2) We recognized net recoveries of $2.4 million and net charge-offs of $21.6 million in the loan portfolio during the years ended December 31, 2023 and 2021, respectively, attributable to one loan relationship that became impaired in the third quarter of 2021 as a result of Hurricane Ida.

 

The allowance for credit losses to total loans increased to 1.38% at December 31, 2023 compared to 1.16% at December 31, 2022 while the allowance for credit losses to nonaccrual loans ratio increased to 529% at December 31, 2023 from 244% at December 31, 2022. The increase in the allowance for credit losses to total loans at December 31, 2023 compared to December 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. The increase in the allowance for credit losses to nonaccrual loans and the decrease in nonaccrual loans to total loans are due to the decrease in nonaccrual loans primarily due to large paydowns on one loan relationship impacted by Hurricane Ida. Nonaccrual loans were $5.8 million, or 0.26% of total loans, at December 31, 2023, a decrease of $4.2 million compared to $10.0 million, or 0.47% of total loans, at December 31, 2022. 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).

 

    Year ended December 31,
   

2023

   

2022

   

2021

 
    Net (Charge-offs) Recoveries    

Average balance

   

Ratio of Net Charge-offs to Average Loans

    Net (Charge-offs) Recoveries    

Average balance

   

Ratio of Net Charge-offs to Average Loans

   

Net (Charge-offs) Recoveries

   

Average balance

   

Ratio of Net Charge-offs to Average Loans

 

Mortgage loans on real estate:

                                                                       

Construction and development

  $ 75     $ 200,691       (0.04 )%   $ 48     $ 210,160       (0.02 )%   $ (247 )   $ 211,230       0.12 %

1-4 Family

    (24 )     410,320       0.01       103       380,481       (0.03 )     (156 )     354,748       0.04  

Multifamily

          86,668                   56,665                   60,327        

Farmland

          9,206             13       15,837       (0.08 )     (13 )     23,128       0.06  

Commercial real estate

    2,219       961,617       (0.23 )     33       901,422       (0.00 )     (10,274 )     869,098       1.18  

Commercial and industrial

    171       442,299       (0.04 )     535       357,837       (0.15 )     (11,641 )     362,483       3.21  

Consumer

    (166 )     12,433       1.34       (149 )     14,853       1.00       (58 )     21,056       0.28  

Total

  $ 2,275     $ 2,123,234       (0.11 )%   $ 583     $ 1,937,255       (0.03 )%   $ (22,389 )   $ 1,902,070       1.18 %

 

Charge-offs reflect the realization of losses in the portfolio that were recognized previously through the provision for credit losses. Net charge-offs include recoveries of amounts previously charged off. Net recoveries for the years ended December 31, 2023 and 2022 were $2.3 million and $0.6 million, respectively, equal to 0.11% and 0.03% of the average loan balance for the respective periods. Net charge-offs for the year ended December 31, 2021 were $22.4 million, or 1.18%, of the average loan balance. Net recoveries for the year ended December 31, 2023 were primarily attributable to recoveries on one loan relationship that became impaired in the third quarter of 2021 as a result of Hurricane Ida. Net recoveries for the year ended December 31, 2022 were primarily driven by one $0.9 million recovery on a commercial and industrial loan relationship. Net charge-offs for the year ended December 31, 2021 were primarily due to charge-offs of $21.6 million in the third quarter of 2021 due to the impairment charge related to one loan relationship impacted by Hurricane Ida. Commercial and industrial loans and commercial real estate loans were the categories affected.

 

 

Management believes the allowance for credit losses at December 31, 2023 is sufficient to provide adequate protection against losses in our loan 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, unanticipated effects of the current geopolitical and domestic political conflicts, a resurgence of COVID-19, 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. 

 

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.

 

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.

 

Occasionally, we modify 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 our 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.

 

 

Other Real Estate Owned. Other real estate owned consists of properties acquired through foreclosure or acceptance of a deed in lieu of foreclosure, as well as any properties owned by the Company that are not intended to be used to carry out its operations. These properties are initially recorded at the lower of cost or fair market value based on appraisal 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. For the year ended December 31, 2023, additions to other real estate owned were $3.9 million, which were primarily driven by transfers of properties related to one loan relationship that became impaired in the third quarter of 2021 as a result of Hurricane Ida. During the year ended December 31, 2023, we closed one branch and one stand-alone ATM and transferred the associated land and buildings from bank premises and equipment to other real estate owned, as we did not intend to use the properties for banking operations. Other real estate owned with a cost basis of $1.5 million and $5.8 million was sold during the years ended December 31, 2023 and 2022, respectively, resulting in a net loss of $0.1 million and a net gain of $9,000 for the respective periods, compared to a cost basis of $0.9 million and a net loss of $5,000 for the year ended December 31, 2021.

 

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

 

   

December 31, 2023

   

December 31, 2022

 

1-4 Family

  $     $ 682  

Commercial real estate

    4,323        

Commercial and industrial

    115        

Total other real estate owned

  $ 4,438     $ 682  

 

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

 

    Year ended     Year ended  
   

December 31, 2023

   

December 31, 2022

 

Balance, beginning of period

  $ 682     $ 2,653  

Additions

    3,930       3,327  

Transfers from bank premises and equipment

    1,425       525  

Sales of other real estate owned

    (1,599 )     (5,823 )

Balance, end of period

  $ 4,438     $ 682  

 

Please refer to Note 4. Other Real Estate Owned, for additional information.

 

Impact of Inflation. Inflation reached a near 40-year high in late 2021 primarily due to effects of the COVID-19 pandemic, and continued rising through June 2022. Since June 2022, the rate of inflation has generally declined; however, it has remained above the Federal Reserve’s target inflation rate of two percent through March 7, 2024. 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 Year-over-Year Comparability – Rising Inflation and Interest Rates, which generally increased the amount we earn on our interest-earning assets but also increased the amount we pay on our interest-bearing liabilities as discussed throughout this report. We believe that higher rates resulting from inflation and related factors led to constrained loan demand during 2023. When the rate of inflation accelerates, there is an erosion of consumer and customer purchasing power. Accordingly, if the rate of inflation accelerates in the future, 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 and related higher rates have led and may continue to lead to lower loan re-financings. Inflation has also increased and may continue to increase the costs of goods and services we purchase, including the costs of salaries and benefits. In January 2024, the Federal Reserve decided not to change the federal funds target rate. Many economists expect the Federal Reserve to decrease the federal funds target rate one or more times during the remainder of 2024. For additional information, see Interest Rate Risk below, and Item 1A. Risk FactorsRisks Related to our BusinessIncreasing and high interest rates in 2022 and 2023 caused interest expense on both deposits and borrowings to increase significantly in 2023; further increases in interest rates could continue to have an adverse effect on our profitability and – Inflation and rising prices may continue to adversely affect our results of operations and financial condition.

 

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, four to six months, seven to twelve 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 December 31, 2023, the Bank was within the policy guidelines for asset/liability management.

 

The following table depicts the estimated impact on net interest income of immediate changes in interest rates at the specified levels for the periods presented.

 

As of December 31, 2023

   

Estimated

Changes in Interest Rates

 

Increase/Decrease in

(in basis points)

 

Net Interest Income (1)

+300   (7.4 )%
+200   (5.4 )%
+100   (2.4 )%
-100   2.8 %
-200   6.8 %
-300   9.7 %

 

 

(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 slow the rate of repayment on our mortgage-related loans which would increase our returns, but can also increase our costs of interest-bearing liabilities faster than we expect and faster than an increase in our yield on interest-earning assets which would decrease our returns. 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, 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 December 31, 2023 and 2022,64% 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 December 31, 2023, 95% of our investment securities portfolio was classified as AFS, and we had gross unrealized losses in our AFS investment securities portfolio of $57.7 million and gross unrealized gains of $0.3 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 and borrowings under the BTFP, which impacts their liquidity. At December 31, 2023, securities with a carrying value of $296.2 million were pledged to secure certain deposits, borrowings, and other liabilities compared to $165.7 million in pledged securities at December 31, 2022 with the increase due primarily to the pledge of securities to secure borrowings under the BTFP.

 

 

Other sources available for meeting liquidity needs include advances from the FHLB, repurchase agreements and other borrowings. FHLB advances 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 December 31, 2023, the balance of our outstanding advances with the FHLB was $23.5 million, all long-term advances based on original maturity, a decrease from $387.0 million at December 31, 2022, consisting of $333.5 million short-term and $53.5 million long-term advances; we decreased our use of FHLB advances as we utilized the BTFP. The total amount of the remaining credit available to us from the FHLB at December 31, 2023 was $919.5 million. At December 31, 2023, our FHLB borrowings were collateralized by a blanket pledge of certain loans totaling approximately $975.4 million.

 

Beginning in March 2023, we became eligible to borrow from the BTFP, which provides additional liquidity through borrowings secured by the pledging of certain qualifying securities and other assets valued at par. 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. During the second quarter, we utilized the BTFP to secure fixed rate funding for a one-year term and reduce short-term FHLB advances, which are priced daily. During the fourth quarter of 2023 and again in the first quarter of 2024, we refinanced all of our borrowings under the BTFP with new borrowings under the BTFP with a one-year term due to more favorable rates. At December 31, 2023, borrowings outstanding under the BTFP were $212.5 million, and our remaining borrowing capacity under the BTFP was $58.5 million based on the value of 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 certain investment securities. We had $8.6 million of repurchase agreements outstanding at December 31, 2023, and none at December 31, 2022.

 

We maintain unsecured lines of credit with FNBB and TIB totaling $60.0 million. These lines of credit are federal funds lines of credit and are used for overnight borrowing only. There were no outstanding balances on our unsecured lines of credit at December 31, 2023 or 2022.

 

At December 31, 2023, we held $32.0 million of cash and cash equivalents and maintained approximately $1.04 billion of available funding from FHLB advances, the BTFP, and unsecured lines of credit with correspondent banks. Cash and cash equivalents and available funding represent 149% of uninsured deposits of $720.1 million at December 31, 2023.

 

In addition, at both December 31, 2023 and 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. For additional information, see Note 10. Subordinated Debt Securities and see Discussion and Analysis of Financial Condition – Borrowings above.

 

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. In recent periods, the proportion of our deposits represented by noninterest-bearing deposits has declined primarily due to rising market interest rates as customers have migrated to higher yielding alternatives. At December 31, 2023, we held $269.1 million of brokered time deposits and no brokered demand deposits, as defined for federal regulatory purposes, to secure fixed cost funding and reduce FHLB advances. At December 31, 2022, we held $10.0 million of brokered time deposits and no brokered demand deposits, as defined for federal regulatory purposes. We have historically utilized brokered demand deposits, due to more favorable pricing, to satisfy the required borrowings under interest rate swap agreements. We also 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 December 31, 2023, we held $17.0 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 years ended December 31, 2023 and 2022.

 

   

Percentage of Total Average Deposits and Borrowed Funds

   

Cost of Funds

 
   

Year ended December 31,

   

Year ended December 31,

 
   

2023

   

2022

   

2023

   

2022

 

Noninterest-bearing demand

    20 %     26 %     %     %

Interest-bearing demand

    27       38       1.30       0.27  

Brokered demand deposits

                      0.42  

Savings deposits

    5       7       0.40       0.05  

Brokered time deposits

    7             5.02       4.80  

Time deposits

    28       18       3.48       0.88  

Short-term borrowings

    10       6       4.93       3.05  

Borrowed funds

    3       5       4.54       3.49  

Total deposits and borrowed funds

    100 %     100 %     2.33 %     0.63 %

 

Capital Resources. 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 capital 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 intended 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 2019, we issued $25.0 million of our 2029 Notes, which are intended to qualify as Tier 2 capital for regulatory capital purposes. For additional information see Discussion and Analysis of Financial Condition Borrowings.

 

 

During 2023, we paid $3.8 million in dividends, compared to $3.6 million in 2022 and $3.1 million in 2021. Our board of directors has authorized a share repurchase program and during 2023 we paid $3.0 million to repurchase our shares, compared to $10.5 million in 2022 and $6.9 million in 2021. The aggregate purchase price does not include the effect of excise tax expense incurred on net share repurchases. On July 19, 2023 and September 21, 2022, the board of directors approved an additional 350,000 shares and 300,000 shares, respectively, of the Company’s common stock for repurchase. At December 31, 2023, we had 514,266 shares of our common stock remaining authorized for repurchase under the program. For additional information, see Note 10. Subordinated Debt Securities and Note 13. Stockholders' Equity.

 

We are subject to restrictions on dividends under applicable banking laws and regulations. Please refer to the discussion under the heading “Supervision and Regulation – Dividends” in Item 1. Business, for more information. We are also subject to additional legal and contractual restrictions on dividends. Please refer to the discussion under the heading “Dividend Policy” in Item 5. Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities and under the heading “Common Stock – Dividend Restrictions” in Note 13. Stockholders' Equity.

 

We are subject to various regulatory capital requirements administered by the Federal Reserve and the OCC. These requirements are described in greater detail under the heading “Supervision and Regulation – Regulatory Capital Requirements” of Item 1. Business. Those guidelines specify capital tiers, which include the following classifications:

 

Capital Tiers(1)

 

Tier 1 Leverage Ratio

 

Common Equity Tier 1 Capital Ratio

 

Tier 1 Capital Ratio

 

Total Capital Ratio

 

Ratio of Tangible Equity 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.

 

The Company and the Bank each were in compliance with all regulatory capital requirements as of December 31, 2023, 2022 and 2021. 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 to be Well Capitalized

 
   

Amount

   

Ratio

   

Amount

   

Ratio

 

December 31, 2023

                               

Investar Holding Corporation:

                               

Tier 1 capital to average assets (leverage)

  $ 239,095       8.35 %   $       %

Tier 1 common equity to risk-weighted assets

    229,595       9.51              

Tier 1 capital to risk-weighted assets

    239,095       9.90              

Total capital to risk-weighted assets

    313,574       12.99              

Investar Bank:

                               

Tier 1 capital to average assets (leverage)

    280,687       9.81       143,085       5.00  

Tier 1 common equity to risk-weighted assets

    280,687       11.64       156,805       6.50  

Tier 1 capital to risk-weighted assets

    280,687       11.64       192,990       8.00  

Total capital to risk-weighted assets

    310,846       12.89       241,238       10.00  
                                 

December 31, 2022

                               

Investar Holding Corporation:

                               

Tier 1 capital to average assets (leverage)

  $ 231,048       8.53 %   $       %

Tier 1 common equity to risk-weighted assets

    221,548       9.79              

Tier 1 capital to risk-weighted assets

    231,048       10.21              

Total capital to risk-weighted assets

    300,009       13.25              

Investar Bank:

                               

Tier 1 capital to average assets (leverage)

    267,603       9.89       135,344       5.00  

Tier 1 common equity to risk-weighted assets

    267,603       11.83       147,044       6.50  

Tier 1 capital to risk-weighted assets

    267,603       11.83       180,977       8.00  

Total capital to risk-weighted assets

    292,339       12.92       226,221       10.00  

 

Off-Balance Sheet Transactions and Lease Obligations

 

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 December 31, 2023 and December 31, 2022, the Company had no current or forward starting interest rate swap agreements. For additional information, see Note 12. Derivative Financial Instruments.

 

During the year ended December 31, 2022, we voluntarily terminated our remaining interest rate swap agreements with a total notional amount of $115.0 million in response to market conditions. During year ended December 31, 2021, we voluntarily terminated interest rate swap agreements with a total notional amount of $150.0 million in response to market conditions and as a result of excess liquidity. For years ended December 31, 2022 and December 31, 2021, unrealized gains of $6.4 million and $1.4 million, respectively, net of tax expenses of $1.7 million and $0.4 million, respectively, were reclassified from “Accumulated other comprehensive (loss) income” and recorded as “Swap termination fee income” in noninterest income in the accompanying consolidated statements of income.

 

For the years ended December 31, 2022 and December 31, 2021, a gain of $4.3 million, net of a $1.2 million tax expense, and a gain of $5.3 million, net of a $1.4 million tax expense, respectively, was recognized in “Other comprehensive income (loss)” in the accompanying consolidated statements of comprehensive (loss) income for the change in fair value of the interest rate swap contracts.

 

 

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 Measurement. The Company did not recognize any gains or losses in other income resulting from fair value adjustments during the years ended December 31, 2023, 2022, and 2021. At December 31, 2023, we had notional amounts of $174.9 million in interest rate swap contracts with customers and $174.9 million in offsetting interest rate swap contracts with other financial institutions. The fair value of the swap contracts consisted of gross assets of $17.3 million and gross liabilities of $17.3 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. The credit risk associated with these commitments is evaluated in a manner similar to the allowance for credit losses. The reserve for unfunded loan commitments is included in “Accrued taxes and other liabilities” in the accompanying consolidated balance sheets. At December 31, 2023 and 2022, the reserve for unfunded loan commitments was $0.3 million and $0.4 million, 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. Virtually 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).

 

   

December 31, 2023

   

December 31, 2022

 

Commitments to extend credit:

               

Loan commitments

  $ 413,019     $ 333,040  

Standby letters of credit

    17,844       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 will continue this process as new commitments are entered into or existing commitments are renewed.

 

Additionally, at December 31, 2023, the Company had unfunded commitments of $1.3 million for its investment in Small Business Investment Company qualified funds.

 

For each of the years ended December 31, 2023 and 2022, we engaged in no off-balance sheet transactions reasonably likely to have a material effect on our financial condition, results of operations, or cash flows currently or in the future.

 

 

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 December 31, 2023, contractually obligated lease payments due under non-cancelable operating leases by payment date (dollars in thousands).

 

Less than one year

  $ 381  

One to three years

    727  

Three to five years

    682  

Over five years

    671  

Total

  $ 2,461  

 

On January 27, 2023, we completed the previously announced sale of certain assets, deposits and other liabilities associated with the Alice and Victoria, Texas branch locations. 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 7A. Quantitative and Qualitative Disclosures about Market Risk

 

The information contained in Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations Risk Management hereof is incorporated herein by reference.

 

 

 

Item 8. Financial Statements and Supplementary Data

 

Managements Report on Internal Control over Financial Reporting

 

To the Stockholders and Board of Directors

 

Investar Holding Corporation

 

Baton Rouge, Louisiana

 

Investar Holding Corporation (the “Company”) is responsible for the preparation, integrity and fair presentation of the consolidated financial statements included in this annual report. The consolidated financial statements and notes included in this annual report have been prepared in conformity with accounting principles generally accepted in the United States of America and necessarily include some amounts that are based on management’s best estimates and judgments.

 

Management of the Company is responsible for establishing and maintaining effective internal control over financial reporting designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America. The Company’s internal control over financial reporting includes those policies and procedures that: (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.

 

The system of internal control over financial reporting as it relates to the financial statements is evaluated for effectiveness by management and tested for reliability through a program of internal audits. Actions are taken to correct potential deficiencies as they are identified. Any system of internal control, no matter how well designed, has inherent limitations, including the possibility that a control can be circumvented or overridden, and misstatements due to error or fraud may occur and not be detected. Also, because of changes in conditions, internal control effectiveness may vary over time. Accordingly, even an effective system of internal control will provide only reasonable assurance with respect to financial statement preparation.

 

Management, with the participation of the Company’s principal executive officer and principal financial officer, conducted an assessment of the effectiveness of the Company’s system of internal control over financial reporting as of December 31, 2023, based on criteria for effective internal control over financial reporting described in the “Internal Control - Integrated Framework,” (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, management has concluded that, as of December 31, 2023, the Company’s system of internal control over financial reporting is effective and meets the criteria of the “Internal Control – Integrated Framework.”

 

HORNE LLP, the Company’s independent registered public accounting firm that has audited the Company’s financial statements included in this annual report, has issued an attestation report on the Company’s internal control over financial reporting which is included herein.

 

     

Date: March 7, 2024

By:

/s/ John J. D’Angelo

   

John J. D’Angelo

   

President and Chief Executive Officer

     

Date: March 7, 2024

By:

/s/ John R. Campbell

    John R. Campbell
   

Executive Vice President and Chief Financial Officer

 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Stockholders and the Board of Directors of Investar Holding Corporation

 

Opinion on the Internal Control Over Financial Reporting

 

We have audited Investar Holding Corporation’s (the “Company”) internal control over financial reporting as of December 31, 2023, based on criteria established in the Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2023, based on criteria established in the Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013.

 

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (the “PCAOB”), the consolidated financial statements of the Company as of December 31, 2023 and our report dated March 7, 2024 expressed an unqualified opinion.

 

Basis for Opinion

 

The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting in the accompanying Report on Management's Assessment of Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

 

Definition and Limitations of Internal Control over Financial Reporting

 

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the financial statements.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

/s/ HORNE LLP

 

Baton Rouge, Louisiana

March 7, 2024

 

 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Stockholders and the Board of Directors of Investar Holding Corporation

 

Opinion on the Financial Statements

 

We have audited the accompanying consolidated balance sheets of Investar Holding Corporation (the “Company”) as of December 31, 2023 and 2022, and the related consolidated statements of income, comprehensive income, changes in stockholders’ equity, and cash flows, for each of the three years in the period ended December 31, 2023, and the related notes to the consolidated financial statements (collectively, referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2023 and 2022, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2023, in conformity with accounting principles generally accepted in the United States of America.

 

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (the “PCAOB”), the Company’s internal control over financial reporting as of December 31, 2023, based on criteria established in the Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013, and our report dated March 7, 2024, expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

 

Emphasis-of-Matter

 

As discussed in Note 1 to the financial statements, the Company has changed its method of accounting for credit losses effective January 1, 2023, due to the adoption of Accounting Standards Codification ASC 326: Financial Instruments – Credit Losses (“ASC 326”). The Company adopted the new credit loss standard using the modified retrospective approach such that prior period amounts are not adjusted and continue to be reported in accordance with previously applicable generally accepted accounting principles. Our opinion is not modified with respect to this matter.

 

Basis for Opinion

 

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

 

Critical Audit Matter

 

The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (i) relates to accounts or disclosures that are material to the financial statements and (ii) involved especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing separate opinions on the critical audit matter or on the accounts or disclosures to which it relates.

 

Allowance for Credit Losses

 

Description of the Matter

 

As described in Notes 1 and 3 to the financial statements, the Company’s allowance for credit losses (“ACL”) is a valuation that reflects the Company’s best estimate of expected credit losses inherent within the Company’s loans held for investment portfolio and is maintained at a level believed adequate by management to absorb credit losses inherent in the entire loan portfolio in accordance with Accounting Standards Codification ASC 326: Financial Instruments – Credit Losses. The ACL is measured over the contractual life of loans held for investments and is estimated using relevant available information relating to past events, current conditions and reasonable and supportable forecasts, as well as qualitative adjustments. The ACL was $30,540,000 at December 31, 2023, which consists of two components; the loss allocations on pools of loans that share similar risk characteristics and loss allocations on individual loans that do not share similar risk characteristics with other loans and the measurement of expected credit loss for such individual loans.

 

The Company’s measurement of expected credit losses of loans on a pool basis when the loans share similar risk characteristics is based off historical data that is adjusted, as necessary, for qualitative factors where there are differences in the historical loss data of the Company and current or projected future conditions. Consideration of the relevant qualitative factors are used to bring the ACL to the level management believes is appropriate based on factors that are otherwise unaccounted for in the quantitative process. The ACL also includes reserves for loans evaluated on an individual basis, such as certain loans on nonaccrual. Management applies judgment in the determination of the qualitative factors and reserves assigned on an individual basis to estimate the ACL.

 

The ACL was identified by us as a critical audit matter because of the extent of auditor judgment applied and significant audit effort to evaluate the significant subjective and complex judgments made by management including the judgment required in evaluating management's determination of the qualitative factors and the reserve assumptions for loans evaluated on an individual basis.

 

 

How we Addressed the Matter in Our Audit

 

The primary audit procedures we performed in responses to this critical audit matter included:

 

 Obtained an understanding of the Company's process for establishing the ACL, including determination of the qualitative factors and reserve assumptions for loans evaluated on an individual basis, and evaluated the process utilized by management to challenge the model results and determine the best estimate of the ACL as of the balance sheet date.
 Evaluated the design and tested the operating effectiveness of the controls associated with the ACL process, including controls around the reliability and accuracy of data used in the model, management's review and approval of the selected qualitative factors, the reserve assumptions for loans evaluated on an individual basis, the governance of the credit loss methodology, and management's review and approval of the ACL.
 

Assessed reasonableness of model methodology and key modeling assumptions, as well as the appropriateness of management’s qualitative framework, and reserve assumptions for loans evaluated on an individual basis.

 Performed specific substantive tests of the model utilized, qualitative factors and the reserve assumptions for loans evaluated on an individual basis. We evaluated if qualitative factors were applied based on a comprehensive framework and compared the adjustments utilized by management to both internal portfolio metrics and external macroeconomic data (as applicable) to support adjustments and evaluate trends in such adjustments. Within our reserve testing for loans evaluated on an individual basis, we evaluated management’s assumptions, including collateral valuations. In addition, we evaluated the Company’s estimate of the overall ACL giving consideration to the Company’s borrowers, loan portfolio, and macroeconomic trends, independently obtained and compared such information to comparable financial institutions and considered whether new or contrary information existed.

 

We have served as the Company’s auditor since 2020.

 

/s/ HORNE LLP

 

Baton Rouge, Louisiana

March 7, 2024

 

 

 

 

INVESTAR HOLDING CORPORATION

CONSOLIDATED BALANCE SHEETS

(Amounts in thousands, except share data)

 

  

December 31,

 
  

2023

  

2022

 

ASSETS

        

Cash and due from banks

 $28,285  $30,056 

Interest-bearing balances due from other banks

  3,724   10,010 

Federal funds sold

     193 

Cash and cash equivalents

  32,009   40,259 
         

Available for sale securities at fair value (amortized cost of $419,283 and $467,316, respectively)

  361,918   405,167 

Held to maturity securities at amortized cost (estimated fair value of $20,513 and $7,922, respectively)

  20,472   8,305 

Loans

  2,210,619   2,104,767 

Less: allowance for credit losses

  (30,540)  (24,364)

Loans, net

  2,180,079   2,080,403 

Equity securities

  14,597   27,254 

Bank premises and equipment, net of accumulated depreciation of $19,476 and $22,025, respectively

  44,183   49,587 

Other real estate owned, net

  4,438   682 

Accrued interest receivable

  14,366   12,749 

Deferred tax asset

  16,910   16,438 

Goodwill and other intangible assets, net

  42,320   43,147 

Bank owned life insurance

  58,797   57,379 

Other assets

  25,066   12,437 

Total assets

 $2,815,155  $2,753,807 
         

LIABILITIES

        

Deposits:

        

Noninterest-bearing

 $448,752  $580,741 

Interest-bearing

  1,806,975   1,501,624 

Total deposits

  2,255,727   2,082,365 

Advances from Federal Home Loan Bank

  23,500   387,000 

Borrowings under Bank Term Funding Program

  212,500    

Repurchase agreements

  8,633    

Subordinated debt, net of unamortized issuance costs

  44,320   44,225 

Junior subordinated debt

  8,630   8,515 

Accrued taxes and other liabilities

  35,077   15,920 

Total liabilities

  2,588,387   2,538,025 
         

Commitments and contingencies (Note 19)

          
         

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; 9,748,067 and 9,901,847 shares issued and outstanding, respectively

  9,748   9,902 

Surplus

  145,456   146,587 

Retained earnings

  116,711   108,206 

Accumulated other comprehensive loss

  (45,147)  (48,913)

Total stockholders’ equity

  226,768   215,782 

Total liabilities and stockholders’ equity

 $2,815,155  $2,753,807 

 

See accompanying notes to the consolidated financial statements.

 

 

 

INVESTAR HOLDING CORPORATION

CONSOLIDATED STATEMENTS OF INCOME

(Amounts in thousands, except share data)

 

   

For the years ended December 31,

 
   

2023

   

2022

   

2021

 

INTEREST INCOME

                       

Interest and fees on loans

  $ 117,892     $ 93,373     $ 90,230  

Interest on investment securities

                       

Taxable

    12,372       9,796       3,948  

Tax-exempt

    693       482       552  

Other interest income

    2,244       918       812  

Total interest income

    133,201       104,569       95,542  
                         

INTEREST EXPENSE

                       

Interest on deposits

    42,072       6,250       7,487  

Interest on borrowings

    16,609       8,534       4,241  

Total interest expense

    58,681       14,784       11,728  

Net interest income

    74,520       89,785       83,814  
                         

Provision for credit losses

    (2,000 )     2,922       22,885  

Net interest income after provision for credit losses

    76,520       86,863       60,929  
                         

NONINTEREST INCOME

                       

Service charges on deposit accounts

    3,090       3,090       2,422  

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

    (323 )     6       2,321  

Loss on sale or disposition of fixed assets, net

    (1,323 )     (258 )     (408 )

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

    (114 )     9       (5 )

Swap termination fee income

          8,077       1,835  

Gain on sale of loans

    75       37       199  

Servicing fees and fee income on serviced loans

    14       74       204  

Interchange fees

    1,697       2,036       1,920  

Income from bank owned life insurance

    1,417       1,305       1,146  

Change in the fair value of equity securities

    (65 )     (90 )     214  

Income from insurance proceeds

          1,384        

Other operating income

    2,070       2,680       2,194  

Total noninterest income

    6,538       18,350       12,042  

Income before noninterest expense

    83,058       105,213       72,971  
                         

NONINTEREST EXPENSE

                       

Depreciation and amortization

    3,780       4,435       4,988  

Salaries and employee benefits

    37,143       34,974       35,527  

Occupancy

    2,994       2,915       2,753  

Data processing

    3,482       3,600       3,112  

Marketing

    302       262       275  

Professional fees

    1,933       1,774       1,585  

Loss on early extinguishment of subordinated debt

          222        

Acquisition expense

                2,448  

Other operating expenses

    12,996       12,683       12,374  

Total noninterest expense

    62,630       60,865       63,062  

Income before income tax expense

    20,428       44,348       9,909  

Income tax expense

    3,750       8,639       1,909  

Net income

  $ 16,678     $ 35,709     $ 8,000  
                         

EARNINGS PER SHARE

                       

Basic earnings per share

  $ 1.69     $ 3.54     $ 0.77  

Diluted earnings per share

    1.69       3.50       0.76  

Cash dividends declared per common share

    0.395       0.365       0.31  

 

See accompanying notes to the consolidated financial statements.

 

 

 

INVESTAR HOLDING CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Amounts in thousands)

 

  

For the years ended December 31,

 
  

2023

  

2022

  

2021

 

Net income

 $16,678  $35,709  $8,000 

Other comprehensive income (loss):

            

Investment securities:

            

Unrealized gain (loss), available for sale, net of tax expense (benefit) of $951, ($12,993), and ($694), respectively

  3,510   (48,019)  (2,611)

Reclassification of realized loss (gain), available for sale, net of tax benefit (expense) of $67, ($1), and ($488), respectively

  256   (5)  (1,833)

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

     (1)  (1)

Derivative financial instruments:

            

Change in fair value of interest rate swaps designated as cash flow hedges, net of tax expense of $0, $1,151, and $1,396, respectively

     4,329   5,253 

Reclassification of realized gain, interest rate swap termination, net of tax expense of $0, $1,697, and $385, respectively

     (6,380)  (1,450)

Total other comprehensive income (loss)

  3,766   (50,076)  (642)

Total comprehensive income (loss)

 $20,444  $(14,367) $7,358 

 

See accompanying notes to the consolidated financial statements.

 

 

 

INVESTAR HOLDING CORPORATION

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY

(Amounts in thousands, except share data)

 

              

Accumulated

     
              

Other

  

Total

 
  

Common

      

Retained

  

Comprehensive

  

Stockholders’

 
  

Stock

  

Surplus

  

Earnings

  

Income (Loss)

  

Equity

 

Balance, December 31, 2020

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

Surrendered shares

  (19)  (348)        (367)

Shares repurchased

  (359)  (6,566)        (6,925)

Options exercised

  47   685         732 

Dividends declared, $0.31 per share

        (3,225)     (3,225)

Stock-based compensation

  65   1,676         1,741 

Net income

        8,000      8,000 

Other comprehensive loss, net

           (642)  (642)

Balance, December 31, 2021

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

Surrendered shares

  (24)  (462)        (486)

Shares repurchased

  (519)  (10,021)        (10,540)

Options exercised

  10   123         133 

Dividends declared, $0.365 per share

        (3,663)     (3,663)

Stock-based compensation

  92   2,015         2,107 

Net income

        35,709      35,709 

Other comprehensive loss, net

           (50,076)  (50,076)

Balance, December 31, 2022

 $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

  (22)  (330)        (352)

Shares repurchased

  (222)  (2,804)        (3,026)

Options exercised

  8   97         105 

Dividends declared, $0.395 per share

        (3,878)     (3,878)

Stock-based compensation

  82   1,906         1,988 

Net income

        16,678      16,678 

Other comprehensive income, net

           3,766   3,766 

Balance, December 31, 2023

 $9,748  $145,456  $116,711  $(45,147) $226,768 

 

See accompanying notes to the consolidated financial statements.

 

 

 

INVESTAR HOLDING CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in thousands)

 

   

For the years ended December 31,

 
   

2023

   

2022

   

2021

 

Cash flows from operating activities

                       

Net income

  $ 16,678     $ 35,709     $ 8,000  

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

                       

Depreciation and amortization

    3,780       4,435       4,988  

Provision for credit losses

    (2,000 )     2,922       22,885  

Net accretion of purchase accounting adjustments

    (274 )     (95 )     (1,560 )

Net (accretion) amortization of securities

    (62 )     972       3,484  

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

    323       (6 )     (2,321 )

Loss on sale or disposition of fixed assets, net

    1,323       258       408  

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

    114       (9 )     5  

Gain on sale of loans to First Community Bank

    (75 )            

Loss on early extinguishment of subordinated debt

          222        

FHLB stock dividend

    (642 )     (152 )     (40 )

Stock-based compensation

    1,988       2,107       1,741  

Deferred taxes

    (350 )     (655 )     (547 )

Net change in value of bank owned life insurance

    (1,417 )     (1,305 )     (1,143 )

Amortization of subordinated debt issuance costs

    95       66       92  

Change in the fair value of equity securities

    65       90       (214 )

Loans held for sale:

                       

Originations

          (624 )     (10,235 )

Proceeds from sales

          1,281       9,814  

Gain on sale of loans

          (37 )     (199 )

Net change in:

                       

Accrued interest receivable

    (518 )     (1,394 )     2,451  

Other assets

    5,772       (1,732 )     (3,086 )

Accrued taxes and other liabilities

    1,447       695       (1,042 )

Net cash provided by operating activities

    26,247       42,748       33,481  
                         

Cash flows from investing activities

                       

Proceeds from sales of investment securities available for sale

    14,974             137,803  

Purchases of securities available for sale

    (107,904 )     (181,636 )     (255,455 )

Purchases of securities held to maturity

    (14,056 )            

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

    140,712       60,173       84,729  

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

    1,879       1,933       2,149  

Proceeds from redemption or sale of equity securities

    17,429       1,225       574  

Purchases of equity securities

    (4,196 )     (11,615 )     (523 )

Net decrease (increase) in loans

    41,999       (225,090 )     86,967  

Proceeds from sales of other real estate owned

    1,484       6,071       878  

Purchases of other real estate owned

                (501 )

Proceeds from sales of fixed assets

    42       4,692       194  

Purchase of loans

    (163,842 )            

Purchases of fixed assets

    (1,072 )     (1,056 )     (3,318 )

Purchases of bank owned life insurance

          (5,000 )     (8,000 )

Purchases of other investments

    (617 )     (718 )     (233 )

Distributions from investments

    274       34       23  

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

    (596 )            

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

                8,112  

Net cash (used in) provided by investing activities

    (73,490 )     (350,987 )     53,399  

 

 

 

INVESTAR HOLDING CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED

(Amounts in thousands)

 

   

For the years ended December 31,

 
   

2023

   

2022

   

2021

 

Cash flows from financing activities

                       

Net increase (decrease) in customer deposits

    188,125       (38,249 )     25,946  

Net increase (decrease) in repurchase agreements

    8,633       (5,783 )     130  

Net (decrease) increase in short-term FHLB advances

    (333,500 )     333,500       (42,000 )

Net increase in borrowings under the Bank Term Funding Program

    212,500              

Repayment of long-term FHLB advances

    (30,000 )     (25,000 )      

Cash dividends paid on common stock

    (3,844 )     (3,552 )     (3,090 )

Payments to repurchase common stock

    (3,026 )     (10,540 )     (6,925 )

Proceeds from stock options exercised

    105       133       732  

Proceeds from subordinated debt, net of issuance costs

          19,548        

Extinguishment of subordinated debt

          (18,600 )      

Net cash provided by (used in) financing activities

    38,993       251,457       (25,207 )

Net (decrease) increase in cash and cash equivalents

    (8,250 )     (56,782 )     61,673  

Cash and cash equivalents, beginning of period

    40,259       97,041       35,368  

Cash and cash equivalents, end of period

  $ 32,009     $ 40,259     $ 97,041  
                         

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION

                       

Cash payments for:

                       

Income taxes

  $ 2,899     $ 8,887     $ 4,207  

Interest on deposits and borrowings

    56,773       14,409       11,817  

SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING ACTIVITIES

                       

Transfer from loans to other real estate owned

  $ 3,930     $ 3,327     $ 521  

Transfer from bank premises and equipment to other real estate owned

    1,425       525       1,850  

 

See accompanying notes to the consolidated financial statements.

 

70

INVESTAR HOLDING CORPORATION
Notes to Consolidated Financial Statements

 

 

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Nature of Operations

 

Investar Holding Corporation is a financial holding company headquartered in Baton Rouge, Louisiana, that provides, through its wholly-owned subsidiary, Investar Bank, National Association (the “Bank”), full banking services, excluding trust services, tailored primarily to meet the needs of individuals, professionals, and small to medium-sized businesses throughout its markets in south Louisiana, southeast Texas and Alabama.

 

Basis of Presentation

 

The consolidated financial statements of Investar Holding Corporation and its wholly-owned subsidiary, the Bank (together, the “Company”), have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”) and to generally accepted practices within the banking industry.

 

Segments

 

All of the Company’s banking operations are considered by management to be aggregated in one reportable operating segment. Because the overall banking operations comprise substantially all of the consolidated operations, no separate segment disclosures are presented in the accompanying consolidated financial statements.

 

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 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.

 

The COVID-19 pandemic and, in 2022 and 2023, rising inflation and interest rates have made certain estimates more challenging, including those discussed above.

 

71

INVESTAR HOLDING CORPORATION
Notes to Consolidated Financial Statements
 

Investment Securities

 

The Company’s investments in securities are accounted for in accordance with applicable guidance contained in the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”), which requires the classification of securities into one of the following categories:

 

 

Securities to be held to maturity (“HTM”): bonds, notes, and debentures for which the Company has the positive intent and ability to hold to maturity are reported at cost, adjusted for premiums and discounts that are recognized in interest income using the interest method over the period to maturity.

 

 

Securities available for sale (“AFS”): available for sale securities consist of bonds, notes, and debentures that are available to meet the Company’s operating needs. These securities are reported at fair value.

 

Unrealized holding gains and losses, net of tax, on available for sale securities are reported as a net amount in other comprehensive income. Purchase premiums and discounts are recognized in interest income using the interest method over the terms of the securities. Realized gains and losses on the sale of debt and equity securities are determined using the specific-identification method and average price method, respectively.

 

The Company follows FASB guidance related to the recognition and presentation of other-than-temporary impairment. The guidance specifies that if an entity does not have the intent to sell a debt security prior to recovery, the security would not be considered other-than-temporarily impaired unless there is a credit loss. When an entity does not intend to sell the security, and it is more likely than not that the entity will not have to sell the security before recovery of its cost basis, it will recognize the credit component of an other-than-temporary impairment of a debt security in earnings and the remaining portion in other comprehensive income.

 

See “Allowance for Credit Losses” below for the accounting treatment of the allowance of credit losses for AFS and HTM securities.

 

Loans

 

The Company’s loan portfolio categories include real estate, commercial and consumer loans. Real estate loans are further categorized into construction and development, 1-4 family residential, multifamily, farmland and commercial real estate loans. The consumer loan category includes loans originated through indirect lending. Indirect lending, which is lending initiated through third-party business partners, is largely comprised of loans made through automotive dealerships.

 

Loans that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off are stated at the unpaid principal balance outstanding, net of purchase premiums or discounts, deferred income (net of costs), any direct principal charge-offs, and an allowance for credit losses. Interest on loans is calculated by using the effective interest rate 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.

 

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 ordinarily placed on nonaccrual when a loan is specifically determined to be impaired or when principal or interest is delinquent for 90 days or more; however, management may elect to continue the accrual when the estimated net realizable value of collateral is sufficient to cover the principal balance and the accrued interest. Any unpaid interest previously accrued on nonaccrual loans is reversed from income. Interest income, generally, is not recognized on specific impaired loans unless the likelihood of further loss is remote. Interest payments received on such loans are applied as a reduction of the loan principal balance. Interest income on other nonaccrual loans is recognized only to the extent of interest payments received. A loan may be returned to accrual status when all the principal and interest amounts contractually due are brought current and future principal and interest amounts contractually due are reasonably assured, which is typically evidenced by a sustained period of repayment performance by the borrower.

 

72

INVESTAR HOLDING CORPORATION
Notes to Consolidated Financial Statements
 

The Company follows the FASB accounting guidance on sales of financial assets, which includes participating interests in loans. For loan participations that are structured in accordance with this guidance, the sold portions are recorded as a reduction of the loan portfolio. Loan participations that do not meet the criteria are accounted for as secured borrowings.

 

See “Acquisition Accounting” below for accounting treatment of loans acquired through business acquisitions.

 

Employee Retention Credit

 

The CARES Act provided for an Employee Retention Credit (“ERC”), which is a broad based refundable payroll tax credit that incentivized businesses to retain employees on the payroll during the COVID-19 pandemic. The ERC is a credit against certain employment taxes of up to $5,000 per employee for eligible employers based on certain wages paid after March 12, 2020 through December 31, 2020. In 2021, the tax credit increased to up to $7,000 for each quarter, equal to 70% of qualified wages paid to employees during a quarter, capped at $10,000 of qualified wages per employee per quarter. The ERC terminated effective September 30, 2021. The Company qualified for the ERC based on the significant adverse financial impacts of the COVID-19 pandemic. In the fourth quarter of 2022, Company recorded a $2.3 million reduction to payroll taxes related to the second quarter of 2021, and in the fourth quarter of 2021, the Company recorded a $1.9 million reduction to payroll taxes related to the first quarter of 2021, which are included as part of “Salaries and employee benefits” in noninterest expense on the accompanying consolidated statements of income for the years ended December 31, 2022 and 2021.

 

Allowance for Credit Losses

 

For reporting periods beginning on and after January 1, 2023, reflecting the adoption of ASU 2016-13:

 

The Company’s allowance for credit losses is determined using a current expected credit loss (“CECL”) model. The allowance for credit losses represents the measurement of all expected credit losses for financial assets accounted for on an amortized cost basis. Expected losses at the reporting date are calculated based on historical experience, current conditions, and reasonable and supportable forecasts. The lifetime expected credit losses are recorded at the time the financial asset is originated or acquired and 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 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 allowance for credit losses is measured on a pool basis when similar risk characteristics exist and is maintained at an amount which management believes is a current estimate of the expected credit losses for the full life of the relevant pool of loans and related unfunded lending commitments. For modeling purposes, loan pools include: agriculture and farmland, automotive, commercial and industrial, construction and development, commercial real estate - nonowner-occupied and multifamily, commercial real estate - owner-occupied, credit cards, home equity lines of credit and junior liens, consumer, residential senior liens, and other loans, which primarily consist of public finance. Management periodically reassesses each pool to confirm that the loans within the pool continue to share similar characteristics and risk profiles and to determine whether further segmentation is necessary. 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. 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. 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. The allowance for credit losses is established after input from management as well as our risk management department and our special assets committee. For collateral dependent loans where the borrower is experiencing financial difficulty, which the Company evaluates 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. Credits deemed uncollectible are charged to the allowance for credit losses. Provisions for credit losses and recoveries on loans previously charged off are adjustments to the allowance for credit losses.

 

Expected credit losses on AFS securities are recorded in an allowance for credit losses 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. In evaluating AFS securities in an unrealized loss position for credit losses, the Company considers the nature of the investments, the current market price, and the current interest rate environment, among other factors. Declines in the fair value of AFS securities that are not considered credit related are recognized in accumulated other comprehensive income.

 

Expected credit losses on HTM securities are recorded in an allowance for credit losses and estimated using a probability of loss model based on reasonable and supportable forecasts. HTM securities are evaluated on a collective basis by security type. In evaluating HTM securities in an unrealized loss position for credit losses, the Company considers the nature of the investments, the current market price, and the current interest rate environment, among other factors. 

 

See “Accounting Standards Adopted in 2023” below for additional information.

 

For reporting periods prior to  January 1, 2023, prior to the adoption of ASU 2016-13:

 

Prior to the adoption of CECL, the Company established an allowance for loan losses in an amount that management believed would be adequate to absorb probable losses inherent in the loan portfolio as of the balance sheet date based on evaluations of the collectability of loans and prior loan loss experience. The evaluations took into consideration such factors as changes in the nature and volume of the loan portfolio, overall portfolio quality, review of specific problem loans, and current economic conditions that may affect the borrower’s ability to pay. This evaluation was inherently subjective as it required estimates that were susceptible to significant revision as more information became available. Allowances for impaired loans were generally determined based on collateral values or the present value of estimated cash flows. Credits deemed uncollectible were charged to the allowance. Provisions for loan losses and recoveries on loans previously charged off were adjusted to the allowance. Past due status was determined based on contractual terms.

 

The allowance consisted of allocated and general components. The allocated component related to loans that were classified as impaired. For loans that were classified as impaired, an allowance was established when the discounted cash flows (or collateral value or observable market price) of the impaired loan was lower than the carrying value of that loan. The general component covered non-classified loans and was based on historical loss experience adjusted for qualitative factors. Based on management’s review and observations made through qualitative review, management may apply qualitative adjustments to determine loss estimates at a group and/or portfolio segment level as deemed appropriate. Management had an established methodology to determine the adequacy of the allowance for loan losses that assessed the risks and losses inherent in the portfolio and portfolio segments. The Company utilized an internally developed model that required judgment to determine the estimation method that fit the credit risk characteristics of the loans in its portfolio and portfolio segments. Qualitative and environmental factors that may not be directly reflected in quantitative estimates include: asset quality trends, changes in loan concentrations, new products and process changes, changes and pressures from competition, changes in lending policies and underwriting practices, trends in the nature and volume of the loan portfolio, changes in experience and depth of lending staff and management and national and regional economic trends. The Company also considered third party or comparable company loss data. Changes in these factors were considered in determining changes in the allowance for loan losses. The impact of these factors on the Company’s qualitative assessment of the allowance for loan losses could change from period to period based on management’s assessment of the extent to which these factors were already reflected in historic loss rates. The uncertainty inherent in the estimation process was also considered in evaluating the allowance for loan losses.

 

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 the 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 December 31, 2023 and 2022 was $13.4 million and $26.0 million, respectively.

 

In addition, equity securities include marketable securities in corporate stocks and mutual funds which totaled $1.2 million at both  December 31, 2023 and 2022.

 

73

INVESTAR HOLDING CORPORATION
Notes to Consolidated Financial Statements
 

Bank Premises and Equipment

 

Bank premises and equipment are stated at cost, less accumulated depreciation, with the exception of land, which is stated at cost. Depreciation expense is computed using the straight-line method and is charged to expense over the estimated useful lives of 39 years for buildings, five to 39 years for improvements, three to seven years for furniture and equipment, and one to five years for computer equipment and software. Costs of major additions and improvements are capitalized. Expenditures for maintenance and repairs are expensed as incurred. Gains or losses on the disposition of land, buildings, and equipment are included in noninterest income on the consolidated statements of income.

 

The Company leases certain branch locations under operating lease agreements. The Company also leases certain office facilities to outside parties under operating lessor agreements; however, such leases are not significant. 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.

 

Other Real Estate Owned

 

Real estate acquired through foreclosure, or other real estate owned on the consolidated balance sheets, is initially recorded at fair value at the time of foreclosure, less estimated selling cost, and any related write down is charged to the allowance for credit losses. Valuations are periodically performed by management and provisions for estimated losses on other real estate owned are charged to expense when fair value is determined to be less than the carrying value.

 

Costs relative to the development and improvement of properties are capitalized to the extent realizable, whereas ordinary upkeep disbursements are charged to expense. The ability of the Company to recover the carrying value of real estate is based upon future sales of the other real estate owned. The ability to affect such sales is subject to market conditions and other factors, many of which are beyond the Company’s control. Operating income and expense of such properties is included in other operating income or expense, respectively, on the accompanying consolidated statements of income. Gain or loss on the disposition of such properties is included in noninterest income on the consolidated statements of income.

 

Goodwill and Other Intangible Assets

 

Goodwill represents the excess of the purchase price over the fair value of the net identifiable assets acquired in a business combination. Goodwill and other intangible assets deemed to have an indefinite useful life are not amortized but instead are subject to review for impairment annually, or more frequently if deemed necessary, in accordance with the provisions of FASB ASC Topic 350,Intangibles Goodwill and Other.

 

Intangible assets with estimable useful lives are amortized over their respective estimated useful lives and reviewed for impairment in accordance with FASB ASC Topic 360,Property, Plant, and Equipment.” If impaired, the asset is written down to its estimated fair value. No impairment charges have been recognized through December 31, 2023. Core deposit intangibles representing the value of the acquired core deposit base are generally recorded in connection with business combinations involving banks and branch locations. The Company’s policy is to amortize core deposit intangibles over the estimated useful life of the deposit base. The remaining useful lives of core deposit intangibles are evaluated periodically to determine whether events and circumstances warrant revision of the remaining period of amortization. The Company’s core deposit intangibles are currently amortized using the sum-of-the-years-digits basis over 10 to 15 years. See Note 7. Goodwill and Other Intangible Assets, for additional information.

 

Bank Owned Life Insurance

 

The Company invests in bank owned life insurance (“BOLI”) policies that provide earnings to help cover the cost of employee benefit plans. The Company is the owner and beneficiary of the life insurance policies it purchased directly on a chosen group of employees. The policies are carried on the Company’s consolidated balance sheet at their cash surrender value and are subject to regulatory capital requirements. The determination of the cash surrender value includes a full evaluation of the contractual terms of each policy and assumes the surrender of policies on an individual-life by individual-life basis. Additionally, the Company periodically reviews the creditworthiness of the insurance companies that have underwritten the policies. Earnings accruing to the Company are derived from the general account investments of the insurance companies. Increases in the net cash surrender value of BOLI policies and insurance proceeds received are not taxable and are recorded in noninterest income in the consolidated statements of income.

 

74

INVESTAR HOLDING CORPORATION
Notes to Consolidated Financial Statements
 

Repurchase Agreements

 

Securities sold under agreements to repurchase are secured borrowings treated as financing activities and are carried at the amounts at which the securities will be subsequently reacquired as specified in the respective agreements.

 

Stock-Based Compensation

 

The Company accounts for stock-based compensation under the provisions of ASC Topic 718,Compensation - Stock Compensation.” Under this accounting guidance, fair value is established as the measurement objective in accounting for share-based payment awards and requires the application of a fair value based measurement method in accounting for compensation costs, which is recognized over the requisite service period. The impact of forfeitures of share-based payment awards on compensation expense is recognized as forfeitures occur. See Note 14. Stock-Based Compensation, for further disclosures regarding stock-based compensation.

 

Off-Balance Sheet Credit-Related Financial Instruments

 

The Company accounts for its guarantees in accordance with the provisions of ASC Topic 460,Guarantees.” In the ordinary course of business, the Company has entered into commitments to extend credit, including commitments under credit card agreements, commercial letters of credit and standby letters of credit. Such financial instruments are recorded when they are funded.

 

Derivative Financial Instruments

 

ASC Topic 815,Derivatives and Hedging,” requires that all derivatives be recognized as assets or liabilities in the balance sheet at fair value. Derivatives executed with the same counterparty are generally subject to master netting arrangements, however, fair value amounts recognized for derivative financial instruments and fair value amounts recognized for the right/obligation to reclaim/return cash collateral are not offset for financial reporting purposes.

 

In the course of its business operations, the Company is exposed to certain risks, including interest rate, liquidity and credit risk. The Company manages its risks through the use of derivative financial instruments, primarily through management of exposure due to the receipt or payment of future cash amounts based on interest rates. The Company’s derivative financial instruments manage the differences in the timing, amount and duration of expected cash receipts and payments.

 

Derivatives which are designated and qualify as a hedge of the exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. The effective portion of the derivative’s gain or loss is initially reported as a component of other comprehensive income and subsequently reclassified into earnings when the forecasted transaction affects earnings or when the hedge is terminated. The ineffective portion of the gain or loss is reported in earnings immediately.

 

In applying hedge accounting for derivatives, the Company establishes a method for assessing the effectiveness of the hedging derivative and a measurement approach for determining the ineffective aspect of the hedge upon the inception of the hedge. These methods are consistent with the Company’s approach to managing risk. Note 12. Derivative Financial Instruments, describes the derivative instruments currently used by the Company and discloses how these derivatives impact the Company’s financial position and results of operations.

 

Income Taxes

 

The provision for income taxes is based on amounts reported in the consolidated statements of income after exclusion of nontaxable income such as interest on state and municipal securities. Also, certain items of income and expenses are recognized in different time periods for financial statement purposes than for income tax purposes. Thus, provisions for deferred taxes are recorded in recognition of such temporary differences.

 

Deferred taxes are determined utilizing a liability method whereby deferred tax assets are recognized for deductible temporary differences and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.

 

75

INVESTAR HOLDING CORPORATION
Notes to Consolidated Financial Statements
 

The Company has adopted accounting guidance related to accounting for uncertainty in income taxes, which sets out a consistent framework to determine the appropriate level of tax reserves to maintain for uncertain tax positions.

 

The Company recognizes interest and penalties on income taxes as a component of income tax expense.

 

Revenue Recognition

 

The Company recognizes revenue in the consolidated statements of income as it is earned and when collectability is reasonably assured. The primary source of revenue is interest income from interest-earning assets, which is recognized on the accrual basis of accounting using the effective interest method. The recognition of revenues from interest-earning assets is based upon formulas from underlying loan agreements, securities contracts, or other similar contracts. Noninterest income is recognized on the accrual basis of accounting as services are provided or as transactions occur. Noninterest income includes fees from deposit accounts, merchant services, automated teller machine (“ATM”) and debit card fees, servicing fees, interchange fees, and other miscellaneous services and transactions.

 

Earnings Per Share

 

Basic earnings per share is calculated using the two-class method. The two-class method is an earnings allocation formula that determines earnings per share separately for common stock and participating securities according to dividends declared and participation rights in undistributed earnings. Under this method, all earnings distributed and undistributed, are allocated to participating securities and common shares based on their respective rights to receive dividends. Unvested share-based payment awards that contain nonforfeitable rights to dividends are considered participating securities (i.e. unvested time-vested restricted stock), not subject to performance based measures.

 

Basic earnings per share is calculated by dividing net income available to common shareholders by the weighted average number of common shares outstanding during the period. Diluted earnings per share is calculated in a manner similar to that of basic earnings per share except that the weighted average number of common shares outstanding is increased to include the number of additional common shares that would have been outstanding if all potentially dilutive common shares (such as those resulting from the exercise of stock options and warrants) were issued during the period, computed using the treasury stock method.

 

Statements of Cash Flows

 

For purposes of the statements of cash flows, cash and cash equivalents include cash and amounts due from banks and federal funds sold due to the short-term nature of these items.

 

Comprehensive Income

 

Comprehensive income includes net income and other comprehensive income or loss, which in the case of the Company includes unrealized gains and losses on securities, changes in the fair value of interest rate swaps, and the reclassification of realized gains on AFS securities and interest rate swap terminations to net income, net of related income taxes.

 

76

INVESTAR HOLDING CORPORATION
Notes to Consolidated Financial Statements
 

Acquisition Accounting

 

The Company follows the FASB ASC Topic 805, “Business Combinations” (“ASC 805”) to determine the appropriate accounting treatment for an acquisition. ASC 805 prescribes an initial fair value screen to determine if substantially all of the fair value of the assets acquired is concentrated in a single asset or group of similar assets. If the initial screen test is met, the assets acquired represent an asset acquisition rather than a business combination.

 

Loans acquired in an asset acquisitions are recorded using the cost accumulation and allocation model whereby the cost of the acquisition is allocated on a relative fair value basis to the assets acquired. 

 

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

 

Loans acquired in a business combination are recorded at their estimated fair value as of the acquisition date. The fair value of loans acquired is determined using a discounted cash flow model based on assumptions regarding the amount and timing of principal and interest prepayments, estimated payments, estimated default rates, estimated loss severity in the event of defaults, and current market rates. The fair value adjustment for performing acquired loans is accreted over the life of the loan using the effective interest method. Estimated credit losses are included in the determination of fair value; therefore, an allowance for credit losses is not recorded on the acquisition date. Subsequent to acquisition, acquired performing loans are evaluated using a similar allowance methodology as the legacy portfolio. An allowance for credit losses is only recorded to the extent that the required reserves exceed the unaccreted fair value adjustment.

 

The Company accounts for purchased credit deteriorated (“PCD”) assets under ASC Topic 326. The CECL estimate for PCD assets 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.

 

Share Repurchases

 

The Louisiana Business Corporation Act does not include the concept of treasury stock. Rather, shares purchased by the Company constitute authorized but unissued shares. Accounting principles generally accepted in the United States of America state that accounting for treasury stock shall conform to state law. The Company’s consolidated financial statements as of December 31, 2023, 2022 and 2021 reflect this principle. The cost of shares purchased by the Company has been allocated to common stock and surplus balances.

 

77

INVESTAR HOLDING CORPORATION
Notes to Consolidated Financial Statements
 

Reclassifications

 

Certain reclassifications have been made to the 2022 and 2021 financial statements to conform to the 2023 presentation.

 

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 HTM debt securities, to be presented at an amount net of an allowance for credit losses, which reflects expected losses for the full life of the financial asset. Unfunded lending commitments are also within the scope of this topic. See “Allowance for Credit Losses” above for additional information on the calculation of the allowance for credit losses under ASU 2016-13.

 

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 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. 

 

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. 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.

 

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. The Company used the prospective transition approach for PCD loans that were previously classified as PCI and accounted for under ASC 310-30,Loans and Debt Securities Acquired with Deteriorated Credit Quality” (“ASC 310-30”). As permitted under ASU 2016-13, the Company did not reassess whether PCI assets meet the criteria of PCD assets as of the date of adoption.

 

The Company adopted ASU 2016-13 on January 1, 2023, and recorded a one-time, cumulative effect adjustment as shown in the table below (dollars in thousands).

 

  

December 31, 2022

  

Impact of ASU 2016-13 Adoption

  

January 1, 2023

 

Assets:

            

Allowance for credit losses

 $(24,364) $(5,865) $(30,229)

Deferred tax asset

  16,438   1,142   17,580 

Remaining purchase discount on loans(1)

  (818)  422   (396)

Liabilities:

            

Reserve for unfunded loan commitments(2)

  372   (6)  366 

Stockholders’ Equity

            

Retained earnings

  108,206   (4,295)  103,911 

 

 (1)

For PCD loans, formerly classified as PCI, the Company applied the guidance under CECL using the prospective transition approach. As a result, the Company adjusted the amortized cost basis of the PCD loans to reclassify the purchase discount to the allowance for credit losses on January 1, 2023.

 (2)

The allowance for credit losses on unfunded loan commitments is included in “Accrued taxes and other liabilities” in the accompanying consolidated balance sheets. The related provision for credit losses on unfunded loan commitments is included in “Provision for credit losses” in the accompanying consolidated statements of income for the year ended December 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. The Company’s AFS and HTM securities portfolios were not materially impacted by the adoption of ASU 2016-13 due to the composition of the portfolios, which consists primarily of U.S. Treasury and U.S. government agencies and corporations securities and mortgage-backed securities. Due to the nature of the investments, current market prices, and the current interest rate environment, the Company determined that the declines in the fair values of the HTM and AFS securities portfolio were not attributable to credit losses. The Company will apply the provisions of ASU 2016-13 to debt securities that have an other-than-temporary impairment on a prospective basis. Accordingly, there was no adjustment made to the amortized cost basis upon adoption. The adoption of ASU 2016-13 did not have a significant impact on the Company’s regulatory capital ratios. 

 

FASB ASC Topic 326 “Financial Instruments – Credit Losses, Troubled Debt Restructurings and Vintage Disclosures” Update No. 2022-02 (ASU 2022-02). ASU 2022-02 became effective for the Company on January 1, 2023 and is applied prospectively. ASU 2022-02 amends Topic 326 to eliminate the accounting guidance for troubled debt restructurings (“TDRs”) by creditors that have adopted ASU 2016-13 and, instead, requires that an entity evaluate whether the modification represents a new loan or a continuation of an existing loan. The amendment also requires that public business entities disclose current-period gross charge-offs by year of origination for financing receivables and net investments in leases. The adoption of ASU 2022-02 did not have a material impact on the Company’s consolidated financial statements.

 

FASB ASC Topic 848 “Reference Rate Reform: Facilitation of the Effects of Reference Rate Reform on Financial Reporting” Update No. 2020-04 (ASU 2020-04) and FASB ASC Topic 848 “Reference Rate Reform: Deferral of the Sunset Date” Update No. 2022-06 (ASU 2022-06). In  March 2020, the FASB issued ASU 2020-04, which is intended to provide temporary optional expedients and exceptions to the GAAP guidance on contract modifications and hedge accounting to ease the financial reporting burdens related to the expected market transition from the London Interbank Offered Rate (“LIBOR”) and other interbank offered rates to alternative reference rates. ASU 2020-04 became effective as of March 12, 2020 and could be adopted any time during the period of January 1, 2020 through December 31, 2022. In  December 2022, the FASB issued ASU 2022-06, which deferred the sunset date of ASU 2020-04 from  December 31, 2022 to  December 31, 2024. The Company implemented a plan to transition all loans and other financial instruments, including certain indebtedness, with attributes that are either directly or indirectly influenced by LIBOR to its preferred replacement index, the Secured Overnight Financing Rate (“SOFR”). The Company has transitioned all loans and certain indebtedness. The adoption of ASU 2022-06 did not have a material impact on the Company’s consolidated financial statements.

 

Recent Accounting Pronouncements

 

This section briefly describes accounting standards that have been issued, but are not yet adopted, that could impact the Company’s financial statements.

 

FASB “Disclosure Improvements” Update No. 2023-06 (ASU 2023-06”). In October 2023, the FASB issued ASU 2023-06, which amends the disclosure or presentation requirements related to various topics. The amendment is intended to align U.S. GAAP with the SEC’s regulations. ASU 2023-06 is required to be applied prospectively, and early adoption is prohibited. For reporting entities subject to the SEC’s existing disclosure requirements, the effective dates of ASU 2023-06 will be the date on which the SEC’s removal of that related disclosure requirement from Regulation S-X or Regulation S-K becomes effective. If by June 30, 2027, the SEC has not removed the applicable requirement from Regulation S-X or Regulation S-K, the pending content of the related amendment will be removed and will not become effective for any entities. ASU 2023-06 is not expected to have a material impact on the Company’s consolidated financial statements.

 

FASB ASC Topic 740 “Income Taxes - Improvements to Income Tax Disclosures” Update No. 2023-09 (ASU 2023-09”). In December 2023, the FASB issued ASU 2023-09, which enhances the transparency and decision usefulness of income tax disclosures. ASU 2023-09 requires disclosure of additional categories of information about federal, state and foreign income taxes in the rate reconciliation table and requires companies to provide more information about the reconciling items in some categories if a quantitative threshold is met. The adoption of ASU 2023-09 is effective for fiscal years beginning after December 15, 2024 and is not expected to have a material impact on the Company’s consolidated financial statements.

 

78

INVESTAR HOLDING CORPORATION
Notes to Consolidated Financial Statements
 
 

NOTE 2. INVESTMENT SECURITIES

 

The amortized cost and approximate fair value of investment securities classified as AFS are summarized below as of the dates presented (dollars in thousands).

 

December 31, 2023

 

Amortized Cost

  

Gross Unrealized Gains

  

Gross Unrealized Losses

  

Fair Value

 

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

 $20,383  $100  $(440) $20,043 

Obligations of state and political subdivisions

  18,768   11   (2,076)  16,703 

Corporate bonds

  30,097      (3,741)  26,356 

Residential mortgage-backed securities

  274,950   14   (42,919)  232,045 

Commercial mortgage-backed securities

  75,085   208   (8,522)  66,771 

Total

 $419,283  $333  $(57,698) $361,918 

 

December 31, 2022

 

Amortized Cost

  

Gross Unrealized Gains

  

Gross Unrealized Losses

  

Fair Value

 

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).

 

  

Twelve months ended December 31,

 
  

2023

  

2022

  

2021

 

Proceeds from sales

 $14,974  $  $137,803 

Gross gains

 $2  $  $2,323 

Gross losses

 $(325) $  $(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).

 

December 31, 2023

 

Amortized Cost

  

Gross Unrealized Gains

  

Gross Unrealized Losses

  

Fair Value

 

Obligations of state and political subdivisions

 $18,163  $314  $(82) $18,395 

Residential mortgage-backed securities

  2,309      (191)  2,118 

Total

 $20,472  $314  $(273) $20,513 

 

December 31, 2022

 

Amortized Cost

  

Gross Unrealized Gains

  

Gross Unrealized Losses

  

Fair Value

 

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 December 31, 2023 or December 31, 2022.

 

79

INVESTAR HOLDING CORPORATION
Notes to Consolidated Financial Statements
 

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

 

December 31, 2023

 

Fair Value

  

Unrealized Losses

  

Fair Value

  

Unrealized Losses

  

Fair Value

  

Unrealized Losses

 

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

 $1,268  $(7) $9,284  $(433) $10,552  $(440)

Obligations of state and political subdivisions

        15,425   (2,076)  15,425   (2,076)

Corporate bonds

  468   (28)  25,888   (3,713)  26,356   (3,741)

Residential mortgage-backed securities

  2,705   (421)  228,415   (42,498)  231,120   (42,919)

Commercial mortgage-backed securities

  1,085   (35)  50,271   (8,487)  51,356   (8,522)

Total

 $5,526  $(491) $329,283  $(57,207) $334,809  $(57,698)

 

  

Less than 12 Months

  

12 Months or More

  

Total

 

December 31, 2022

 

Fair Value

  

Unrealized Losses

  

Fair Value

  

Unrealized Losses

  

Fair Value

  

Unrealized Losses

 

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)

 

At  December 31, 2023, 698 of the Company’s AFS debt securities had unrealized losses totaling 14.7% of the individual securities’ amortized cost basis and 13.8% of the Company’s total amortized cost basis of the AFS investment securities portfolio. At such date, 682 of the 698 securities had been in a continuous loss position for over 12 months.

 

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

 

December 31, 2023

 

Fair Value

  

Unrealized Losses

  

Fair Value

  

Unrealized Losses

  

Fair Value

  

Unrealized Losses

 

Obligations of state and political subdivisions

 $  $  $3,064  $(82) $3,064  $(82)

Residential mortgage-backed securities

        2,118   (191)  2,118   (191)

Total

 $  $  $5,182  $(273) $5,182  $(273)

 

  

Less than 12 Months

  

12 Months or More

  

Total

 

December 31, 2022

 

Fair Value

  

Unrealized Losses

  

Fair Value

  

Unrealized Losses

  

Fair Value

  

Unrealized Losses

 

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)

 

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 December 31, 2023 and 2022.

 

80

INVESTAR HOLDING CORPORATION
Notes to Consolidated Financial Statements
 

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

 

December 31, 2023

 

Amortized Cost

  

Fair Value

  

Amortized Cost

  

Fair Value

 

Due within one year

 $1,034  $1,027  $960  $961 

Due after one year through five years

  28,620   27,623   2,556   2,582 

Due after five years through ten years

  43,634   39,971   4,647   4,621 

Due after ten years

  345,995   293,297   12,309   12,349 

Total debt securities

 $419,283  $361,918  $20,472  $20,513 

 

  

Securities Available For Sale

  

Securities Held to Maturity

 

December 31, 2022

 

Amortized Cost

  

Fair Value

  

Amortized Cost

  

Fair Value

 

Due within one year

 $1,082  $1,072  $915  $915 

Due after one year through five years

  32,452   31,394   960   961 

Due after five years through ten years

  52,093   48,229   3,663   3,536 

Due after ten years

  381,689   324,472   2,767   2,510 

Total debt securities

 $467,316  $405,167  $8,305  $7,922 

 

Accrued interest receivable on the Company’s investment securities was $1.7 million at both  December 31, 2023 and  December 31, 2022, and is included in “Accrued interest receivable” on the accompanying consolidated balance sheets.

 

At December 31, 2023, securities with a carrying value of $296.2 million were pledged to secure certain deposits, borrowings, and other liabilities, compared to $165.7 million in pledged securities at December 31, 2022.

 

81

INVESTAR HOLDING CORPORATION
Notes to Consolidated Financial Statements
 
 

NOTE 3. 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).

 

  

December 31,

 
  

2023

  

2022

 

Construction and development

 $190,371  $201,633 

1-4 Family

  413,786   401,377 

Multifamily

  105,946   81,812 

Farmland

  7,651   12,877 

Commercial real estate

  937,708   958,243 

Total mortgage loans on real estate

  1,655,462   1,655,942 

Commercial and industrial

  543,421   435,093 

Consumer

  11,736   13,732 

Total loans

 $2,210,619  $2,104,767 

 

Unamortized premiums and discounts on loans, included in the total loans balances above, were $0.2 million and $0.8 million at  December 31, 2023 and  December 31, 2022, respectively. Unearned income, or deferred fees, on loans was $1.1 million and $1.3 million at  December 31, 2023 and  December 31, 2022, respectively, and is also included in the total loans balance in the table above.

 

82

INVESTAR HOLDING CORPORATION
Notes to Consolidated Financial Statements
 

The table below provides an analysis of the aging of loans as of  December 31, 2023 (dollars in thousands).

 

  

December 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

 $189,746  $  $55  $570  $190,371  $ 

1-4 Family

  406,014   3,031   1,720   3,021   413,786    

Multifamily

  105,946            105,946    

Farmland

  7,651            7,651    

Commercial real estate

  937,272   48   359   29   937,708    

Total mortgage loans on real estate

  1,646,629   3,079   2,134   3,620   1,655,462    

Commercial and industrial

  542,206   259   488   468   543,421    

Consumer

  11,552   57   82   45   11,736    

Total loans

 $2,200,387  $3,395  $2,704  $4,133  $2,210,619  $ 

 

The table below provides an analysis of nonaccrual loans as of  December 31, 2023 and  December 31, 2022 (dollars in thousands).

 

  

December 31, 2023

  

December 31, 2022(1)

 
  

Nonaccrual with No Allowance for Credit Loss

  

Nonaccrual with an Allowance for Credit Loss

  

Total Nonaccrual Loans

  

Interest Income Recognized on Nonaccrual Loans

  

Total Nonaccrual Loans

 

Construction and development

 $577  $212  $789  $42  $372 

1-4 Family

  2,937   1,241   4,178   26   1,207 

Multifamily

               

Farmland

           10   62 

Commercial real estate

  216      216   416   6,032 

Total mortgage loans on real estate

  3,730   1,453   5,183   494   7,673 

Commercial and industrial

  59   409   468   997   2,183 

Consumer

  74   45   119   15   130 

Total loans

 $3,863  $1,907  $5,770  $1,506  $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. Interest income recognized on nonaccrual loans shown in the table above for the year ended December 31, 2023 was primarily attributable to the resolution of one oil and gas loan relationship. 

 

Collateral Dependent Loans

 

Collateral dependent loans are loans for which the repayments, on the basis of the Company’s assessment at the reporting date, are expected to be provided substantially through the operation or sale of the collateral and the borrower is experiencing financial difficulty. Loans that do not share risk characteristics are excluded from the loan pools and evaluated on an individual basis, and the Company has determined to evaluate collateral dependent loans individually for impairment. The allowance for credit losses for collateral dependent loans is measured based on the difference between the fair value of the collateral and the amortized cost basis of the asset as of the measurement date. When repayment is expected to be from the operation of the collateral, expected credit losses are calculated as the amount by which the amortized cost basis of the financial asset exceeds the present value of expected cash flows from the operation of the collateral. When repayment is expected to be from the sale of the collateral, expected credit losses are calculated as the amount by which the amortized costs basis of the financial asset exceeds the fair value of the underlying collateral less estimated cost to sell. The Company’s collateral dependent loans include all nonaccrual loans shown in the table above at December 31, 2023. The types of collateral that secure collateral dependent loans are discussed under “Portfolio Segment Risk Factors” below. 

 

83

INVESTAR HOLDING CORPORATION
Notes to Consolidated Financial Statements
 

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. In the third quarter of 2023, we exited the consumer mortgage origination business.

 

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 nonowner-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 nonowner-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.

 

84

INVESTAR HOLDING CORPORATION
Notes to Consolidated Financial Statements
 

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.

 

Concentrations of Credit

 

Substantially all of the Company’s loans and commitments have been granted to customers in the Company’s market areas in south Louisiana, southeast Texas and Alabama. The distribution of commitments to extend credit approximates the distribution of loans outstanding.

 

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.

 

85

INVESTAR HOLDING CORPORATION
Notes to Consolidated Financial Statements
 

The table below presents the Company’s loan portfolio by year of origination, category, and credit quality indicator as of  December 31, 2023 (dollars in thousands). Loans acquired are shown in the table by origination year. The Company had an immaterial amount of revolving loans converted to term loans at  December 31, 2023.

 

  

December 31, 2023

 
  

2023

  

2022

  

2021

  

2020

  

2019

  

Prior

  

Revolving Loans

  

Total

 

Construction and development

                                

Pass

 $51,811  $83,668  $25,169  $2,661  $935  $4,012  $17,496  $185,752 

Special Mention

  3,063      767               3,830 

Substandard

     293   489         7      789 

Total construction and development

 $54,874  $83,961  $26,425  $2,661  $935  $4,019  $17,496  $190,371 
                                 

Current-period gross charge-offs

 $  $  $  $  $  $  $  $ 
                                 

1-4 Family

                                

Pass

 $43,047  $101,479  $85,340  $58,926  $26,836  $59,115  $33,454  $408,197 

Special Mention

        477               477 

Substandard

  179   1,949   257   162   963   1,510   92   5,112 

Total 1-4 family

 $43,226  $103,428  $86,074  $59,088  $27,799  $60,625  $33,546  $413,786 
                                 

Current-period gross charge-offs

 $(22) $  $  $  $(21) $(3) $  $(46)
                                 

Multifamily

                                

Pass

 $7,839  $64,932  $16,300  $5,045  $633  $6,969  $160  $101,878 

Special Mention

                 4,068      4,068 

Substandard

                        

Total multifamily

 $7,839  $64,932  $16,300  $5,045  $633  $11,037  $160  $105,946 
                                 

Current-period gross charge-offs

 $  $  $  $  $  $  $  $ 
                                 

Farmland

                                

Pass

 $1,762  $1,347  $727  $936  $775  $1,013  $1,015  $7,575 

Special Mention

                        

Substandard

                 76      76 

Total farmland

 $1,762  $1,347  $727  $936  $775  $1,089  $1,015  $7,651 
                                 

Current-period gross charge-offs

 $  $  $  $  $  $  $  $ 
                                 

Commercial real estate

                                

Pass

 $76,043  $269,311  $218,780  $175,604  $82,909  $105,083  $4,731  $932,461 

Special Mention

        181               181 

Substandard

           1,474   172   3,233   187   5,066 

Total commercial real estate

 $76,043  $269,311  $218,961  $177,078  $83,081  $108,316  $4,918  $937,708 
                                 

Current-period gross charge-offs

 $  $  $  $  $(2) $(25) $  $(27)
                                 

Commercial and industrial

                                

Pass

 $60,123  $139,543  $31,459  $14,244  $7,439  $14,290  $273,208  $540,306 

Special Mention

                    2,289   2,289 

Substandard

  49   78   154   7   416   8   114   826 

Total commercial and industrial

 $60,172  $139,621  $31,613  $14,251  $7,855  $14,298  $275,611  $543,421 
                                 

Current-period gross charge-offs

 $  $  $(190) $  $(7) $(31) $(193) $(421)
                                 

Consumer

                                

Pass

 $4,881  $2,303  $1,611  $734  $250  $1,130  $658  $11,567 

Special Mention

                        

Substandard

  4   7   1   14   4   139      169 

Total consumer

 $4,885  $2,310  $1,612  $748  $254  $1,269  $658  $11,736 
                                 

Current-period gross charge-offs

 $(119) $(22) $(10) $(12) $(5) $(58) $(22) $(248)
                                 

Total loans

                                

Pass

 $245,506  $662,583  $379,386  $258,150  $119,777  $191,612  $330,722  $2,187,736 

Special Mention

  3,063      1,425         4,068   2,289   10,845 

Substandard

  232   2,327   901   1,657   1,555   4,973   393   12,038 

Total loans

 $248,801  $664,910  $381,712  $259,807  $121,332  $200,653  $333,404  $2,210,619 
                                 

Current-period gross charge-offs

 $(141) $(22) $(200) $(12) $(35) $(117) $(215) $(742)

 

 

86

INVESTAR HOLDING CORPORATION
Notes to Consolidated Financial Statements
 

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

 
  

Pass

  

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

 

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 balances of the participations and whole loans sold were $25.9 million and $16.9 million as of December 31, 2023 and 2022, respectively. The unpaid principal balances of these loans were approximately $99.8 million and $92.9 million at December 31, 2023 and 2022, respectively.

 

Loans to Related Parties

 

In the ordinary course of business, the Company makes loans to related parties including its executive officers, principal shareholders, directors and their immediate family members, as well as to companies in which these individuals are principal owners. Loans outstanding to such related party borrowers amounted to approximately $46.0 million and $97.0 million as of December 31, 2023 and December 31, 2022, respectively. No related party loans were classified as nonperforming or nonaccrual at  December 31, 2023 or  December 31, 2022.

 

The table below shows the aggregate principal balance of loans to such related parties for the years ended December 31, 2023 and 2022 (dollars in thousands).

 

  

December 31,

 
  

2023

  

2022

 

Balance, beginning of period

 $96,977  $97,606 

New loans/changes in relationship

  2,570   14,570 

Repayments/changes in relationship

  (53,547)  (15,199)

Balance, end of period

 $46,000  $96,977 

 

87

INVESTAR HOLDING CORPORATION
Notes to Consolidated Financial Statements
 

Allowance for Credit Losses

 

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 $12.7 million and $10.8 million at  December 31, 2023 and  December 31, 2022, respectively, and is included in “Accrued interest receivable” on the accompanying consolidated balance sheets.

 

Refer to Note 1. Summary of Significant Accounting Policies – Allowance for Credit Losses and – Accounting Standards Adopted in 2023 for more information on the adoption of ASU 2016-13.

 

The table below shows a summary of the activity in the allowance for credit losses for the years ended December 31, 2023, 2022 and 2021 (dollars in thousands).

 

  

December 31,

 
  

2023

  

2022

  

2021

 

Balance, beginning of period

 $24,364  $20,859  $20,363 

ASU 2016-13 adoption impact(1)

  5,865       

Provision for credit losses on loans(2)(3)

  (1,964)  2,922   22,885 

Charge-offs

  (742)  (633)  (22,636)

Recoveries

  3,017   1,216   247 

Balance, end of period

 $30,540  $24,364  $20,859 

 

 (1)On  January 1, 2023, the Company adopted ASU 2016-13, which introduced a new model known as CECL. Refer to Note 1. Summary of Significant Accounting Policies for more information on the adoption of ASU 2016-13. Amounts as of December 31, 2023 reflect the impact of adopting the CECL accounting standard and the Company’s transition from a probable incurred loss methodology to the current expected credit loss methodology. Prior period amounts represent the allowance for loan losses under the probable incurred loss methodology.
 (2)For the year ended  December 31, 2023, the $2.0 million negative provision for credit losses on the consolidated statement of income includes a $2.0 million negative provision for loan losses and a $36,000 negative provision for unfunded loan commitments.
 (3)For the year ended  December 31, 2021, the provision for loan losses includes a $21.6 million impairment recorded for one of the Company’s loan relationships as a result of Hurricane Ida. The corresponding loan balances in the same amount were then charged off.

 

The following tables outline the activity in the allowance for credit losses by collateral type for the years ended December 31, 2023, 2022 and 2021, and show both the allowance and portfolio balances for loans individually and collectively evaluated for impairment as of December 31, 2023, 2022 and 2021 (dollars in thousands). Amounts as of December 31, 2023 reflect the impact of adopting the CECL accounting standard and the Company’s transition from a probable incurred loss methodology to the current expected credit loss methodology. Prior period amounts represent the allowance for loan losses under the probable incurred loss methodology.

 

  

December 31, 2023

 
  

Construction & Development

  

1-4 Family

  

Multifamily

  

Farmland

  

Commercial Real Estate

  

Commercial & 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 losses on loans

  (84)  524   209   (12)  (2,922)  213   108   (1,964)

Charge-offs

     (46)        (27)  (421)  (248)  (742)

Recoveries

  75   22         2,246   592   82   3,017 

Ending balance

 $2,471  $9,129  $1,124  $2  $10,691  $6,920  $203  $30,540 

Ending allowance balance for loans individually evaluated for impairment

  212   187            114   25   538 

Ending allowance balance for loans collectively evaluated for impairment

  2,259   8,942   1,124   2   10,691   6,806   178   30,002 

Loans receivable:

                                

Balance of loans individually evaluated for impairment

  789   4,178         216   468   119   5,770 

Balance of loans collectively evaluated for impairment

  189,582   409,608   105,946   7,651   937,492   542,953   11,617   2,204,849 

Total period-end balance

 $190,371  $413,786  $105,946  $7,651  $937,708  $543,421  $11,736  $2,210,619 

 

88

INVESTAR HOLDING CORPORATION
Notes to Consolidated Financial Statements
 
  

December 31, 2022

 
  

Construction & Development

  

1-4 Family

  

Multifamily

  

Farmland

  

Commercial Real Estate

  

Commercial & 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 losses on loans

  160   477   326   (283)  1,331   797   114   2,922 

Charge-offs

     (11)     (54)  29   (397)  (200)  (633)

Recoveries

  48   114      67   4   932   51   1,216 

Ending balance

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

Ending allowance balance for loans individually evaluated for impairment

  26   46         36   112   63   283 

Ending allowance balance for loans acquired with deteriorated credit quality

                        

Ending allowance balance for loans collectively evaluated for impairment

  2,529   3,871   999   113   10,682   5,631   256   24,081 

Loans receivable:

                                

Balance of loans individually evaluated for impairment

  591   1,479      62   5,936   2,241   130   10,439 

Balance of loans acquired with deteriorated credit quality

     302         609      57   968 

Balance of loans collectively evaluated for impairment

  201,042   399,596   81,812   12,815   951,698   432,852   13,545   2,093,360 

Total period-end balance

 $201,633  $401,377  $81,812  $12,877  $958,243  $435,093  $13,732  $2,104,767 

 

  

December 31, 2021

 
  

Construction & Development

  

1-4 Family

  

Multifamily

  

Farmland

  

Commercial Real Estate

  

Commercial & Industrial

  

Consumer

  

Total

 

Allowance for credit losses:

                                

Beginning balance

 $2,375  $3,370  $589  $435  $8,496  $4,558  $540  $20,363 

Provision for credit losses on loans

  219   123   84   (39)  11,132   11,494   (128)  22,885 

Charge-offs

  (283)  (188)     (13)  (10,280)  (11,713)  (159)  (22,636)

Recoveries

  36   32         6   72   101   247 

Ending balance

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

Ending allowance balance for loans individually evaluated for impairment

                 468   96   564 

Ending allowance balance for loans acquired with deteriorated credit quality

           210            210 

Ending allowance balance for loans collectively evaluated for impairment

  2,347   3,337   673   173   9,354   3,943   258   20,085 

Loans receivable:

                                

Balance of loans individually evaluated for impairment

  529   1,995      79   16,685   13,321   182   32,791 

Balance of loans acquired with deteriorated credit quality

     348      1,701   636      64   2,749 

Balance of loans collectively evaluated for impairment

  202,675   361,964   59,570   18,348   879,056   297,510   17,349   1,836,472 

Total period-end balance

 $203,204  $364,307  $59,570  $20,128  $896,377  $310,831  $17,595  $1,872,012 

 

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 refinancings and restructurings by creditors when a borrower is experiencing financial difficulty. ASU 2022-02 became effective for the Company 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 year ended  December 31, 2023, the amount of loans that were modified to borrowers experiencing financial difficulty was immaterial. 

 

89

INVESTAR HOLDING CORPORATION
Notes to Consolidated Financial Statements
 

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 those 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 tables contain information on the Company’s impaired loans at  December 31, 2022 and 2021. The average recorded investment was calculated based on the month-end balances of the loans during the period reported (dollars in thousands).

 

  

As of and for the year ended December 31, 2022

 
  

Recorded Investment

  

Unpaid Principal Balance

  

Related Allowance

  

Average Recorded Investment

  

Interest Income Recognized

 

With no related allowance recorded:

                    

Construction and development

 $366  $375  $  $300  $15 

1-4 Family

  1,005   1,082      821   17 

Farmland

  62   70      68    

Commercial real estate

  5,746   21,016      10,515   28 

Total mortgage loans on real estate

  7,179   22,543      11,704   60 

Commercial and industrial

  1,996   2,530      6,868   70 

Consumer

  34   45      56    

Total

  9,209   25,118      18,628   130 
                     

With related allowance recorded:

                    

Construction and development

  225   498   26   225    

1-4 Family

  474   484   46   205    

Commercial real estate

  190   190   36   32    

Total mortgage loans on real estate

  889   1,172   108   462    

Commercial and industrial

  245   292   112   421    

Consumer

  96   123   63   96    

Total

  1,230   1,587   283   979    
                     

Total loans:

                    

Construction and development

  591   873   26   525   15 

1-4 Family

  1,479   1,566   46   1,026   17 

Farmland

  62   70      68    

Commercial real estate

  5,936   21,206   36   10,547   28 

Total mortgage loans on real estate

  8,068   23,715   108   12,166   60 

Commercial and industrial

  2,241   2,822   112   7,289   70 

Consumer

  130   168   63   152    

Total

 $10,439  $26,705  $283  $19,607  $130 

 

  

As of and for the year ended December 31, 2021

 
  

Recorded Investment

  

Unpaid Principal Balance

  

Related Allowance

  

Average Recorded Investment

  

Interest Income Recognized

 

With no related allowance recorded:

                    

Construction and development

 $529  $812  $  $731  $17 

1-4 Family

  1,995   2,081      1,965   30 

Farmland

  79   81      193    

Commercial real estate

  16,685   27,139      10,790   181 

Total mortgage loans on real estate

  19,288   30,113      13,679   228 

Commercial and industrial

  9,395   10,941      9,166   152 

Consumer

  55   69      96    

Total

  28,738   41,123      22,941   380 
                     

With related allowance recorded:

                    

Commercial and industrial

  3,926   9,618   468   1,311   24 

Consumer

  127   164   96   146    

Total

  4,053   9,782   564   1,457   24 
                     

Total loans:

                    

Construction and development

  529   812      731   17 

1-4 Family

  1,995   2,081      1,965   30 

Farmland

  79   81      193    

Commercial real estate

  16,685   27,139      10,790   181 

Total mortgage loans on real estate

  19,288   30,113      13,679   228 

Commercial and industrial

  13,321   20,559   468   10,477   176 

Consumer

  182   233   96   242    

Total

 $32,791  $50,905  $564  $24,398  $404 

 

90

INVESTAR HOLDING CORPORATION
Notes to Consolidated Financial Statements
 

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 year ended  December 31, 2022three loans were modified as TDRs through adjustments to maturity. There were no loans modified as TDRs during the previous twelve month period that subsequently defaulted during the year ended  December 31, 2022.

 

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

 

The table below presents the TDR pre- and post-modification outstanding recorded investments by loan category for loans modified during the year ended December 31, 2022 (amounts in thousands, except number of loans).

 

  

December 31, 2022

 
      

Pre-

  

Post-

 
      

Modification

  

Modification

 
      

Outstanding

  

Outstanding

 
  

Number of

  

Recorded

  

Recorded

 

Troubled debt restructurings

 

Contracts

  

Investment

  

Investment

 

Commercial real estate

  1  $186  $186 

Commercial and industrial

  2   58   58 
      $244  $244 

 

The following is a summary of accruing and nonaccrual TDRs and the related allowance by portfolio type at  December 31, 2022 (dollars in thousands).

 

  

TDRs

 
              

Related

 
  

Accruing

  

Nonaccrual

  

Total

  

Allowance

 

December 31, 2022

                

Construction and development

 $219  $  $219  $ 

1-4 Family

  271   127   398    

Commercial real estate

  413   804   1,217    

Commercial and industrial

  58   1,092   1,150    

Total

 $961  $2,023  $2,984  $ 

 

91

INVESTAR HOLDING CORPORATION
Notes to Consolidated Financial Statements
 

The table below includes the average recorded investment and interest income recognized for TDRs for the years ended  December 31, 2022 and 2021. The average recorded investment was calculated based on the month-end balances of the loans during the period reported (dollars in thousands).

 

  

TDRs

 
  

Average Recorded Investment

  

Interest Income Recognized

 

December 31, 2022

        

Construction and development

 $230  $15 

1-4 Family

  489   16 

Commercial real estate

  1,249   28 

Commercial and industrial

  3,511   70 

Total

 $5,479  $129 
         

December 31, 2021

        

Construction and development

 $251  $17 

1-4 Family

  775   28 

Commercial real estate

  5,358   174 

Commercial and industrial

  6,698   149 

Total

 $13,082  $368 

 

92

INVESTAR HOLDING CORPORATION
Notes to Consolidated Financial Statements
 
 

NOTE 4. OTHER REAL ESTATE OWNED

 

The table below shows the activity in other real estate owned for the years ended December 31, 2023 and 2022 (dollars in thousands).

 

  Year ended  Year ended 
  

December 31, 2023

  

December 31, 2022

 

Balance, beginning of period

 $682  $2,653 

Additions

  3,930   3,327 

Transfers from bank premises and equipment

  1,425   525 

Sales of other real estate owned

  (1,599)  (5,823)

Balance, end of period

 $4,438  $682 

 

For the years ended December 31, 2023 and 2022, additions to other real estate owned of $2.7 million and $1.6 million, respectively, were related to transfers of properties related to one loan relationship that became impaired in the third quarter of 2021 as a result of Hurricane Ida. For the years ended December 31, 2023 and 2022, additions to other real estate owned of $0.3 million and $1.7 million, respectively, were related to acquired loans. During the year ended  December 31, 2023, the Company closed one branch and one stand-alone ATM and transferred the associated land and buildings from “Bank premises and equipment, net” to “Other real estate owned, net” in the accompanying consolidated balance sheets, as the Company did not intend to use the properties for banking operations. In 2022, the Company closed two branches, and transferred the land and building associated with one of the closed branches from “Bank premises and equipment, net” to “Other real estate owned, net” in the accompanying consolidated balance sheets, as the Company did not intend to use the properties for banking operations; the property was sold later in the year. At December 31, 2023 and 2022, approximately $0.5 million and $0.6 million, respectively, of loans secured by 1-4 family residential property were in the process of foreclosure.

 

93

INVESTAR HOLDING CORPORATION
Notes to Consolidated Financial Statements
 
 

NOTE 5. BANK PREMISES AND EQUIPMENT

 

Bank premises and equipment consisted of the following as of the dates indicated (dollars in thousands).

 

  

December 31,

 
  

2023

  

2022

 

Land

 $10,206  $11,490 

Buildings and improvements

  39,198   40,799 

Furniture and equipment

  10,317   13,569 

Software

  1,668   2,334 

Construction-in-progress

  158   575 

Right-of-use asset

  2,112   2,845 

Less: Accumulated depreciation and amortization

  (19,476)  (22,025)

Bank premises and equipment, net

 $44,183  $49,587 

 

Depreciation and amortization related to Bank premises and equipment charged to noninterest expense was approximately $3.0 million, $3.5 million and $4.0 million for the years ended December 31, 2023, 2022 and 2021, respectively.

 

During the year ended  December 31, 2023, the Company completed the sale of the Alice and Victoria, Texas locations. The Company also closed one branch and one stand-alone ATM in Louisiana and transferred the associated land and buildings, totaling $1.4 million, from “Bank premises and equipment, net” to “Other real estate owned, net” in the accompanying consolidated balance sheets. The Company also ceased operation of 13 additional ATMs during the third quarter of 2023. During the year ended  December 31, 2023, the Company recognized a loss of $1.3 million included in “Loss on sale or disposition of fixed assets, net” in the accompanying consolidated statements of income. During the year ended  December 31, 2022, the Company closed two branch locations and sold three tracts of land being held for future branch locations. The land and building associated with one of the closed branch locations, totaling $0.5 million, was reclassified from “Bank premises and equipment, net” to “Other real estate owned, net” in the accompanying consolidated balance sheets. During the year ended  December 31, 2022, the Company recognized a loss of $0.3 million included in “Loss on sale or disposition of fixed assets, net” in the accompanying consolidated statements of income.

 

 

NOTE 6. 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 years ended December 31, 2023 and 2022 (dollars in thousands).

 

  

December 31,

 
  

2023

  

2022

 

Total operating lease cost

 $441  $610 

Weighted average remaining lease term (in years)

  6.8   7.0 

Weighted average discount rate

  3.2%  2.9%

 

94

INVESTAR HOLDING CORPORATION
Notes to Consolidated Financial Statements
 

At  December 31, 2023 and 2022, the Company’s operating lease ROU assets were $2.1 million and $2.8 million, respectively, and the Company’s related operating lease liabilities were $2.2 million and $2.9 million, respectively. The Company’s operating leases have remaining terms ranging from 2 to 8 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 December 31, 2023 are presented below (dollars in thousands).

 

2024

 $381 

2025

  388 

2026

  339 

2027

  341 

2028

  341 

Thereafter

  671 

Total

 $2,461 

 

At December 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. The Bank, as lessor, also leases a portion of one of its branch locations. All tenant leases are operating leases. The Bank, as lessor, recognized rental income of $0.4 million, $0.3 million and $0.3 million for the years ended  December 31, 2023, 2022 and 2021, respectively.

 

On  January 27, 2023, the Bank 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, the Bank recorded $0.3 million of occupancy expense to terminate the remaining contractually obligated lease payments due under non-cancelable operating leases.

 

 

NOTE 7. GOODWILL AND OTHER INTANGIBLE ASSETS

 

The Company’s intangible assets consist of goodwill, core deposit intangible assets arising from acquisitions, and a trademark intangible. At December 31, 2023 and 2022, “Goodwill and other intangible assets, net” in the accompanying consolidated balance sheets totaled $42.3 million and $43.1 million, respectively, and included no accumulated impairment losses.

 

The carrying amount of goodwill at December 31, 2023 and 2022 was $40.1 million. The trademark intangible had a carrying value of $0.1 million at December 31, 2023 and 2022.

 

In accordance with ASC Topic 350,Intangibles Goodwill and Other, the Company reviews the carrying value of indefinite-lived intangible assets at least annually, or more frequently if certain impairment indicators exist. The Company performed its annual impairment testing on October 31, 2023 and determined that there was no impairment to its goodwill or trademark intangible asset.

 

Core deposit intangibles have finite lives and are being amortized on an accelerated basis over their estimated useful lives, which range from 10 to 15 years. The table below shows a summary of the core deposit intangible assets as of the dates presented (dollars in thousands).

 

  

December 31,

 

Core deposit intangibles

 

2023

  

2022

 

Gross carrying amount

 $7,486  $7,486 

Accumulated amortization

  (5,354)  (4,527)

Net carrying amount

 $2,132  $2,959 

 

Amortization expense for the core deposit intangible assets recorded in “Depreciation and amortization in the accompanying consolidated statements of income totaled approximately $0.8 million, $0.9 million, and $1.0 million for the years ended December 31, 2023, 2022 and 2021, respectively.

 

95

INVESTAR HOLDING CORPORATION
Notes to Consolidated Financial Statements
 

The future amortization schedule for the Company’s core deposit intangible assets is displayed in the table below (dollars in thousands). The weighted average amortization period remaining for core deposit intangibles is 5.4 years.

 

2024

  624 

2025

  512 

2026

  398 

2027

  278 

2028

  161 

Thereafter

  159 
  $2,132 

 

 

NOTE 8. DEPOSITS

 

Deposits consisted of the following as of the dates presented (dollars in thousands).

 

  

December 31,

 
  

2023

  

2022

 

Noninterest-bearing demand deposits

 $448,752  $580,741 

Interest-bearing demand deposits

  489,604   565,598 

Money market deposit accounts

  179,366   208,596 

Savings accounts

  137,606   155,176 

Brokered time deposits

  269,102   9,990 

Time deposits

  731,297   562,264 

Total deposits

 $2,255,727  $2,082,365 

 

The approximate scheduled maturities of time deposits, including brokered time deposits, for each of the next five years are shown below (dollars in thousands).

 

2024

 $762,456 

2025

  197,355 

2026

  29,803 

2027

  2,374 

2028

  8,411 
  $1,000,399 

 

At  December 31, 2023 and 2022, time deposits greater than $250,000 were approximately $178.1 million, and $155.8 million, respectively.

 

Public fund deposits as of December 31, 2023 and 2022 totaled approximately $134.8 million and $167.5 million, respectively. The funds were secured by securities with a fair value of approximately $110.1 million and $165.5 million as of December 31, 2023 and 2022, respectively.

 

As of December 31, 2023 and 2022, total deposits outstanding to executive officers, principal shareholders, directors and to companies in which they are principal owners amounted to approximately $20.1 million and $29.9 million, respectively.

 

 

NOTE 9. SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE

 

The Company utilizes securities sold under agreements to repurchase (“repurchase agreements”) to facilitate the needs of our customers and to facilitate secured short-term funding needs. Repurchase agreements are stated at the amount of cash received in connection with the transaction. The Company monitors collateral levels on a continuous basis and  may be required to provide additional collateral based on the fair value of the underlying securities. Securities pledged as collateral under repurchase agreements are maintained with the Company’s safekeeping agents.

 

Repurchase agreements mature on a daily basis. At  December 31, 2023, the total balance of repurchase agreements was $8.6 million, and were secured by investment securities with a fair value of approximately $9.0 million. At  December 31, 2022, the Company had no repurchase agreements. The weighted average interest rate on repurchase agreements was 0.13% at  December 31, 2023. The weighted average rate paid for repurchase agreements during the years ended December 31, 2023, 2022 and 2021 was 0.13%, 0.15% and 0.21%, respectively.

 

96

INVESTAR HOLDING CORPORATION
Notes to Consolidated Financial Statements
 
 

NOTE 10. SUBORDINATED DEBT SECURITIES

 

On  April 6, 2022, the Company entered into a Subordinated Note Purchase Agreement with certain institutional accredited investors and qualified institutional buyers (the “Purchasers”) under which the Company issued $20.0 million in aggregate principal amount of its 5.125% Fixed-to-Floating Rate Subordinated Notes due 2032 (the “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 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. 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. 

 

The Company used the majority of the net proceeds to redeem its 6.00% Fixed-to-Floating Rate Subordinated Notes due 2027 (the “2027 Notes”) in June 2022 and utilized the remaining proceeds for share repurchases and for general corporate purposes.

 

On November 12, 2019, the Company issued and sold $25.0 million in aggregate principal amount of its 5.125% Fixed-to-Floating Rate Subordinated Notes (the “2029 Notes”) due December 30, 2029. Beginning on December 30, 2024, the Company may redeem the 2029 Notes, in whole or in part, at their principal amount plus any accrued and unpaid interest. The 2029 Notes bear an interest rate of 5.125% per annum until December 30, 2024, on which date the interest rate will reset quarterly to an annual interest rate equal to the then-current three-month LIBOR as calculated on each applicable date of determination, or an alternative rate determined in accordance with the terms of the 2029 Notes if the three-month LIBOR cannot be determined, plus 349.0 basis points.

 

On March 24, 2017, the Company issued and sold $18.6 million in aggregate principal amount of its 2027 Notes due March 30, 2027. Beginning on March 30, 2022, the Company could redeem the 2027 Notes, in whole or in part, at their principal amount plus any accrued and unpaid interest. The 2027 Notes had an interest rate of 6.00% per annum until March 30, 2022, on which date the interest rate reset quarterly to an annual interest rate equal to the then-current LIBOR plus 394.5 basis points. In June 2022, the Company redeemed the 2027 Notes in full in accordance with their terms at a redemption price equal to 100% of the outstanding principal balance plus accrued and unpaid interest up to but excluding the June 30, 2022 redemption date (“Redemption Date”). The aggregate redemption price, excluding accrued interest, totaled $18.6 million. Interest on the 2027 Notes no longer accrued on or after the Redemption Date.

 

The carrying value of subordinated debt was $44.3 million and $44.2 million at December 31, 2023 and 2022, respectively. The subordinated debt securities were recorded net of issuance costs of $0.7 million and $0.8 million at December 31, 2023 and 2022, respectively, which are being amortized using the straight-line method over the lives of the respective securities.

 

97

INVESTAR HOLDING CORPORATION
Notes to Consolidated Financial Statements
 
 

NOTE 11. OTHER BORROWED FUNDS

 

Federal Home Loan Bank Advances

 

FHLB advances and weighted average interest rates at the end of the period by contractual maturity are summarized as of the dates presented (dollars in thousands).

 

  

Amount

  

Weighted Average Rate

 
  

December 31, 2023

  

December 31, 2022

  

December 31, 2023

  

December 31, 2022

 

Fixed rate advances maturing:

                

2023

 $  $333,500   %  4.55%

2024

  23,500   23,500   1.81   1.81 

2033

     30,000      1.88 
  $23,500  $387,000   1.81%  4.18%

 

As of December 31, 2023, these advances are collateralized by a blanket pledge of certain loans totaling approximately $975.4 million in accordance with the Advance Security and Collateral Agreement with the FHLB. As of December 31, 2023, the Company had an additional $919.5 million available under its line of credit with the FHLB.

 

At  December 31, 2022, the FHLB advances contractually maturing in 2033 were fixed rate, nonamortizing puttable advances. Under the terms of these advances, the Bank sold the FHLB options to terminate the fixed rate advances at specified points in time prior to the stated maturity dates. These advances were terminated during the year ended December 31, 2023.

 

Borrowings Under Bank Term Funding Program

 

On  March 12, 2023, the Federal Reserve established the Bank Term Funding Program (“BTFP”). The BTFP is a one-year program which provides additional liquidity through borrowings with a term of up to one year secured by the pledging of certain qualifying securities and other assets, valued at par value. At  December 31, 2023, outstanding borrowings under the BTFP were $212.5 million, with a weighted average rate of 4.83%. At  December 31, 2023, the Company’s remaining borrowing capacity under the BTFP was $58.5 million based on the value of securities available to be used as collateral, valued at par value as permitted under the program. During the fourth quarter of 2023, the Company refinanced all of its borrowings under the BTFP with new loans under the BTFP with a one-year term due to more favorable rates.

 

Lines of Credit

 

The Company has outstanding unsecured lines of credit with its correspondent banks available to assist in the management of short-term liquidity. Any balances drawn on these lines of credit mature daily. At December 31, 2023 and 2022, the available balance on the unsecured lines of credit totaled approximately $60.0 million, with no outstanding balance reflected on the consolidated balance sheets.

 

Junior Subordinated Debt

 

The following table provides a summary of the Company’s junior subordinated debentures (dollars in thousands).

 

  

Face Value

  

Carrying Value

  

Maturity Date

 

Variable Interest Rate

 

Interest Rate at December 31, 2023

 

First Community Louisiana Statutory Trust I

 $3,609  $3,609  

June 2036

 

3-month SOFR + Spread Adjustment of 0.26% + Margin of 1.77%

  7.42%

BOJ Bancshares Statutory Trust I

  3,093   2,504  

December 2034

 

3-month SOFR + Spread Adjustment of 0.26% + Margin of 1.90%

  7.55%

Cheaha Statutory Trust I

  3,093   2,517  

September 2035

 

3-month SOFR + Spread Adjustment of 0.26% + Margin of 1.70%

  7.35%
  $9,795  $8,630         

 

These debentures are unsecured obligations due to trusts that are unconsolidated subsidiaries. The debentures were issued in conjunction with the trusts’ issuances of obligated capital securities. The trusts used the proceeds from the issuances of their capital securities to buy floating rate junior subordinated deferrable interest debentures that bear the same interest rate and terms as the capital securities. These debentures are the trusts’ only assets and the interest payments from the debentures finance the distributions paid on the capital securities. These debentures rank junior and are subordinate in the right of payment to all other debt of the Company.

 

98

INVESTAR HOLDING CORPORATION
Notes to Consolidated Financial Statements
 

As part of the purchase accounting adjustments made with the BOJ Bancshares Inc. acquisition on December 1, 2017, and with the Cheaha Financial Group, Inc. acquisition on April 1, 2021, the Company adjusted the carrying value of the junior subordinated debentures to fair value as of the respective acquisition date. The discounts on the debentures will continue to be amortized through maturity and recognized as a component of interest expense.

 

The debentures may be called by the Company at par plus any accrued interest. Interest on the debentures is calculated quarterly. The distribution rate payable on the capital securities is cumulative and payable quarterly in arrears. The Company has the right to defer payments of interest on the debentures at any time by extending the interest payment period for a period not exceeding 20 consecutive quarters with respect to each deferral period, provided that no extension period may extend beyond the redemption or maturity date of the debentures.

 

The debentures are included on the consolidated balance sheets as liabilities; however, for regulatory purposes, the carrying values of these obligations are eligible for inclusion in Tier I regulatory capital, subject to certain limitations. The total carrying values of $8.6 million and $8.5 million were allowed in the calculation of Tier I regulatory capital at  December 31, 2023 and 2022, respectively. 

 

 

NOTE 12. 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  December 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.

 

During the year ended  December 31, 2022, the Company voluntarily terminated interest rate swap agreements with a total notional amount of $115.0 million in response to market conditions. During the year ended  December 31, 2021, the Company voluntarily terminated interest rate swap agreements with a total notional amount of $150.0 million in response to market conditions and as a result of excess liquidity. For years ended  December 31, 2022 and  December 31, 2021 unrealized gains of $6.4 million and $1.4 million, respectively, net of tax expenses of $1.7 million and $0.4 million, respectively, were reclassified from “Accumulated other comprehensive (loss) income” and recorded as “Swap termination fee income” in noninterest income in the accompanying consolidated statements of income.

 

For the years ended December 31, 2022 and  December 31, 2021 gains of $4.3 million and $5.3 million, respectively, net of tax expenses of $1.2 million and $1.4 million, respectively, were 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 swap contracts.

 

There were no assets or liabilities recorded in the accompanying consolidated balance sheets at  December 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” (“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 years ended  December 31, 2023, 2022 and 2021. At  December 31, 2023, the Company had notional amounts of $174.9 million in interest rate swap contracts with customers and $174.9 million in offsetting interest rate swap contracts with other financial institutions. The fair value of the swap contracts consisted of gross assets of $17.3 million and gross liabilities of $17.3 million recorded in “Other assets” and “Accrued taxes and other liabilities”, respectively, in the accompanying consolidated balance sheet at  December 31, 2023.

 

99

INVESTAR HOLDING CORPORATION
Notes to Consolidated Financial Statements
 
 

NOTE 13. STOCKHOLDERS' EQUITY

 

Preferred Stock

 

The Company’s Articles of Incorporation give the Company’s board of directors the authority to issue up to 5,000,000 shares of preferred stock. At December 31, 2023, there were no preferred shares outstanding. The preferred shares are considered “blank check” preferred stock. This type of preferred stock allows the board of directors to fix the designations, preferences and relative, participating, optional or other special rights, and qualifications and limitations or restrictions of any series of preferred stock without further shareholder approval.

 

Common Stock

 

The Company’s Articles of Incorporation give the Company’s board of directors the authority to issue up to 40,000,000 shares of common stock. At December 31, 2023, there were 9,748,067 common shares outstanding compared to 9,901,847 and 10,343,494 at December 31, 2022 and 2021, respectively.

 

In addition, the Company repurchased 222,448, 518,978, and 359,138 shares of its common stock through its stock repurchase program at an average price of $13.47, $20.27, and $19.24 per share during the years ended  December 31, 2023, 2022 and 2021, respectively.

 

Dividend Restrictions. In the ordinary course of business, the Company is dependent upon dividends from the Bank to provide funds for the payment of dividends to shareholders and to provide for other cash requirements. Banking regulations may limit the amount of dividends that may be paid to the Company. Approval by regulatory authorities is required if the effect of the dividend would cause the regulatory capital of the Bank to fall below specified minimum levels. Approval is also required if dividends declared exceed the net profits for that year combined with the retained net profits for the preceding two years. Further, a national bank may not pay a dividend in excess of its undivided profits.

 

Under the terms of the junior subordinated debentures, assumed through acquisition, the Company has the right at any time during the term of the debentures to defer the payment of interest. In the event that the Company elects to defer interest on the debentures, it may not, with certain exceptions, declare or pay any dividends or distributions on its common stock or purchase or acquire any of its common stock.

 

Under the terms of the Company’s 5.125% Fixed-to-Floating Rate Subordinated Notes due 2029, the Company may not pay a dividend if either the parent company 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 purposes (but with respect to the parent company, only if it is required to measure and report such ratios on a consolidated basis under applicable law). The Company is also prohibited from paying dividends upon and during the continuance of any Event of Default under such notes.

 

Under the terms of the Company’s 5.125% Fixed-to-Floating Rate Subordinated Notes due 2032, the Company is prohibited from paying dividends upon and during the continuance of any Event of Default under such notes.

 

These restrictions do not, and are not expected in the future to, materially limit the Company’s ability to pay dividends to its shareholders in an amount consistent with the Company’s history of paying dividends.

 

100

INVESTAR HOLDING CORPORATION
Notes to Consolidated Financial Statements
 

Accumulated Other Comprehensive (Loss) Income

 

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

 

  

For the years ended December 31,

 
  

2023

  

2022

  

2021

 
  

Beginning of Period

  

Net Change

  

End of Period

  

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) $3,510  $(39,627) $4,882  $(48,019) $(43,137) $7,493  $(2,611) $4,882 

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

  (5,777)  256   (5,521)  (5,772)  (5)  (5,777)  (3,939)  (1,833)  (5,772)

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

  1      1   2   (1)  1   3   (1)  2 

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

  7,830      7,830   3,501   4,329   7,830   (1,752)  5,253   3,501 

Reclassification of realized gain, interest rate swap termination, net

  (7,830)     (7,830)  (1,450)  (6,380)  (7,830)     (1,450)  (1,450)

Accumulated other comprehensive (loss) income

 $(48,913) $3,766  $(45,147) $1,163  $(50,076) $(48,913) $1,805  $(642) $1,163 

 

 

NOTE 14. STOCK-BASED COMPENSATION

 

Equity Incentive Plan. The Company’s Amended and Restated 2017 Long-Term Incentive Compensation Plan (the “Plan”) authorizes the grant of various types of equity awards, such as restricted stock, restricted stock units, stock options and stock appreciation rights to eligible participants, which include all of the Company’s employees, non-employee directors, and consultants. The Plan has reserved a total of 1,200,000 shares of common stock, 600,000 of which were authorized in 2021, for issuance to eligible participants pursuant to equity awards under the Plan. The Plan is administered by the Compensation Committee of the Company’s board of directors, which determines, within the provisions of the Plan, those eligible employees to whom, and the times at which, equity awards will be granted. The Compensation Committee, in its discretion, may delegate its authority and duties under the Plan to specified officers; however, only the Compensation Committee may approve the terms of equity awards to the Company’s executive officers and directors. At December 31, 2023, approximately 450,058 shares remain available for grant.

 

Stock Options

 

During the years ended December 31, 2023, 2022 and 2021, the Company granted 34,49734,379, and 38,450 stock options, respectively, to key personnel that vest in one-fifth increments on each of the first five anniversaries of the grant date.

 

101

INVESTAR HOLDING CORPORATION
Notes to Consolidated Financial Statements
 

The table below summarizes the Company’s stock option activity for the periods indicated.

 

  

Shares

  

Weighted Average Price

  

Weighted Average Remaining Contractual Term (Years)

 

Outstanding at December 31, 2020

  408,288  $17.66   5.57 

Granted

  38,450   20.72     

Forfeited

  (30,869)  19.56     

Exercised

  (47,388)  15.44     

Outstanding at December 31, 2021

  368,481   18.10   5.05 

Granted

  34,379   18.92     

Forfeited

  (42,930)  21.36     

Exercised

  (9,500)  14.00     

Outstanding at December 31, 2022

  350,430   17.89   4.19 

Granted

  34,497   13.96     

Forfeited

  (50,822)  19.47     

Exercised

  (7,500)  14.00     

Outstanding at December 31, 2023

  326,605   17.32   3.84 

Exercisable at December 31, 2023

  244,847  $17.17   2.44 

 

The aggregate intrinsic value of stock options is calculated as the aggregate difference between the exercise price of the stock options and the fair market value of the Company’s common stock for those stock options having an exercise price lower than the fair market value of the Company’s common stock. At December 31, 2023, the shares underlying outstanding and exercisable stock options both had an intrinsic value of $0.1 million.

 

The Company uses a Black-Scholes option pricing model to estimate the fair value of stock-based awards. The Black-Scholes option pricing model incorporates various subjective assumptions, including expected term and expected volatility. Expected volatility was determined based on the historical volatilities of the Company. Stock option expense of $0.2 million is included in “Salaries and employee benefits” in the accompanying consolidated statements of income for each of the years ended  December 31, 2023, 2022 and 2021. At December 31, 2023, there was $0.3 million of unrecognized compensation cost related to stock options that is expected to be recognized over a weighted average period of 3.2 years.

 

The table below shows the assumptions used for the stock options granted during the years ended December 31, 2023 and 2022.

 

  

2023

  

2022

 

Dividend yield

  2.72%  1.70%

Expected volatility

  38.31%  38.74%

Risk-free interest rate

  3.56%  2.50%

Expected term (in years)

  6.5   6.5 

Weighted average grant date fair value

 $4.58  $6.69 

 

Restricted Stock and Restricted Stock Units

 

Under the Plan, the Company may grant restricted stock, restricted stock units, and other stock-based awards to Plan participants, subject to forfeiture upon the occurrence of certain events until the dates specified in the participant’s award agreement. While restricted stock is subject to forfeiture, holders of restricted stock may exercise full voting rights and will receive all dividends paid with respect to the restricted shares. Restricted stock units (“RSUs”) do not have voting rights and do not receive dividends or dividend equivalents. The restricted stock and RSUs granted under the Plan are typically subject to a vesting period. Compensation expense for restricted stock and RSUs is determined based on the market price of the Company’s common stock at the grant date and is applied to the total number of shares or units granted and is recognized on a straight-line basis over the requisite service period of generally five years for employees and two years for non-employee directors. Upon vesting of restricted stock and RSUs, the benefit of tax deductions in excess of recognized compensation expense is reflected as an income tax benefit in the consolidated statements of income.

 

102

INVESTAR HOLDING CORPORATION
Notes to Consolidated Financial Statements
 

Historically, the Company has granted restricted stock awards to Plan participants. Beginning in 2019, the Company granted time vested RSUs to its non-employee directors and certain officers of the Company with vesting terms ranging from two years to five years.

 

The Company granted a total of 172,736 RSUs to employees and directors for the year ended December 31, 2023. Of the RSUs granted in 2023, 153,467 shares vest over five years and 19,269 shares vest over two years.

 

The Company granted a total of 134,524 RSUs to employees and directors for the year ended December 31, 2022. Of the RSUs granted in 2022, 114,554 shares vest over five years and 19,970 shares vest over two years.

 

The Company granted a total of 129,082 RSUs to employees and directors for the year ended December 31, 2021. Of the RSUs granted in 2021, 105,294 shares vest over five years and 23,788 shares vest over two years.

 

Compensation expense related to restricted stock and RSUs included in the accompanying consolidated statements of income for the years ended  December 31, 2023, 2022 and 2021 was $1.8 million, $2.0 million and $1.6 million, respectively. The unearned compensation related to these awards is amortized to compensation expense over the vesting period. As of  December 31, 2023, unearned stock-based compensation cost associated with these awards totaled approximately $4.3 million and is expected to be recognized over a weighted average period of 3.2 years.

 

The following table summarizes the restricted stock and RSU activity for the years ended December 31, 2023 and December 31, 2022.

 

  

December 31,

 
  

2023

  

2022

 
  

Shares

  

Weighted Average Grant Date Fair Value

  

Shares

  

Weighted Average Grant Date Fair Value

 

Balance, beginning of period

  253,488  $20.19   241,070  $21.16 

Granted

  172,736   14.82   134,524   19.09 

Forfeited

  (7,008)  20.53   (30,169)  20.34 

Earned and issued

  (82,467)  20.42   (91,937)  21.14 

Balance, end of period

  336,749  $17.37   253,488  $20.19 

 

 

NOTE 15. EMPLOYEE BENEFIT PLANS

 

The Company maintains a 401(k) defined contribution plan (the “401(k) Plan”), which covers employees over the age of 21 who have completed three months of credited service, as defined by the 401(k) Plan. The 401(k) Plan allows employees to defer a percentage of their salaries subject to certain limits based on federal tax laws. The Company makes matching contributions up to 4% of the employee’s annual salary (subject to certain maximum compensation amounts as prescribed in Internal Revenue Service guidance). Contributions by the Company and participants are immediately vested. Employer matching contributions to the 401(k) Plan for each of the years ended December 31, 2023, 2022 and 2021 were approximately $1.0 million, and are included in “Salaries and employee benefits” in the accompanying consolidated statements of income.

 

The 401(k) Plan also allows for discretionary Company contributions in the form of cash or Company stock. Contributions in the form of Company stock are held in a portion of the 401(k) Plan that qualifies as an employee stock ownership plan. The Company made Company stock contributions of $0.1 million in the year ended December 31, 2022. The discretionary components vest in increments of 20% annually over a period of five years based on the employees’ years of service, beginning upon completion of two years of service (such that an employee with six years of service will be 100% vested).

 

The Bank has entered into Salary Continuation Agreements (“SCA”) with certain officers of the Company. The SCAs represent unfunded, non-qualified deferred compensation arrangements under the Internal Revenue Code of 1986, as amended. The SCAs between the Bank and each officer, as supplemented if applicable, provide that the officer shall receive annual payments of a fixed amount upon attaining the age of 65, with such payments payable monthly over a period of 120 months (10 years). Each officer is also entitled to certain reduced payments following a termination of employment prior to attaining age 65 (other than a termination due to death or with cause), which payments shall be made on the same schedule mentioned above.

 

103

INVESTAR HOLDING CORPORATION
Notes to Consolidated Financial Statements
 

The Company maintains a deferred compensation plan for a former employee of Citizens Bank (“Citizens”), a liability assumed in the Citizens acquisition in 2017. Under the deferred compensation agreement, the former employee will receive monthly payments of $2,000 through May of 2030. The Company also maintains a deferred compensation plan for certain former employees of Cheaha, and associated liabilities of $1.7 million were assumed in the acquisition on April 1, 2021. The deferred compensation plan provides for payments for a period of 15 years following specified retirement dates, which range from 2018 through 2032. On November 4, 2022, the Company’s then-current Chief Financial Officer separated from the Company, and the Companys board of directors approved the continuation of his Split-Dollar Life Insurance Agreement following his separation date. Accordingly, in the fourth quarter of 2022, the Company recorded deferred compensation expense and associated liability of $0.2 million. At December 31, 2023 and 2022, the Company had a liability of $5.3 million and $5.2 million, respectively, included in “Accrued taxes and other liabilities” on the accompanying consolidated balance sheets related to these deferred compensation plans. Deferred compensation expenses related to these plans recognized for the years ended December 31, 2023, 2022, and 2021 were approximately $0.2 million, $1.0 million and $0.7 million, respectively, and are included in “Salaries and employee benefits” in the accompanying consolidated statements of income.

 

 

NOTE 16. INCOME TAXES

 

Income tax expense is displayed in the table below for the years ended December 31, 2023, 2022 and 2021 (dollars in thousands).

 

  

December 31,

 
  

2023

  

2022

  

2021

 

Current federal income tax expense

 $3,971  $9,075  $2,315 

Current state income tax expense

  129   219   141 

Deferred federal income tax expense

  (350)  (655)  (547)

Total income tax expense

 $3,750  $8,639  $1,909 

 

The provision for federal income taxes differs from that computed by applying the federal statutory rate of 21% as indicated in the following analysis for the years ended December 31, 2023, 2022 and 2021 (dollars in thousands).

 

  

December 31,

 
  

2023

  

2022

  

2021

 

Tax based on statutory rate

 $4,290  $9,313  $2,081 

(Decrease) increase resulting from:

            

Effect of tax-exempt income

  (830)  (873)  (348)

Acquisition costs

        72 

Historical tax credits

        (54)

State taxes

  129   219   141 

Other

  161   (20)  17 

Total income tax expense

 $3,750  $8,639  $1,909 

Effective rate

  18.4%  19.5%  19.3%

 

The Company records deferred income tax on the tax effect of changes in timing differences.

 

104

INVESTAR HOLDING CORPORATION
Notes to Consolidated Financial Statements
 

The net deferred tax asset was comprised of the following items as of the dates indicated (dollars in thousands).

 

  

December 31,

 
  

2023

  

2022

 

Deferred tax liabilities:

        

Depreciation

 $(3,072) $(3,441)

FHLB stock dividend

  (88)  (103)

Basis difference in acquired assets and liabilities

  (1,018)  (1,129)

Operating lease right-of-use asset

  (443)  (598)

Other

  (55)  (46)

Gross deferred tax liability

  (4,676)  (5,317)
         

Deferred tax assets:

        

Allowance for credit losses

  6,474   5,180 

Unrealized loss on available for sale securities

  12,216   13,235 

Net operating loss carryforward

  69   193 

Deferred compensation

  1,117   1,099 

Basis difference in acquired assets and liabilities

  270   440 

Employee and director stock awards

  580   576 

Operating lease liability

  463   619 

Unearned loan fees

  227   269 

Other

  170   144 

Gross deferred tax asset

  21,586   21,755 

Net deferred tax asset

 $16,910  $16,438 

 

The Company acquired net operating loss (“NOL”) carryforwards through tax free acquisitions. As of December 31, 2023 and December 31, 2022, the Company’s gross NOL carryforwards were approximately $0.3 million and $0.9 million, respectively. As of December 31, 2023, approximately $4,000 and $0.3 million of the NOL carryforwards expire in 2033 and 2039, respectively. All available NOL carryforwards are expected to be fully utilized by 2024, therefore the Company did not record a valuation allowance against the NOL carryforwards for the year ended  December 31, 2023.

 

The Company files income tax returns under U.S. federal jurisdiction and the states of Alabama, Florida, Texas and Louisiana, although the state of Louisiana does not assess an income tax on income resulting from banking operations. The Company is open to examination in the U.S. and the states of Louisiana, Alabama, and Florida for tax years ended December 31, 2020 through December 31, 2023; and Texas for tax years ended December 31, 2019 through  December 31, 2023.

 

105

INVESTAR HOLDING CORPORATION
Notes to Consolidated Financial Statements

 

 

NOTE 17. 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 also 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  December 31, 2023 and  December 31, 2022, the fair values of these investments we re $3.4 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.

 

Fair Value of Assets and Liabilities Measured on a Recurring Basis

 

The following methods and assumptions were used by the Company in estimating the fair value of assets and liabilities valued on a recurring basis:

 

AFS Investment Securities and Exchange-Traded 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, and commercial mortgage-backed 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.

 

Management monitors the current placement of securities in the fair value hierarchy to determine whether transfers between levels  may be warranted 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. At  December 31, 2023 and  December 31, 2022, the majority of the Company’s 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.

 

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.

 

106

INVESTAR HOLDING CORPORATION
Notes to Consolidated Financial Statements
 

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

 
      

Active Markets for

  

Significant Other

  

Unobservable

 
      

Identical Assets

  

Observable Inputs

  

Inputs

 
  

Fair Value

  

(Level 1)

  

(Level 2)

  

(Level 3)

 

December 31, 2023

                

Assets:

                

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

 $20,043  $  $20,043  $ 

Obligations of state and political subdivisions

  16,703      11,453   5,250 

Corporate bonds

  26,356      25,893   463 

Residential mortgage-backed securities

  232,045      232,045    

Commercial mortgage-backed securities

  66,771      66,771    

Equity securities

  1,180   1,180       

Interest rate swaps - gross assets

  17,325      17,325    

Total assets

 $380,423  $1,180  $373,530  $5,713 

Liabilities:

                

Interest rate swaps - gross liabilities

  17,325  $  $17,325  $ 
                 

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 

 

107

INVESTAR HOLDING CORPORATION
Notes to Consolidated Financial Statements
 

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 table below provides a reconciliation for assets measured at fair value on a recurring basis using significant unobservable inputs, or level 3 inputs (dollars in thousands).

 

  

Obligations of State and Political Subdivisions

  

Corporate Bonds

  

Total

 

Balance at December 31, 2021

 $22,114  $488  $22,602 

Realized gains (losses) included in net income

         

Unrealized losses included in other comprehensive loss

  (1,474)  (9)  (1,483)

Purchases

         

Sales

         

Maturities, prepayments, and calls

  (4,840)     (4,840)

Transfers into Level 3

         

Transfers out of Level 3

  (9,835)     (9,835)

Balance at December 31, 2022

 $5,965  $479  $6,444 

Realized gains (losses) included in net income

         

Unrealized losses included in other comprehensive income

  (689)  (16)  (705)

Purchases

         

Sales

         

Maturities, prepayments, and calls

  (26)     (26)

Transfers into Level 3

         

Transfers out of Level 3

         

Balance at December 31, 2023

 $5,250  $463  $5,713 

 

There were no liabilities measured at fair value on a recurring basis using level 3 inputs at December 31, 2023 and 2022. For the years ended December 31, 2023, 2022 and 2021, 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 December 31, 2023 and 2022 (dollars in thousands).

 

  

Estimated Fair Value

 

Valuation Technique

 

Unobservable Inputs

 

Range of Discounts

 

December 31, 2023

           

Obligations of state and political subdivisions

 $5,250 

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

 

Bond appraisal adjustment(1)

  0% - 11% 

Corporate bonds

  463 

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

 

Bond appraisal adjustment(1)

  

8%

 
            

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.

 

108

INVESTAR HOLDING CORPORATION
Notes to Consolidated Financial Statements
 

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).

 

The following methods and assumptions were used by the Company in estimating the fair value of assets and liabilities valued on a nonrecurring basis:

 

Loans Individually Evaluated – For collateral dependent loans where the borrower is experiencing financial difficulty, 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. Since not all valuation inputs are observable, these nonrecurring fair value determinations are classified as level 3.

 

Quantitative information about assets measured at fair value on a nonrecurring basis based on significant unobservable inputs (level 3) are summarized below as of the dates indicated; there were no liabilities measured on a nonrecurring basis at December 31, 2023 or 2022 (dollars in thousands).

 

  

Estimated Fair Value

 

Valuation Technique

 

Unobservable Inputs

 

Range of Discounts

  

Weighted Average Discount(2)

 

December 31, 2023

               

Loans individually evaluated for impairment(1)

 $1,293 

Discounted cash flows, underlying collateral value

 

Collateral discounts and estimated costs to sell

  6% - 100%   

29%

 
                

December 31, 2022

               

Impaired loans

 $4,033 

Discounted cash flows, underlying collateral value

 

Collateral discounts and estimated costs to sell

  4% - 100%   

53%

 

 

 (1)Loans individually evaluated that were re-measured during the period had a carrying value of $1.8 million and $4.2 million at  December 31, 2023 and  December 31, 2022, respectively, with related allowance for credit losses of $0.5 million and $0.2 million as of such dates.
 (2)Weighted by relative fair value.

 

109

INVESTAR HOLDING CORPORATION
Notes to Consolidated Financial Statements
 

Financial Instruments

 

Accounting guidance requires the disclosure of estimated fair value information about certain on- and off-balance sheet financial instruments, including those financial instruments that are not measured and reported at fair value on a recurring or nonrecurring basis. The significant methods and assumptions used by the Company to estimate the fair value of financial instruments are discussed below.

 

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 – The fair value measurement techniques and assumptions for AFS securities and exchange-traded equity securities is discussed earlier in the note. The same measurement techniques and assumptions were applied to the valuation of HTM securities and other equity securities including equity in correspondent banks. 

 

Loans – The fair value of portfolio loans, net is determined using an exit price methodology. The exit price methodology is 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 accounts (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 measurement techniques and assumptions for derivative financial instruments is discussed earlier in the note.

 

The estimated fair values of the Company’s financial instruments at December 31, 2023 and December 31, 2022 are shown below (dollars in thousands).

 

  

December 31, 2023

 
  

Carrying Amount

  

Estimated Fair Value

  

Level 1

  

Level 2

  

Level 3

 

Financial assets:

                    

Cash and due from banks

 $32,009  $32,009  $32,009  $  $ 

Investment securities

  382,390   382,431      358,323   24,108 

Equity securities

  14,597   14,597   1,180   13,417    

Loans, net of allowance

  2,180,079   2,020,924         2,020,924 

Interest rate swaps - gross assets

  17,325   17,325      17,325    
                     

Financial liabilities:

                    

Deposits, noninterest-bearing

 $448,752  $448,752  $  $448,752  $ 

Deposits, interest-bearing

  1,806,975   1,735,562         1,735,562 

Borrowings under BTFP and repurchase agreements

  221,133   221,133      221,133    

FHLB long-term advances

  23,500   22,945         22,945 

Junior subordinated debt

  8,630   8,630         8,630 

Subordinated debt

  45,000   44,544      44,544    

Interest rate swaps - gross liabilities

  17,325   17,325      17,325    

 

  

December 31, 2022

 
  

Carrying Amount

  

Estimated 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    

 

110

INVESTAR HOLDING CORPORATION
Notes to Consolidated Financial Statements
 
 

NOTE 18. REGULATORY MATTERS

 

The Company and Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the financial statements. Under capital adequacy guidelines, the Company and Bank must meet specific capital guidelines that involve quantitative measures of assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

 

Quantitative measures established by regulation to ensure capital adequacy require the Company and Bank to maintain minimum amounts and ratios (set forth in the table below) of total, Common Equity Tier 1, and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined) and Tier 1 capital to average assets (as defined).

 

As of December 31, 2023 and 2022, the Bank was considered well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Bank must maintain minimum risk-based and Tier 1 leverage capital ratios as set forth in the table below and not be subject to a written agreement or order with regulators to maintain a specific capital level for any capital measure. There are no conditions or events since the regulatory framework for prompt corrective action was issued that management believes have changed the Bank’s category.

 

111

INVESTAR HOLDING CORPORATION
Notes to Consolidated Financial Statements
 

The Company’s and the Bank’s actual capital amounts and ratios as of December 31, 2023 and December 31, 2022 are presented in the tables below (dollars in thousands).

 

  

Actual

  

Capital Adequacy*

  

Well Capitalized

 
  

Amount

  

Ratio

  

Amount

  

Ratio

  

Amount

  

Ratio

 

December 31, 2023

                        

Tier 1 leverage capital

                        

Investar Holding Corporation

 $239,095   8.35% $114,563   4.00% 

NA

  

NA

 

Investar Bank

  280,687   9.81   114,468   4.00   143,085   5.00 
                         

Common Equity Tier 1 risk-based capital

                        

Investar Holding Corporation

  229,595   9.51   169,031   7.00  

NA

  

NA

 

Investar Bank

  280,687   11.64   168,867   7.00   156,805   6.50 
                         

Tier 1 risk-based capital

                        

Investar Holding Corporation

  239,095   9.90   205,251   8.50  

NA

  

NA

 

Investar Bank

  280,687   11.64   205,052   8.50   192,990   8.00 
                         

Total risk-based capital

                        

Investar Holding Corporation

  313,574   12.99   253,546   10.50  

NA

  

NA

 

Investar Bank

  310,846   12.89   253,300   10.50   241,238   10.00 
                         

December 31, 2022

                        

Tier 1 leverage capital

                        

Investar Holding Corporation

 $231,048   8.53% $108,405   4.00% 

NA

  

NA

 

Investar Bank

  267,603   9.89   108,275   4.00   135,344   5.00 
                         

Common Equity Tier 1 risk-based capital

                        

Investar Holding Corporation

  221,548   9.79   158,457   7.00  

NA

  

NA

 

Investar Bank

  267,603   11.83   158,355   7.00   147,044   6.50 
                         

Tier 1 risk-based capital

                        

Investar Holding Corporation

  231,048   10.21   192,412   8.50  

NA

  

NA

 

Investar Bank

  267,603   11.83   192,288   8.50   180,977   8.00 
                         

Total risk-based capital

                        

Investar Holding Corporation

  300,009   13.25   237,685   10.50  

NA

  

NA

 

Investar Bank

  292,339   12.92   237,532   10.50   226,221   10.00 

 

*The minimum ratios and amounts under the column for Capital Adequacy for December 31, 2023 and December 31, 2022 reflect the minimum regulatory capital ratios imposed under Basel III plus the fully phased-in capital conservation buffer of 2.5%.

 

Applicable Federal statutes, regulations, and guidance impose restrictions on the amounts of dividends that may be declared by the Company and the Bank. In addition to the formal statutes, regulations, and guidance, regulatory authorities also consider the adequacy of the Company’s and the Bank’s total capital in relation to its assets, deposits, risk profile, and other such items and, as a result, capital adequacy considerations could further limit the availability of dividends from the Company and the Bank. The Company is also subject to dividend restrictions under the terms of its 2029 Notes, 2032 Notes, and junior subordinated debentures. See “Common Stock – Dividend Restrictions” in Note 13. Stockholders’ Equity, for more information.

 

112

INVESTAR HOLDING CORPORATION
Notes to Consolidated Financial Statements
 
 

NOTE 19. 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. At December 31, 2023 and 2022, the reserve for unfunded loan commitments was $0.3 million and $0.4 million, 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 amounts of the Company’s commitments to extend credit as of the dates presented (dollars in thousands).

 

  

December 31, 2023

  

December 31, 2022

 

Loan commitments

 $413,019  $333,040 

Standby letters of credit

  17,844   11,379 

 

Additionally, at December 31, 2023, the Company had unfunded commitments of $1.3 million for its investment in Small Business Investment Company qualified funds.

 

Insurance

 

The Company is obligated for certain costs associated with its insurance program for employee health. The Company is self-insured for a substantial portion of its potential claims. The Company recognizes its obligation associated with these costs, up to specified deductible limits, in the period in which a claim is incurred, including with respect to both reported claims and claims incurred but not reported. The claims costs are estimated based on historical claims experience. The reserves for insurance claims are reviewed and updated by management on a quarterly basis.

 

Employment Agreements

 

On August 1, 2020, the Company entered into an employment agreement with its Chief Executive Officer. The agreement provides that the executive shall receive a minimum annual base salary $510,000, shall be eligible for annual incentive compensation up to a certain percentage of the base salary, subject to the discretion and approval of the Company’s board of directors, and shall be entitled to the payment of severance benefits upon termination under specified circumstances. The employment agreement automatically renews for successive one-year periods unless written notice of non-renewal is given by either party to the other at least ninety (90) days prior to the expiration of the then-current term.

 

On August 1, 2020, the Company entered into an employment agreement with its then-current Chief Financial Officer. The agreement provided that the executive would receive a minimum annual base salary $285,000, be eligible for annual incentive compensation up to a certain percentage of the base salary, subject to the discretion and approval of the Company’s board of directors and would be entitled to the payment of severance benefits upon termination under specified circumstances. On November 4, 2022, the Company’s then-current Chief Financial Officer separated from the Company. The Company entered into a separation and release agreement with him, which provided that he would receive compensation and benefits due in connection with a termination due to “Disability” under the employment agreement and released the Company from any and all claims arising on or before November 4, 2022. 

 

113

INVESTAR HOLDING CORPORATION
Notes to Consolidated Financial Statements
 

Legal Proceedings

 

The nature of the business of the Company’s banking and other subsidiaries ordinarily results in a certain amount of claims, litigation, investigations, and legal and administrative cases and proceedings, which are considered incidental to the normal conduct of business. Some of these claims are against entities which the Company acquired in business acquisitions. The Company has asserted defenses to these claims and, with respect to such legal proceedings, intends to continue to defend itself, litigating or settling cases according to management’s judgment as to what is in the best interest of the Company and its shareholders.

 

The Company assesses its liabilities and contingencies in connection with outstanding legal proceedings utilizing the latest information available. Where it is probable that the Company will incur a loss and the amount of the loss can be reasonably estimated, the Company records a liability in its consolidated financial statements. These legal reserves may be increased or decreased to reflect any relevant developments on a quarterly basis. Where a loss is not probable or the amount of loss is not estimable, the Company does not accrue legal reserves. While the outcome of legal proceedings is inherently uncertain, based on information currently available and available insurance coverage, the Company’s management believes that it has established appropriate legal reserves. If an accrual is not made, and there is at least a reasonable possibility that a loss or additional loss may have been incurred, the Company discloses the nature of the contingency and an estimate of the possible loss or range of loss or a statement that such an estimate cannot be made. Any incremental liabilities arising from pending legal proceedings are not expected to have a material adverse effect on the Company’s consolidated financial position, consolidated results of operations, or consolidated cash flows. However, it is possible that the ultimate resolution of these matters, if unfavorable, may be material to the Company’s consolidated financial position, consolidated results of operations, or consolidated cash flows.

 

As of the date of this filing, the Company believes the amount of losses associated with legal proceedings that it is reasonably possible to incur is not material.

 

NOTE 20. TRANSACTIONS WITH RELATED PARTIES

 

The Bank has made and expects in the future to continue to make in the ordinary course of business, loans to directors and executive officers of the Company and the Bank, their affiliated companies, and other related persons. In management’s opinion, these loans were made in the ordinary course of business at normal credit terms, including interest rate and collateral requirements, and do not represent more than normal credit risk. See Note 3. Loans and Allowance for Credit Losses, for more information regarding lending transactions between the Bank and these related parties.

 

During 2023 and 2022, certain executive officers and directors of the Company and the Bank, including companies with which they are affiliated and other related persons, were deposit customers of the Bank. See Note 8. Deposits, regarding total deposits outstanding to these related parties.

 

The Company has participated in transactions with related parties for which the Company believes the terms and conditions are comparable to terms that would have been available from a third party that was unaffiliated with the Company. The following describes transactions since January 1, 2021, in addition to the ordinary banking relationships described above, in which the Company has participated in which one or more of its directors, executive officers, their affiliated companies, or other related persons had or will have a direct or indirect material interest.

 

The Company has engaged in a number of transactions with Joffrion Commercial Division, LLC (“JCD”), a commercial construction company owned and managed by Gordon H. Joffrion, one of the Company’s directors. For each transaction, the Company selected JCD through its public bidding process. The Company did not make any payments to JCD during the years ended  December 31, 2023 or  December 31, 2022. The Company paid JCD approximately $0.1 million during the year ended December 31, 2021.

 

114

INVESTAR HOLDING CORPORATION
Notes to Consolidated Financial Statements
 
 

NOTE 21. PARENT COMPANY ONLY FINANCIAL STATEMENTS

 

BALANCE SHEETS

        
  

December 31,

 

(dollars in thousands)

 

2023

  

2022

 

ASSETS

        

Cash and due from banks

 $840  $6,153 

Equity securities

  752   823 

Due from bank subsidiary

  1,141   937 

Investment in bank subsidiary

  277,760   261,737 

Investment in trust

  295   295 

Trademark intangible

  100   100 

Other assets

  864   518 

Total assets

 $281,752  $270,563 
         

LIABILITIES

        

Subordinated debt, net of unamortized issuance costs

 $44,320  $44,225 

Junior subordinated debt

  8,630   8,515 

Accounts payable

  228   253 

Accrued interest payable

  571   567 

Dividend payable

  975   941 

Deferred tax liability

  260   280 

Total liabilities

  54,984   54,781 
         

STOCKHOLDERS’ EQUITY

        

Common stock

  9,748   9,902 

Surplus

  145,456   146,587 

Retained earnings

  116,711   108,206 

Accumulated other comprehensive loss

  (45,147)  (48,913)

Total stockholders’ equity

  226,768   215,782 

Total liabilities and stockholders’ equity

 $281,752  $270,563 

 

115

INVESTAR HOLDING CORPORATION
Notes to Consolidated Financial Statements
 

STATEMENTS OF INCOME

        
  

For the years ended December 31,

 

(dollars in thousands)

 

2023

  

2022

 

REVENUE

        

Dividends received from bank subsidiary

 $3,300  $17,000 

Dividends on corporate stock

     19 

Change in the fair value of equity securities

  (71)  (35)

Interest income from investment in trust

  22   11 

Other operating income

  138    

Total revenue

  3,389   16,995 

EXPENSE

        

Interest on borrowings

  3,216   3,137 

Management fees to bank subsidiary

  360   360 

Loss on early extinguishment of subordinated debt

     222 

Other expense

  519   666 

Total expense

  4,095   4,385 

(Loss) income before income tax expense and equity in undistributed income of bank subsidiary

  (706)  12,610 

Equity in undistributed income of bank subsidiary

  16,552   22,172 

Income tax benefit

  832   927 

Net income

 $16,678  $35,709 

 

116

INVESTAR HOLDING CORPORATION
Notes to Consolidated Financial Statements
 

STATEMENTS OF CASH FLOWS

        
  

For the years ended December 31,

 

(dollars in thousands)

 

2023

  

2022

 

CASH FLOWS FROM OPERATING ACTIVITIES

        

Net income

 $16,678  $35,709 

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

        

Equity in undistributed earnings of bank subsidiary

  (16,552)  (22,172)

Change in the fair value of equity securities

  71   35 

Amortization of subordinated debt issuance costs and purchase accounting adjustments

  210   197 

Loss on early extinguishment of subordinated debt

     222 

Net change in:

        

Due from bank subsidiary

  (204)  31 

Other assets

  (84)  5 

Deferred tax liability

  (20)  (52)

Accrued other liabilities

  1,638   1,746 

Net cash provided by operating activities

  1,737   15,721 
         

CASH FLOWS FROM INVESTING ACTIVITIES

        

Purchases of equity securities

     (750)

Proceeds from the sale of equity securities

     1,225 

Purchases of other investments

  (285)  (225)

Net cash (used in) provided by investing activities

  (285)  250 
         

CASH FLOWS FROM FINANCING ACTIVITIES

        

Cash dividends paid on common stock

  (3,844)  (3,552)

Payments to repurchase common stock

  (3,026)  (10,540)

Proceeds from stock options exercised

  105   133 

Proceeds from subordinated debt, net of issuance costs

     19,548 

Extinguishment of subordinated debt

     (18,600)

Net cash used in financing activities

  (6,765)  (13,011)

Net (decrease) increase in cash

  (5,313)  2,960 

Cash and cash equivalents, beginning of period

  6,153   3,193 

Cash and cash equivalents, end of period

 $840  $6,153 
         

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:

        

Cash payments for:

        

Interest on borrowings

 $3,212  $3,179 

 

117

INVESTAR HOLDING CORPORATION
Notes to Consolidated Financial Statements
 
 

NOTE 22. EARNINGS PER SHARE

 

The following is a summary of the information used in the computation of basic and diluted earnings per common share for the years ended December 31, 2023, 2022 and 2021 (in thousands, except share data).

 

  

December 31,

 
  

2023

  

2022

  

2021

 

Earnings per common share - basic

            

Net income

 $16,678  $35,709  $8,000 

Less: income allocated to participating securities

  (1)  (33)  (21)

Net income allocated to common shareholders

  16,677   35,676   7,979 

Weighted average basic shares outstanding

  9,839,258   10,085,758   10,416,145 

Basic earnings per common share

 $1.69  $3.54  $0.77 
             

Earnings per common share - diluted

            

Net income allocated to common shareholders

 $16,677  $35,676  $7,979 

Weighted average basic shares outstanding

  9,839,258   10,085,758   10,416,145 

Dilutive effect of securities

  2,583   94,951   84,157 

Total weighted average diluted shares outstanding

  9,841,841   10,180,709   10,500,302 

Diluted earnings per common share

 $1.69  $3.50  $0.76 

 

The weighted average number of 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.

 

  

December 31,

 
  

2023

  

2022

  

2021

 

Stock options

     15,361   869 

Restricted stock awards

     135   431 

Restricted stock units

  71,711   15,176   20,828 

 

118

 

Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

 

None.

 

Item 9A. Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

As of the end of the period covered by this Annual Report on Form 10-K, the Company carried out an evaluation under the supervision and with the participation of its management, including the Chief Executive Officer and Chief Financial Officer (the Company’s principal executive and financial officers), of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as defined in Exchange Act Rules 13a-15(e) and 15d-15(e). Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective for ensuring that information the Company is required to disclose in 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 Securities and Exchange Commission’s rules and forms.

 

Changes in Internal Control over Financial Reporting

 

There were no changes to internal control over financial reporting during the fourth quarter of 2023 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

Managements Report on Internal Control over Financial Reporting

 

Management’s annual report on internal control over financial reporting and the report thereon of Horne LLP are included herein under Item 8. Financial Statements and Supplementary Data.

 

Item 9B. Other Information

 

Pursuant to Item 408(a) of Regulation S-K, none of our directors or executive officers adopted, terminated, or modified a Rule 10b5-1 trading arrangement or a non-Rule 10b5-1 trading arrangement during the quarter ended December 31, 2023.

 

 

Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections

 

Not applicable.

 

 

PART III

 

Item 10. Directors, Executive Officers and Corporate Governance

 

Except as provided below, the information required by Item 10 is incorporated by reference to the Company’s Definitive Proxy Statement for its 2024 Annual Meeting of Shareholders (the “2024 Proxy Statement”).

 

Code of Conduct and Ethics

 

The Company has adopted a Code of Ethics for the Chief Executive Officer and Senior Financial Officers that applies to its Chief Executive Officer, Chief Financial Officer, Chief Accounting Officer and any other senior financial officers, and the Company has also adopted a Code of Conduct that applies to all of the Company’s directors, officers and employees. The full text of the Code of Ethics for the Chief Executive Officer and Senior Financial Officers and the Code of Conduct can be found by clicking on “Corporate Governance” under the “Investor Relations” tab on the Company’s website, www.investarbank.com, and then by clicking on “Code of Ethics for the Chief Executive Officer and Senior Financial Officers” or “Code of Conduct,” as applicable. The Company intends to satisfy the disclosure requirement under Item 5.05(c) of Form 8-K regarding an amendment to, or waiver from, a provision of the Company’s Code of Ethics for the Chief Executive Officer and Senior Financial Officers by posting such information on its website, at the address specified above.

 

Item 11. Executive Compensation

 

The information required by Item 11 is incorporated by reference to the 2024 Proxy Statement.

 

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

 

Stock Ownership

 

Except as provided below, the information required by Item 12 is incorporated by reference to the 2024 Proxy Statement.

 

Securities Authorized for Issuance under Equity Compensation Plans

 

The following table presents certain information regarding our equity compensation plans as of December 31, 2023.

 

Plan category

 

Number of securities to be issued upon exercise of outstanding options, warrants and rights(3)

   

Weighted-average exercise price of outstanding options, warrants and rights

   

Number of securities remaining available for future issuance under equity compensation plans

 

Equity compensation plans approved by security holders(1)

    484,340     $ 19.94       450,058  

Equity compensation plans not approved by security holders(2)

    179,014       15.16        

Total

    663,354     $ 17.32       450,058  

 

 

(1)

Represents shares available for issuance under the Company’s Amended and Restated 2017 Long-Term Incentive Compensation Plan (the “Plan”). The Plan authorizes the grant of various types of equity grants and awards, such as restricted stock, stock options and stock appreciation rights to eligible participants, which include all of the Company’s employees, non-employee directors, and consultants.

  (2) The Investar Holding Corporation 2014 Long-Term Incentive Compensation Plan (the “2014 Plan”) was adopted by the Company’s board of directors on January 15, 2014 and was amended on March 13, 2014. Because the Company was a private corporation at the time of the adoption of the 2014 Plan, shareholder approval of the 2014 Plan was not required, nor was such approval obtained. A total of 600,000 shares of common stock was reserved for issuance pursuant to awards under the 2014 Plan. Effective May 24, 2017, no future awards will be granted under the 2014 Plan, although the terms and conditions of the 2014 Plan will continue to govern any outstanding awards thereunder.
  (3) Includes 336,749 shares issuable pursuant to outstanding restricted stock units, which do not have an exercise price.

 

Item 13. Certain Relationships and Related Transactions, and Directors Independence

 

The information required by Item 13 is incorporated by reference to the 2024 Proxy Statement.

 

Item 14. Principal Accountant Fees and Services

 

The information required by Item 14 is incorporated by reference to the 2024 Proxy Statement.

 

 

PART IV

 

Item 15. Exhibit and Financial Statement Schedules

 

(a)

Documents Filed as Part of this Report.

 

 

(1)

The following financial statements are incorporated by reference from Item 8. Financial Statements and Supplementary Data hereof:

 

Report of Independent Registered Public Accounting Firms (PCAOB ID: 171)

Consolidated Balance Sheets as of December 31, 2023 and 2022

Consolidated Statements of Income for the Years Ended December 31, 2023, 2022 and 2021

Consolidated Statements of Comprehensive (Loss) Income for the Years Ended December 31, 2023, 2022 and 2021

Consolidated Statements of Changes in Stockholders’ Equity for the Years Ended December 31, 2023, 2022 and 2021

Consolidated Statements of Cash Flows for the Years Ended December 31, 2023, 2022 and 2021

Notes to Consolidated Financial Statements 

 

 

(2)

All schedules for which provision is made in the applicable accounting regulations of the SEC are omitted because of the absence of conditions under which they are required or because the required information is included in the consolidated financial statements and related notes thereto.

 

 

(3)

The following exhibits are filed as part of this Form 10-K, and this list includes the Exhibit Index.

 

Exhibit Number

 

Description

 

Location

2.1

 

Agreement and Plan of Reorganization dated January 21, 2021 by and among Investar Holding Corporation, Cheaha Financial Group, Inc. and High Point Acquisition, Inc.

 

Exhibit 2.1 to the Current Report on Form 8-K of the Company filed January 25, 2021 and incorporated herein by reference

         

3.1

 

Restated Articles of Incorporation of Investar Holding Corporation

 

Exhibit 3.1 to the Registration Statement on Form S-1 of the Company filed May 16, 2014 and incorporated herein by reference

         

3.2

 

Amended and Restated By-laws of Investar Holding Corporation

 

Exhibit 3.2 to the Registration Statement on Form S-4 of the Company filed October 10, 2017 and incorporated herein by reference

         

4.1

 

Specimen Common Stock Certificate

 

Exhibit 4.1 to the Registration Statement on Form S-1 of the Company filed May 16, 2014 and incorporated herein by reference

         

4.2

 

Description of Registrant’s Securities Registered under Section 12 of the Securities Exchange Act of 1934

  Exhibit 4.2 to the Annual Report on Form 10-K of the Company filed March 9, 2022 and incorporated herein by reference
         

4.3

 

Form of 5.125% Fixed to Floating Rate Subordinated Note due 2029

 

Exhibit 4.1 to the Current Report on Form 8-K filed November 14, 2019 and incorporated herein by reference

         

4.4

  Indenture, dated April 6, 2022, by and among Investar Holding Corporation and UMB Bank, National Association, as trustee  

Exhibit 4.1 to the Current Report on Form 8-K filed with the SEC on April 7, 2022 and incorporated herein by reference.

         
4.5   Form of 5.125% Fixed-to-Floating Rate Subordinated Note due 2032   Exhibit 4.2 to the Current Report on Form 8-K filed with the SEC on April 7, 2022 and incorporated herein by reference

 

 

10.1

 

Form of the Director Support Agreement, dated October 10, 2018, among Investar Holding Corporation, Mainland Bank and all of the directors of Mainland Bank parties thereto

 

Exhibit 10.3 to the Registration Statement on Form S-4 of the Company filed November 30, 2018 and incorporated herein by reference

         

10.2*

 

Employment Agreement, dated August 1, 2020 by and among Investar Holding Corporation, Investar Bank, National Association, and John J. D’Angelo

 

Exhibit 10.1 to the Current Report on Form 8-K filed August 6, 2020 and incorporated herein by reference

         
10.3*   Employment Agreement, dated August 1, 2020 by and among Investar Holding Corporation, Investar Bank, National Association, and Christopher L. Hufft   Exhibit 10.2 to the Current Report on Form 8-K filed August 6, 2020 and incorporated herein by reference
         

10.4*

 

Amended and Restated Investar Holding Corporation 2017 Long-Term Incentive Compensation Plan

 

Exhibit 10.1 to the Current Report on Form 8-K filed May 20, 2021 and incorporated herein by reference

         

10.5*

 

Salary Continuation Agreement, dated as of February 28, 2018, by and between Investar Bank and John D’Angelo

 

Exhibit 10.1 to the Current Report on Form 8-K of the Company filed March 1, 2018 and incorporated herein by reference

         

10.6*

 

Supplemental Salary Continuation Agreement, dated May 22, 2019, by and between Investar Bank and John D’Angelo

 

Exhibit 10.1 to the Current Report on Form 8-K of the Company filed May 23, 2019 and incorporated herein by reference

         

10.7*

 

Salary Continuation Agreement, dated as of February 28, 2018, by and between Investar Bank and Christopher Hufft

 

Exhibit 10.2 to the Current Report on Form 8-K of the Company filed March 1, 2018 and incorporated herein by reference

         

10.8*

 

Supplemental Salary Continuation Agreement, dated May 22, 2019, by and between Investar Bank and Christopher Hufft

 

Exhibit 10.2 to the Current Report on Form 8-K of the Company filed May 23, 2019 and incorporated herein by reference

         
10.9*   Separation Agreement & Release with Christopher Hufft, dated November 4, 2022   Exhibit 10.10 to the Annual Report on Form 10-K of the Company filed March 8, 2023 and incorporated herein by reference
         

10.10*

 

Form of Split Dollar Agreement by and between Investar Bank and each executive entering into a Salary Continuation Agreement

 

Exhibit 10.4 to the Current Report on Form 8-K of the Company filed March 1, 2018 and incorporated herein by reference

         

10.11*

 

Form of First Amendment to Split Dollar Agreement by and between Investar Bank and each executive entering into a Supplemental Salary Continuation Agreement

 

Exhibit 10.3 to the Current Report on Form 8-K filed May 23, 2019 and incorporated herein by reference

         
10.12*  

Investar Holding Corporation 2014 Long-Term Incentive Compensation Plan, as amended by Amendment No. 1 to Investar Holding Corporation 2014 Long Term Incentive Plan

 

Exhibit 10.1 to the Registration Statement on Form S-1 of the Company filed May 16, 2014 and, as to Amendment No.1, Exhibit 99.2 to the Registration Statement on Form S-8 of the Company filed October 30, 2014, each of which is incorporated herein by reference

         
10.13*   Amendment to the Split Dollar Agreement between Investar Bank and Christopher Hufft, dated November 1, 2022   Exhibit 10.13 to the Annual Report on Form 10-K of the Company filed March 8, 2023 and incorporated herein by reference
         

10.14*

 

Form of Stock Option Grant Agreement

 

Exhibit 10.2 to the Registration Statement on Form S-1 of the Company filed May 16, 2014 and incorporated herein by reference

         

10.15*

 

Form of Restricted Stock Award Agreement for Employees

 

Exhibit 10.3 to the Annual Report on Form 10-K of the Company filed March 11, 2016 and incorporated herein by reference

         

10.16*

 

Form of Restricted Stock Award Agreement for Non-Employee Directors

 

Exhibit 10.4 to the Annual Report on Form 10-K of the Company filed March 11, 2016 and incorporated herein by reference

         

10.17*

 

Form of Restricted Stock Unit Agreement for Employees

 

Exhibit 10.15 to the Annual Report on Form 10-K of the Company filed March 15, 2019 and incorporated herein by reference

         

10.18*

 

Form of Restricted Stock Unit Agreement for Non-Employee Directors

 

Exhibit 10.16 to the Annual Report on Form 10-K of the Company filed March 15, 2019 and incorporated herein by reference

         

10.19*

 

Investar Holding Corporation 401(k) Plan, as restated effective January 1, 2021

 

Exhibit 10.20 to the Annual Report on Form 10-K of the Company filed March 10, 2021 and incorporated herein by reference

 

 

21.1

 

Subsidiaries of the Registrant

 

Exhibit 21 to the Registration Statement on Form S-1 of the Company filed May 16, 2014 and incorporated herein by reference

         

23.1

 

Consent of Horne LLP

 

Filed herewith

         

31.1

 

Rule 13a-14(a) Certification of Principal Executive Officer of the Company in accordance with Section 302 of the Sarbanes-Oxley Act of 2002

 

Filed herewith

         

31.2

 

Rule 13a-14(a) Certification of Principal Financial Officer of the Company in accordance with Section 302 of the Sarbanes-Oxley Act of 2002

 

Filed herewith

         

32.1

 

Section 1350 Certification of Principal Executive Officer of the Company in accordance with Section 906 of the Sarbanes-Oxley Act of 2002

 

Filed herewith

         

32.2

 

Section 1350 Certification of Principal Financial Officer of the Company in accordance with Section 906 of the Sarbanes-Oxley Act of 2002

 

Filed herewith

         
97.1   Investar Holding Corporation Clawback Policy   Filed herewith

 

101.INS

 

Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document

  Filed herewith
         

101.SCH

 

Inline XBRL Taxonomy Extension Schema Document

  Filed herewith
         

101.CAL

 

Inline XBRL Taxonomy Extension Calculation Linkbase Document

  Filed herewith
         

101.DEF

 

Inline XBRL Taxonomy Extension Definition Linkbase Document

  Filed herewith
         

101.LAB

 

Inline XBRL Taxonomy Extension Label Linkbase Document

  Filed herewith
         

101.PRE

 

Inline XBRL Taxonomy Extension Presentation Linkbase Document

  Filed herewith
         

104

 

Cover Page Interactive Data File (embedded within the Inline XBRL Document and include in Exhibit 101)

  Filed herewith

 

* Management contract or compensatory plan or arrangement.

 

Item 16. Form 10-K Summary

 

Not applicable.

 

 

SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) 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:

March 7, 2024

by:

/s/ John J. D’Angelo

     

John J. D’Angelo

     

President and

     

Chief Executive Officer

 

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated.

 

Date:

March 7, 2024

by:

/s/ John J. D’Angelo

     

John J. D’Angelo

     

President, Chief Executive

     

Officer and Director

     

(Principal Executive Officer)

       

Date:

March 7, 2024

by:

/s/ John R. Campbell

     

John R. Campbell

     

Executive Vice President and

     

Chief Financial Officer

     

(Principal Financial Officer)

       

Date:

March 7, 2024

by:

/s/ Corey E. Moore

      Corey E. Moore
     

Senior Vice President and

     

Chief Accounting Officer

     

(Principal Accounting Officer)

       

Date:

March 7, 2024

by:

/s/ Anita M. Fontenot

     

Anita M. Fontenot

     

Director

 

 

Date:

March 7, 2024

by:

/s/ William H. Hidalgo, Sr.

     

William H. Hidalgo, Sr.

     

Chairman of the Board

       
Date: March 7, 2024 by: /s/ Rose J. Hudson
      Rose J. Hudson
      Director
       

Date:

March 7, 2024

by:

/s/ Gordon H. Joffrion, III

     

Gordon H. Joffrion, III

     

Director

       

Date:

March 7, 2024

by:

/s/ Robert C. Jordan

     

Robert C. Jordan

     

Director

       
Date: March 7, 2024 by: /s/ Julio A. Melara
      Julio A. Melara
      Director
       

Date:

March 7, 2024

by:

/s/ Suzanne O. Middleton

     

Suzanne O. Middleton

     

Director

       

Date:

March 7, 2024

by:

/s/ Andrew C. Nelson, M.D.

     

Andrew C. Nelson, M.D.

     

Director

       

Date:

March 7, 2024

by:

/s/ Frank L. Walker

     

Frank L. Walker

     

Director

       

Date:

March 7, 2024

by:

/s/ James E. Yegge, M.D.

      James E. Yegge, M.D.
      Director

 

125