UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-Q
(Mark One)
For the quarterly period ended June 30, 2014
or
For the transition period from to
Commission File Number: 001-36522
Investar Holding Corporation
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
7244 Perkins Road, Baton Rouge, Louisiana 70808
(Address of principal executive offices, including zip code)
(225) 227-2222
(Registrant’s telephone number, including area code)
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 x
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
The number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date, is as follows: Common stock, $1.00 par value, 7,229,924 shares outstanding as of August 8, 2014.
TABLE OF CONTENTS
Part I. Financial Information
Item 1.
Financial Statements (Unaudited)
Consolidated Statements of Operations for the three and six months ended June 30, 2014 and 2013
Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2014 and 2013
Consolidated Statements of Changes in Stockholders’ Equity
Consolidated Statements of Cash Flows for the six months ended June 30, 2014 and 2013
Notes to the Consolidated Financial Statements
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
Item 4.
Controls and Procedures
Part II. Other Information
Item 1A.
Risk Factors
Unregistered Sales of Equity Securities and Use of Proceeds
Item 6.
Exhibits
Signatures
Exhibit Index
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
When included in this Quarterly Report on Form 10-Q, or in other documents that Investar Holding Corporation (the “Company”) files with the Securities and Exchange Commission (“SEC”) or in statements made by or on behalf of the Company, words like “may,” “should,” “could,” “predict,” “potential,” “believe,” “think,” “will likely result,” “expect,” “continue,” “will,” “anticipate,” “seek,” “estimate,” “intend,” “plan,” “projection,” “would,” “outlook” and similar expressions or the negative version of those words are intended to identify forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995. These forward-looking statements involve a variety of risks and uncertainties that could cause actual results to differ materially from those described therein. The Company’s forward-looking statements are based on assumptions and estimates that management believes to be reasonable in light of the information available at the time such statements are made. However, many of the matters addressed by these statements are inherently uncertain and could be affected by many factors beyond management’s control. Factors that could have a material effect on the Company’s business, financial condition, results of operations and future growth prospects can be found in the Risk Factors section of the Registration Statement on Form S-1 that the Company originally filed with the SEC on May 16, 2014 (and subsequently amended) and Part II, Item 1A. – Risk Factors, of this Quarterly Report on Form 10-Q. Additional risk factors may also be described in reports that the Company files from time to time with the SEC.
Because forward-looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified, you should not rely on any forward-looking statement as a prediction of future events. We expressly disclaim any obligation or undertaking to update our forward-looking statements, and we do not intend to release publicly any updates or changes in our expectations concerning the forward-looking statements or any changes in events, conditions or circumstances upon which any forward-looking statement may be based, except as required by law.
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INVESTAR HOLDING CORPORATION
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except share data)
ASSETS
Cash and due from banks
Interest bearing balances due from other banks
Federal funds sold
Cash and cash equivalents
Available for sale securities at fair value (amortized cost of $65,286 and $56,733, respectively)
Held to maturity securities at amortized cost (estimated fair value of $13,707 and $5,986, respectively)
Loans held for sale
Loans, net of allowance for loan losses of $3,882 and $3,380, respectively
Other equity securities
Bank premises and equipment, net
Real estate owned, net
Accrued interest receivable
Prepaid FDIC/OFI assessment
Deferred tax asset
Goodwill
Other assets
Total assets
LIABILITIES
Deposits:
Noninterest bearing
Interest bearing
Total deposits
Advances from Federal Home Loan Bank
Repurchase agreements
Notes payable
Accrued interest payable
Accrued taxes and other liabilities
Total liabilities
STOCKHOLDERS’ EQUITY
Common stock, $1.00 par value per share; 40,000,000 shares authorized; 3,945,753 and 3,945,114 shares issued and outstanding, respectively
Treasury Stock
Surplus
Retained earnings
Accumulated other comprehensive income (loss)
Total stockholders’ equity
Total liabilities and stockholders’ equity
4
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
INTEREST INCOME
Interest and fees on loans
Interest on investment securities:
Taxable interest income
Exempt from federal income taxes
Other interest income
Total interest income
INTEREST EXPENSE
Interest on deposits
Interest on borrowings
Total interest expense
Net interest income
Provision for loan losses
Net interest income after provision for loan losses
NONINTEREST INCOME
Service charges on deposit accounts
Gain on sale of investment securities, net
Net (loss) gain on sales of ORE
Gain on sale of loans
Bargain purchase gain
Fee income on mortgage loans held for sale, net
Other operating income
Total noninterest income
Income before noninterest expense
NONINTEREST EXPENSE
Salaries and employee benefits
Net occupancy expense and equipment expense
Bank shares tax
FDIC and OFI assessments
Legal fees
Data processing
Advertising
Stationery and supplies
Software amortization and expense
Professional fees
Telephone expense
Business entertainment
Other operating expenses
Total noninterest expense
Income before income tax expense
Income tax expense
Net income
EARNINGS PER SHARE
Basic earnings per share
Diluted earnings per share
Cash dividends declared per common share
5
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Amounts in thousands)
Other comprehensive income (loss):
Reclassification of realized gains, net of tax of $16, $16, $56 and $105, respectively
Unrealized gains (losses), available for sale, net of tax of $114, ($212), $137 and ($344), respectively
Unrealized gains, transfer from available for sale to held to maturity, net of tax of $6, $8, $6 and $8, respectively
Total other comprehensive income (loss)
Total comprehensive income
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CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
Balance, December 31, 2012
Proceeds from sale of stock
Common stock issued for acquisition, 320,774 shares
Stock issuance cost
Dividends declared – $0.05 per share
Stock based compensation
Other comprehensive loss, net
Balance, December 31, 2013
Surrendered shares
Dividends declared – $0.01 per share
Other comprehensive income, net
Balance, June 30, 2014 (Unaudited)
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CONSOLIDATED STATEMENTS OF CASH FLOWS
Cash flows from operating activities:
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization of purchase accounting adjustments
Writedowns of real estate owned
Depreciation and amortization
Net amortization of securities
Gain on sale of securities
Loans held for sale:
Originations
Proceeds from sales
Loss (gain) on disposition of real estate owned
Stock dividends
Stock-based compensation
Net change in:
Prepaid OFI/FDIC assessment
Deferred taxes
Net cash (used in) provided by operating activities
Cash flows from investing activities:
Proceeds from maturities, calls and sales of investment securities available for sale
Funds invested in securities available for sale
Funds invested in securities held to maturity
Proceeds from principal paydowns and maturities of investment securities available for sale
Proceeds from principal paydowns and maturities of investment securities held to maturity
Proceeds from sale of loans
Proceeds from redemption of other equity securities
Purchase of other equity securities
Net increase in loans
Proceeds from sales of foreclosed assets
Purchases of premises, equipment and software
Cash received in acquisition
Net cash used in investing activities
Net increase in customer deposits
Net increase in repurchase agreements
Net increase (decrease) in short-term advances
Proceeds from long-term advances
Repayment of long-term advances
Cash dividends paid on common stock
Proceeds from sales of common stock
Net cash provided by financing activities
Net (decrease) increase in cash and cash equivalents
Cash and cash equivalents, beginning of period
Cash and cash equivalents, end of period
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying unaudited consolidated financial statements of Investar Holding Corporation (the “Company”) have been prepared in accordance with United States generally accepted accounting principles (“GAAP”) for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include information or footnotes necessary for a complete presentation of financial position, results of operations, and cash flows in conformity with generally accepted accounting principles. However, in the opinion of management, all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation of the financial statements have been included. The results of operations for the three and six month periods ended June 30, 2014 are not necessarily indicative of the results that may be expected for the entire fiscal year. These statements should be read in conjunction with the Company’s audited financial statements for the year ended December 31, 2013, including the notes thereto, which were included as part of the Company’s Registration Statement on Form S-1, originally filed with the Securities and Exchange Commission on May 16, 2014, and subsequently amended.
Nature of Operations
Investar Holding Corporation, headquartered in Baton Rouge, Louisiana, provides full banking services, excluding trust services, through its wholly-owned banking subsidiary, Investar Bank (the “Bank”), a Louisiana-chartered bank. The Company’s primary market is South Louisiana. The Company currently operates 11 full service banking offices located throughout its market and had 165 employees at June 30, 2014.
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 susceptible to a significant change in the near term are the allowance for loan losses, the fair value of financial instruments and the determination of other-than-temporary impairments of securities.
Concentrations of Credit Risk
The Company’s loan portfolio consists of the various types of loans described in Note 4, Loans. Real estate or other assets secure most loans. The majority of loans has been made to individuals and businesses in the Company’s market of South Louisiana. Customers are dependent on the condition of the local economy for their livelihoods and servicing their loan obligations. The Company does not have any significant concentrations in any one industry or individual customer.
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Recent Accounting Pronouncements
FASB ASC Subtopic 310-40 “Receivables – Troubled Debt Restructurings by Creditors” Update No. 2014-04. The Financial Accounting Standards Board (the “FASB”) issued Update No. 2014-04 in January 2014. The amendments in this update clarify that an in substance repossession or foreclosure occurs, and a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan, upon either (1) the creditor obtaining legal title to the residential real estate property upon completion of a foreclosure or (2) the borrower conveying all interest in the residential real estate property to the creditor to satisfy the loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. Additionally, the amendments require interim and annual disclosure of both (1) the amount of foreclosed residential real estate property held by the creditor and (2) the recorded investment in consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure according to local requirements of the applicable jurisdiction. The amendments in the update should be applied prospectively and are effective for fiscal years, and interim periods within those years, beginning after December 15, 2014. Early adoption is permitted. The adoption of this standard is not expected to have a material impact on the Company’s consolidated financial position.
FASB ASC Topic 606 “Revenue from Contracts with Customers” Update No. 2014-09. The FASB issued Update No. 2014-09 in May 2014 to address the previous revenue recognition requirements in GAAP that differ from those in International Financial Reporting Standards (“IFRS”). Accordingly, the FASB and the International Accounting Standards Board (“IASB”) initiated a joint project to clarify the principles for recognizing revenue and to develop a common revenue standard for GAAP and IFRS. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. For public entities, the standard is effective for annual and interim periods beginning after December 15, 2016, and calendar year-end public entities will apply it in the quarter that ends March 31, 2017. Early adoption is not permitted. We are currently assessing the potential impact of this amendment on our consolidated financial statements.
FASB ASC Topic 718 “Compensation – Stock Compensation” Update No. 2014 -12. The FASB issued Update No. 2014-12 in June 2014 to resolve the diverse accounting treatment of share-based payment awards that require, as a condition to vesting, achievement of a specific performance target after the requisite service period. Many reporting entities account for these performance targets as performance conditions that affect the vesting of the award and, therefore, do not reflect the performance target in the estimate of the grant-date fair value of the award, while other reporting entities treat those performance targets as nonvesting conditions that affect the grant-date fair value of the award. This amendment requires that these performance targets that affect vesting and that could be achieved after the requisite service period be treated as a performance condition. A reporting entity should apply existing guidance in Topic 718 “Compensation - Stock Compensation” as it relates to awards with performance conditions that affect vesting to account for such awards. The amendments in this update are effective for annual periods and interim periods within those annual periods beginning after December 15, 2015. Early adoption is permitted. The adoption of this standard is not expected to have a material impact on the Company’s consolidated financial position.
FASB ASC Topic 860 “Transfers and Servicing” Update No. 2014-11. The FASB issued Update No. 2014-11 in June 2014 to respond to stakeholders’ concerns about current accounting and disclosures for repurchase agreements and similar transactions. The amendments in this Update require two accounting changes. Firstly, the amendments in this Update change the accounting for repurchase-to-maturity transactions to secured borrowing accounting. Secondly, for repurchase financing arrangements, the amendments require separate accounting for a transfer of a financial asset executed contemporaneously with a repurchase agreement with the same counterparty, which will result in secured borrowing accounting for the repurchase agreement. The amendments
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in this Update require disclosures for certain transactions comprising (1) a transfer of a financial asset accounted for as a sale and (2) an agreement with the same transferee entered into in contemplation of the initial transfer that results in the transferor retaining substantially all of the exposure to the economic return on the transferred financial asset throughout the term of the transaction. For those transactions outstanding at the reporting date, the transferor is required to disclose certain information by type of transaction. The amendments in this Update also require certain disclosures for repurchase agreements, securities lending transactions, and repurchase-to-maturity transactions that are accounted for as secured borrowings. The accounting changes in this Update are effective for public business entities for the first interim or annual period beginning after December 15, 2014. An entity is required to present changes in accounting for transactions outstanding on the effective date as a cumulative-effect adjustment to retained earnings as of the beginning of the period of adoption. Earlier application for a public business entity is prohibited. For public business entities, the disclosure for certain transactions accounted for as a sale is required to be presented for interim and annual periods beginning after December 15, 2014, and the disclosure for repurchase agreements, securities lending transactions, and repurchase-to-maturity transactions accounted for as secured borrowings is required to be presented for annual periods beginning after December 15, 2014, and for interim periods beginning after March 15, 2015. The disclosures are not required to be presented for comparative periods before the effective date. The adoption of this standard is not expected to have a material impact on the Company’s consolidated financial position.
NOTE 2. 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 three and six months ended June 30, 2014 and 2013 (dollars in thousands, except share data):
Net income available to common shareholders
Weighted average number of common shares outstanding used in computation of basic earnings per common share
Effect of dilutive securities:
Restricted stock
Stock options
Stock warrants
Weighted average number of common shares outstanding plus effect of dilutive securities used in computation of diluted earnings per common share
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NOTE 3. INVESTMENT SECURITIES
The amortized cost and approximate fair value of investment securities classified as available for sale are summarized as follows as of the dates presented (dollars in thousands):
June 30, 2014
Obligations of other U.S. government agencies and corporations
Mortgage-backed securities
Obligations of state and political subdivisions
Corporate bonds
Equity mutual funds
Total
December 31, 2013
The amortized cost and approximate fair value of investment securities classified as held to maturity are summarized as follows as of the dates presented (dollars in thousands):
The Company had no securities classified as trading as of June 30, 2014 or December 31, 2013.
The aggregate fair values and aggregate unrealized losses on securities whose fair values are below book values are summarized in the tables below. Due to the nature of the investment and current market prices, these unrealized losses are considered a temporary impairment of the securities.
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The following table presents, by type and number of securities, the age of gross unrealized losses and fair value by investment category for securities available for sale as of the dates presented (dollars in thousands):
The following table presents, by type and number of securities, the age of gross unrealized losses and fair value by investment category for securities held to maturity as of the dates presented (dollars in thousands):
Obligations of other U.S. Government agencies and corporations
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The unrealized losses in the Bank’s investment portfolio, caused by interest rate increases, are not credit issues, and the Bank does not intend to sell the securities and it is not more likely than not that the Bank will be required to sell the investments before recovery of their amortized cost bases. The Bank does not consider these securities to be other-than-temporarily impaired at June 30, 2014 or December 31, 2013.
Equity securities at June 30, 2014 and December 31, 2013 include Federal Home Loan Bank and First National Bankers Bankshares, Inc. stock. This stock is considered restricted stock as only banks that are members of the organization may acquire or redeem shares of such stock. The stock is redeemable at its face value; therefore, there are no gross unrealized gains or losses associated with this investment.
The Company invested $500,000 in an equity mutual fund known as the Community Reinvestment Act Qualified Investment Fund (ticker CRAIX) on May 11, 2012. The mutual fund is composed of taxable municipal bonds, money market funds, small business administration pools, corporate bonds, single family agency mortgage-backed securities, and multifamily agency mortgage-backed securities. This investment was made in accordance with the Company’s Community Reinvestment Act (“CRA”) action plan in order to receive CRA credit. At June 30, 2014, the approximate fair value of the investment in the fund was $485,000 with a loss of approximately $21,000, and at December 31, 2013, the investment’s approximate fair value was $476,000 with a loss of approximately $30,000.
The amortized cost and approximate fair value of investment debt securities, by contractual maturity (including mortgage-backed securities), are shown below as of the dates presented. Actual maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties (dollars in thousands).
Due within one year
Due after one year through five years
Due after five years through ten years
Due after ten years
Total debt securities
Total equity securities
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NOTE 4. LOANS
The Company’s loan portfolio consists of the following categories of loans as of the dates presented (dollars in thousands):
Mortgage loans on real estate:
Construction and development
1-4 Family
Multifamily
Farmland
Nonfarm, nonresidential
Commercial and industrial
Consumer
Total loans
The following table provides an analysis of the aging of loans as of the dates presented (dollars in thousands):
Total real estate loans
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On October 1, 2011, the Bank acquired South Louisiana Business Bank (“SLBB”), a full service commercial bank headquartered in Prairieville, Louisiana. On May 1, 2013, the Bank acquired First Community Bank (“FCB”), a full service commercial bank headquartered in Hammond, Louisiana.
Total loans at June 30, 2014 include approximately $53.9 million of loans acquired in the FCB and SLBB acquisitions that were recorded at fair value as of the acquisition dates. Included in the acquired loan balances at June 30, 2014 were approximately $0.5 million in loans 30-59 days outstanding and $0.9 million in nonaccrual loans. There were no acquired loans 60-89 or 90 or more days outstanding at June 30, 2014.
Total loans at December 31, 2013 include approximately $64.8 million of loans acquired in the FCB and SLBB acquisitions that were recorded at fair value as of the acquisition dates. Included in the acquired loan balances as December 31, 2013 were approximately $0.2 million in loans 30-59 days outstanding, $34,000 in loans 60-89 days outstanding, and $1.2 million in nonaccrual loans. There were no acquired loans 90 or more days outstanding at December 31, 2013.
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 the highest credit characteristics and financial strength. Borrowers possess characteristics that are highly profitable, with low to negligible leverage and demonstrate significant net worth and liquidity.
Special Mention – Loans classified as special mention have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the Company’s credit position at some future date.
Substandard – Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected.
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.
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The following table presents a breakdown of the Company’s loan portfolio by credit quality indicators as of the dates presented (dollars in thousands):
The Company had no loans that were classified as doubtful or loss as of June 30, 2014 or December 31, 2013.
Loan participations and whole loans sold to and serviced for others are not included in the accompanying consolidated balance sheets. The unpaid principal balances of these loans were approximately $126.2 million and $59.8 million as of June 30, 2014 and December 31, 2013, respectively.
In the ordinary course of business, the Company makes loans to its executive officers, principal stockholders, directors and to companies in which these borrowers are principal owners. Loans outstanding to such borrowers (including companies in which they are principal owners) amounted to approximately $13.4 million and $11.8 million as of June 30, 2014 and December 31, 2013, respectively. These loans are all current and performing according to the original terms. These loans were made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with persons not related to the Company or the Bank and did not involve more than normal risk of collectability or present other unfavorable features.
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The aggregate amount of loans to such related parties is as follows as of the dates presented (dollars in thousands):
Balance, beginning of period
Acquired loans
New loans
Repayments
Balance, end of period
The Company elected to account for certain loans acquired in the FCB acquisition as acquired impaired loans under FASB Accounting Standards Codification (“ASC”) 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality (“ASC 310-30”), due to evidence of credit deterioration at acquisition and the probability that the Company will be unable to collect all contractually required payments.
The following table presents the fair value of loans acquired with deteriorated credit quality as of the date of the FCB acquisition (dollars in thousands):
Contractually required principal and interest
Nonaccretable difference
Cash flows expected to be collected
Accretable yield
Fair value of loans at acquisition
Total loans acquired in the FCB acquisition included $72.6 million of performing loans not accounted for under ASC 310-30.
The following table presents changes in the carrying value, net of allowance for loan losses, of the acquired impaired loans for the periods presented (dollars in thousands):
Carrying value, net at December 31, 2012
Loans acquired
Accretion to interest income
Net transfers from (to) nonaccretable difference to (from) accretable yield
Payments received, net
Transfers to real estate owned
Carrying value, net at December 31, 2013
Charge-offs
Carrying value, net at June 30, 2014
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Accretable yield on acquired impaired loans at June 30, 2014 and December 31, 2013 is as follows (dollars in thousands):
Balance, period ended December 31, 2012
Accretion
Balance, period ended December 31, 2013
Balance, period ended June 30, 2014
NOTE 5. ALLOWANCE FOR LOAN LOSSES
An analysis of the allowance for loan losses is as follows as of the dates presented (dollars in thousands):
Loans charged-off
Recoveries
The following tables outline the changes in the allowance for loan losses by collateral type, the allowances for loans individually and collectively evaluated for impairment, and the amount of loans individually and collectively evaluated for impairment as of and for the six months ended June 30, 2014 and the year ended December 31, 2013 (dollars in thousands):
Allowance for loan losses:
Beginning balance
Provision
Ending balance
Ending allowance balance for loans individually evaluated for impairment
Ending allowance balance for loans collectively evaluated for impairment
Ending allowance balance for loans acquired with deteriorated credit quality
Loans receivable:
Balance of loans individually evaluated for impairment
Balance of loans collectively evaluated for impairment
Total period-end balance
Balance of loans acquired with deteriorated credit quality
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Impaired Loans
The Company considers a loan to be impaired when, based on current information and events, the Company determines that it will not be able to collect all amounts due according to the loan agreement, including scheduled interest payments. Determination of impairment is treated the same across all classes of loans. When the Company identifies a loan as impaired, it measures 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 is the operation or liquidation of the collateral. In these cases when foreclosure is probable, the Company uses the current fair value of the collateral, less selling costs, instead of discounted cash flows. If the Company determines that the value of the impaired loan is 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 recognizes impairment through an allowance estimate or a charge-off to the allowance.
When the ultimate collectability of the total principal of an impaired loan is in doubt and the loan is on nonaccrual, all payments are applied to principal, under the cost recovery method. When the ultimate collectability of the total principal of an impaired loan is not in doubt and the loan is on nonaccrual, contractual interest is credited to interest income when received, under the cash basis method.
The following tables include the recorded investment and unpaid principal balances for impaired loans with the associated allowance amount, if applicable. The Company determined the specific allowance based on the present values of expected future cash flows, discounted at the loan’s effective interest rate, except when the remaining source of repayment for the loan is the operation or liquidation of the collateral. In those cases, the current fair value of the collateral, less selling cost, was used to determine the specific allowance recorded.
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Also presented in the tables below is the average recorded investment of the impaired loans and the related amount of interest recognized during the time within the period that the impaired loans were impaired. The average balances are calculated based on the month-end balances of the loans during the period reported (dollars in thousands).
With no related allowance recorded:
1-4 Family residential
With related allowance recorded:
Total loans:
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Commercial & industrial
Troubled Debt Restructurings
In situations where, for economic or legal reasons related to a borrower’s financial difficulties, the Company grants a concession for other than an insignificant period of time to the borrower that the Company would not otherwise consider, the related loan is classified as a troubled debt restructuring (“TDR”). The Company strives to identify borrowers in financial difficulty early and work with them to modify to more affordable terms before such loan reaches nonaccrual status. These modified terms may include 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 where the Company grants the borrower new terms that provide for a reduction of either interest or principal, the Company measures any impairment on the restructuring as previously noted for impaired loans.
Loans classified as TDRs, consisting of six credits, totaled approximately $881,000 at June 30, 2014 compared to four credits totaling approximately $815,000 at December 31, 2013. All of the Company’s TDRs were acquired from FCB. All six credits were considered TDRs due to modification of terms through adjustments to maturity, and all are currently performing in accordance with their modified terms.
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The following table presents the TDR pre- and post-modification outstanding recorded investments by loan categories as of the dates presented (dollars in thousands):
Troubled debt restructurings
Other Construction Loans
Commercial Real Estate: Non-owner occupied
Commercial & Industrial
NOTE 6. INCOME TAXES
The expense for income taxes and the effective tax rate included in the statement of operations is as follows for the periods presented (dollars in thousands):
Effective tax rate
The effective tax rates differ from the statutory tax rate of 35% largely due to tax exempt interest income earned on certain investment securities and the bargain purchase gain recognized upon the acquisition of FCB in May 2013.
NOTE 7. FAIR VALUES OF FINANCIAL INSTRUMENTS
In accordance with FASB ASC Topic 820, Fair Value Measurement and Disclosure (“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. 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.
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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 on quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date. Level 1 assets and liabilities generally include debt and equity securities that are traded in an active exchange market. Valuations are obtained from readily available pricing sources for market transactions involving identical assets or liabilities.
Level 2 – Valuation is based on inputs other than quoted prices included within level 1 that are observable for the asset or liability, either directly or indirectly. The valuation may be based on quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the asset or liability.
Level 3 – Valuation is based on unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which determination of fair value requires significant management judgment or estimation.
A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.
The following methods and assumptions were used by the Company in estimating fair value disclosures for financial instruments:
Investments and Mortgage-Backed 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 highly liquid government bonds and exchange-traded equities.
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, include Government Sponsored Enterprise obligations, corporate bonds, and other securities. Mortgage-backed securities are included in level 2 if observable inputs are available. In certain cases where there is limited activity or less transparency around inputs to the valuation, the Company classifies those securities in level 3. Equity mutual funds are valued based on market quoted prices and are classified in level 1 as they are actively traded.
Cash and Due from Banks – For those short-term instruments, fair value is the carrying value.
Federal Funds Sold/Purchased and Securities Sold Under Repurchase Agreements – The fair value is the carrying value.
Loans – For variable-rate loans that re-price frequently and with no significant change in credit risk, fair values are based on carrying values. Fair values for certain mortgage loans (for example, one-to-four family residential), credit card loans, and other consumer loans are based on quoted market prices of similar instruments sold in conjunction with securitization transactions, adjusted for differences in loan characteristics. Fair values for other
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loans (for example, commercial real estate and investment property mortgage loans, commercial and industrial loans) are estimated using discounted cash flow analyses, using market interest rates for comparable loans. Fair values for nonperforming loans are estimated using discounted cash flow analyses or underlying collateral values, where applicable.
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 2.
Real Estate Owned – The fair values are estimated based on recent appraisal values of the property less costs to sell the property, as real estate owned is valued at the lower of cost or fair value of the property, less estimated costs to sell. Certain inputs used in appraisals are not always observable, and therefore real estate owned may be classified in level 3 within the fair value hierarchy. When inputs are observable, these assets are classified in level 2.
Accrued Interest – The carrying amounts of accrued interest approximate fair value.
Deposit Liabilities – The fair values disclosed for demand deposits (for example, interest and noninterest checking, savings, and certain types of money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (that is, their carrying amounts). The carrying amounts of variable-rate, 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 maturing within 90 days approximate their fair values. Fair values of other short-term borrowings are estimated using discounted cash flow analyses based on current market rates for similar types of borrowing arrangements.
Long-Term Borrowings – The fair values of long-term borrowings are estimated using discounted cash flows 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 would therefore be classified in level 3 within the fair value hierarchy.
Commitments – The fair value of commitments to extend credit was not significant.
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Fair Value of Assets Measured on a Recurring Basis
Assets measured at fair value on a recurring basis are summarized below; there were no liabilities measured on a recurring basis at June 30, 2014 or December 31, 2013 (dollars in thousands):
Obligations of other U.S. government agencies
Fair Value Assets Measured on a Nonrecurring Basis
Assets measured at fair value on a non-recurring basis are summarized below; there were no liabilities measured on a non-recurring basis at June 30, 2014 or December 31, 2013 (dollars in thousands):
Impaired loans
Real estate owned
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The estimated fair values of the Company’s financial instruments at June 30, 2014 and December 31, 2013 were as follows (dollars in thousands):
Financial assets:
Investment securities
Loans, net of allowance
Financial liabilities:
Deposits, noninterest-bearing
Deposits, interest-bearing
FHLB short-term advances and repurchase agreements
FHLB long-term advances
Other borrowed funds-long term
NOTE 8. COMMITMENTS AND CONTINGENCIES
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, which are not included in the accompanying financial statements.
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,
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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. Essentially all letters of credit issued have expiration dates within one year. At June 30, 2014 and December 31, 2013, the Company’s commitments to extend credit totaled approximately $50.9 million and $67.1 million, respectively.
The Company is required to maintain average reserves at the Federal Reserve Bank. There were approximately $6.8 million and $4.6 million in required reserves at June 30, 2014 and December 31, 2013, respectively.
NOTE 9. SUBSEQUENT EVENTS
On July 3, 2014, the Company completed an initial public offering (the “Offering”) of 2,875,000 shares of common stock at an initial offering price of $14.00 per share, which generated net proceeds of approximately $37.6 million after deducting underwriting discounts and commissions payable by the Company in connection with the Offering. On July 17, 2014, the underwriters exercised their option to purchase an additional 410,300 shares of Company common stock at the Offering price, less underwriting discounts and commissions.
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ITEM 2. MANAGEMENT’S 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 (the “Company,” “we,” “our,” or “us”) and its wholly-owned subsidiary, Investar Bank (the “Bank”). The following discussion and analysis should be read in conjunction with our unaudited consolidated financial statements and related notes thereto included herein, and the audited consolidated financial statements and notes and the related Management’s Discussion and Analysis of Financial Conditions and Results of Operations in the Registration Statement on Form S-1 that the Company originally filed with the Securities and Exchange Commission (“SEC”) on May 16, 2014, and subsequently amended. As discussed in the Form S-1, in November 2013, the Company completed a share exchange with the Bank’s shareholders, resulting in the Bank becoming a wholly-owned subsidiary of the Company. Accordingly, references below to financial condition or results of operations or to events or circumstances relating to dates or time periods prior to the share exchange (even if “we,” “our,” or “us” is used) relate to the Bank alone, while references below to financial condition or results of operations or to events or circumstances relating to dates or time periods after the share exchange pertain to the Company and the Bank on a consolidated basis, unless the context explicitly dictates otherwise.
Overview
Our principal business is lending to and accepting deposits from individuals and small to medium-sized businesses. 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 and gains on the sale of loans and securities. Our principal expenses are interest expense on interest-bearing customer deposits and borrowings, salaries, employee benefits, occupancy costs, data processing and operating expenses. We measure our performance through our net interest margin, return on average assets, and return on average equity, among other metrics, while maintaining appropriate regulatory leverage and risk-based capital ratios.
Discussion and Analysis of Financial Condition
Total assets were $729.1 million at June 30, 2014, an increase of 14.8% from total assets of $634.9 million at December 31, 2013.
Loans
General. Loans, excluding loans held for sale, constitute our most significant asset, comprising 77.3% and 79.4% of our total assets at June 30, 2014 and December 31, 2013, respectively. Loans, excluding loans held for sale, increased $59.9 million, or 11.9%, to $564.0 million at June 30, 2014 from $504.1 million at December 31, 2013 as a result of organic loan growth in our markets. The table below sets forth the balance of loans, excluding loans held for sale, outstanding by loan type as of the dates presented, and the percentage of each loan type to total loans (dollars in thousands):
Consumer installment loans:
Auto loans
Other consumer installment loans
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The following table sets forth loans outstanding at June 30, 2014, which, based on remaining scheduled repayments of principal, are due in the periods indicated. Loans with balloon payments and longer amortizations are often repriced and extended beyond the initial maturity when credit conditions remain satisfactory. Demand loans, loans having no stated schedule of repayments and no stated maturity, and overdrafts are reported below as due in one year or less.
Loans held for sale. Loans held for sale increased $27.1 million, or 538.9%, to $32.1 million at June 30, 2014 from $5.0 million at December 31, 2013. The increase is primarily due to approximately $26.3 million of consumer loans (consisting of indirect auto loans) being classified as held for sale at June 30, 2014. No consumer loans were classified as held for sale at December 31, 2013. In the first six months of 2014, we originated $35.7 million in mortgage loans for sale, as compared to $52.1 million in mortgage loans for sale originated in the first six months of 2013.
During the latter half of 2013 and continuing into the second quarter of 2014, mortgage rates began to increase, resulting in a decline in originations. As these rates are expected to remain elevated in 2014 relative to their historic lows in the past two years, we do not expect significant growth in mortgage originations and anticipate that our originations of mortgage loans held for sale may continue to decline in the future.
One-to-four family mortgage loans not held in our portfolio are typically sold on a “best efforts” basis within 30 days after the loan is funded. This means that residential real estate originations are locked in at a contractual rate with a third party investor or directly with government sponsored agencies, and we are obligated to sell the mortgage only if it is closed and funded. As a result, the risk we assume is conditioned upon loan underwriting and market conditions in the national mortgage market. Although loan fees and some interest income are derived from mortgage loans held for sale, our largest source of income is gains from the sale of these loans in the secondary market.
We also sell pools of our auto loans in order to manage our concentration in auto loans as well as to generate liquidity. During the three and six months ended June 30, 2014, we recognized gains from the sales of auto loan pools of $0.5 million and $0.7 million, respectively. We did not begin selling auto loan pools until the second quarter of 2013 where we recognized a gain of $52,000.
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 each of June 30, 2014 and December 31, 2013, we had no concentrations of loans exceeding 10% of total loans other than loans in the categories listed in the table above.
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Investment Securities
We purchase investment securities primarily to provide a source for meeting liquidity needs, with return on investment a secondary consideration. We also use investment securities as collateral for certain deposits and other types of borrowing. Investment securities totaled $79.5 million at June 30, 2014, an increase of $16.8 million, or 26.8%, from $62.8 million at December 31, 2013. Our increase in investment securities at June 30, 2014 compared to December 31, 2013 was primarily due to our investment of cash not used in our lending activities into investment securities.
The securities portfolio consists primarily of U.S. government agency obligations, mortgage-backed securities and municipal securities, although the Company also holds corporate bonds and equity mutual funds. The Asset Liability Committee (“ALCO”) reviews the investment portfolio on an ongoing basis to ensure that the investments conform to the Company’s investment policy.
The following table shows the carrying value of our investment securities portfolio by investment type and the percentage that such investment type comprises of our entire portfolio at the dates indicated (dollars in thousands):
The investment portfolio consists of available for sale and held to maturity securities. Held to maturity securities are stated at amortized cost. The carrying values of the Company’s available for sale securities are adjusted for unrealized gains or losses as valuation allowances, and any gains or losses are reported on an after-tax basis as a component of other comprehensive income. Any expected credit loss due to the inability to collect all amounts due according to the security’s contractual terms is recognized as a charge against earnings. Any remaining unrealized loss related to other factors would be recognized in other comprehensive income, net of taxes.
The following table 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 June 30, 2014 (dollars in thousands):
Held to maturity:
Obligations of states and political subdivisions
Available for sale:
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The maturity of mortgage-backed securities reflects scheduled repayments based upon the contractual maturities of the securities.
Premises and Equipment
Bank premises and equipment increased $3.0 million, or 12.1%, to $27.7 million at June 30, 2014 from $24.7 million at December 31, 2013. Our acquisition of a parcel of land in Lafayette, Louisiana for a potential future branch location and the construction of a new branch in Baton Rouge, Louisiana opened during the third quarter of 2014 are the primary reasons for this increase.
At June 30, 2014, our deferred tax asset was $0.7 million compared to $1.2 million at December 31, 2013. The deferred tax asset is due to a net operating loss acquired in the FCB acquisition and the non-deductibility of the loan loss provision for tax purposes. The Company assesses the recoverability of its deferred tax asset quarterly, and the current and projected level of taxable income provides for the ultimate realization of the carrying value of its deferred tax asset.
Deposits
The following table sets forth the composition of our deposits and the percentage of each deposit type to total deposits at June 30, 2014 and December 31, 2013 (dollars in thousands):
Noninterest-bearing demand deposits
NOW accounts
Money market deposit accounts
Savings accounts
Time deposits
Total deposits at June 30, 2014 were $578.7 million, an increase of $46.1 million, or 8.7%, from December 31, 2013. Total noninterest-bearing demand deposits at December 31, 2013 were slightly inflated by a $14.0 million short term deposit made by a commercial customer in late December 2013 that was fully withdrawn in January 2014. With respect to the remainder of our deposit growth, the increase in total deposits was driven primarily by an increase in NOW accounts of $21.7 million, or 28.1%, an increase of $11.0 million, or 18.7%, in noninterest-bearing demand deposits after adjusting for the $14.0 million short term deposit, and an increase in time deposits of $23.9 million, or 9.1%, from December 31, 2013. We believe our deposit cross sell strategy has resulted in both noninterest-bearing demand deposit and NOW account growth.
Our management is focused on growing and maintaining a stable source of funding, specifically core deposits, and allowing more costly deposits to mature, within the context of mitigating interest rate risk and maintaining our net interest margin and sufficient levels of liquidity. As we have grown, our deposit mix has evolved from a primary reliance on certificates of deposit, which are less relationship driven and less dependent on the convenience of branch locations than other types of deposit accounts. As our branch network has expanded and the reach of our relationship-driven approach to banking has grown, our mix of deposits has shifted and is relatively balanced between transactional accounts, such as checking, savings, money market and NOW accounts, and certificates of deposits.
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The following table shows the maturity of certificates of deposit and other time deposits of $100,000 or more at June 30, 2014 and December 31, 2013 (dollars in thousands):
Time remaining until maturity:
Three months or less
Over three months through six months
Over six months through twelve months
Over one year through three years
Over three years
Borrowings
Total borrowings include securities sold under agreements to repurchase, advances from the Federal Home Loan Bank (“FHLB”), a line of credit with First National Bankers Bankshares, Inc. FNBB (“FNBB”), and junior subordinated debentures. Securities sold under agreements to repurchase increased $1.2 million to $11.4 million at June 30, 2014 from $10.2 million at December 31, 2013. Our advances from the FHLB were $68.4 million at June 30, 2014, an increase of $37.6 million, or 121.9%, from FHLB advances of $30.8 million at December 31, 2013. The increase in borrowings was used primarily to fund loan growth. The notes payable balance of $8.6 million at June 30, 2014 includes a $5.0 million draw on our line of credit with FNBB, which was repaid with the proceeds of our initial public offering, and the junior subordinated debentures that we assumed in connection with our acquisition of FCB. The notes payable balance at December 31, 2013 included only the junior subordinated debentures.
The average balances and cost of funds of short-term borrowings at June 30, 2014 and at December 31, 2013 are summarized as follows (dollars in thousands):
Federal funds purchased and other short-term borrowings
Securities sold under agreements to repurchase
Total short-term borrowings
Results of Operations
Performance Summary
Three months ended June 30, 2014 vs. three months ended June 30, 2013. For the three months ended June 30, 2014, net income was $1.1 million, or $0.27 per basic share and $0.26 per diluted share, compared to net income of $1.7 million, or $0.47 per basic share and $0.44 per diluted share, for the three months ended June 30, 2013. The decrease in our net income was due to a $0.9 million bargain purchase gain recorded in the second quarter of 2013 as part of the FCB acquisition. Return on average assets declined to 0.61% for the three months ended June 30, 2014 from 1.43% for three months ended June 30, 2013 primarily due to the $0.9 million bargain purchase gain recorded during the second quarter of 2013 as part of the FCB acquisition. Increases in our operational costs attributable to our de novo branch facilities also contributed to this decline. Return on average equity was 7.45% for the three months ended June 30, 2014 as compared to 13.41% for the three months ended June 30, 2013.
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Six months ended June 30, 2014 vs. six months ended June 30, 2013. For the six months ended June 30, 2014, net income was $1.9 million, or $0.50 per basic share and $0.47 per diluted share, compared to net income of $2.3 million, or $0.68 per basic share and $0.64 per diluted share, for the six months ended June 30, 2013. The decrease in our net income was due to a $0.9 million bargain purchase gain recorded in the second quarter of 2013 as part of the FCB acquisition. Return on average assets declined to 0.58% for the six months ended June 30, 2014 from 1.09% for six months ended June 30, 2013 due to the same factors noted above with respect to the quarter over quarter comparison. Return on average equity was 6.89% for the six months ended June 30, 2014 as compared to 9.83% for the six months ended June 30, 2013.
Net Interest Income and Net Interest Margin
Net interest income, which is the largest component of our earnings, is the difference between interest earned on assets and the cost of interest-bearing liabilities. The primary factors affecting net interest income are the volume, yield and mix of our rate-sensitive assets and liabilities as well as the amount of our nonperforming loans and the interest rate environment.
The primary factors affecting net interest income and net interest margin are changes in interest rates, competition and the shape of the interest rate yield curve. The decline in interest rates since 2008 has put significant downward pressure on net interest margin over the past few years. Each rate reduction in interest rate indices and, in particular, the prime rate, rates paid on U.S. Treasury securities and the London Interbank Offering Rate, resulted in a reduction in the yield on our variable rate loans indexed to one of these indices. However, rates on our deposits and other interest-bearing liabilities did not decline proportionally. To offset the effects on our net interest income and net interest margin from the prevailing interest rate environment, we have continued to focus our interest-earning assets in loans and shift our interest-bearing liabilities from higher-costing deposits, like certificates of deposit, to noninterest-bearing and other lower cost deposits.
Three months ended June 30, 2014 vs. three months ended June 30, 2013. Net interest income increased 32.5% to $6.3 million for the three months ended June 30, 2014 from $4.7 million for the same period in 2013. Net interest margin was 3.85% for the three months ended June 30, 2014, down 43 basis points from 4.28% for the three months ended June 30, 2013. The increase in net interest income resulted from increases in the volume of interest-earning assets and decreases in the cost of interest-bearing liabilities, offset by declines in the rate paid on interest-earning assets and an increase in the volume of interest-bearing liabilities. For the three months ended June 30, 2014, average loans increased approximately $188.2 million as compared to the same period in 2013, while average investment securities increased approximately $19.0 million. Over the same comparative period, average interest-bearing liabilities increased approximately $197.5 million. All of these changes were driven both by the impact of the assets acquired and liabilities assumed in connection with the FCB acquisition as well as organic loan and deposit growth.
Interest income was $7.4 million for the three months ended June 30, 2014 compared to $5.5 million for the same period in 2013 as a result of an increase in the volume of interest-earning assets, offset by a decrease in the rate paid on such assets. As the average balances table below illustrates, loan interest income made up substantially all of our interest income for the three months ended June 30, 2014 and 2013. Competitive factors and the prolonged low interest rate environment have contributed to a lower yield on earning assets. The overall yield on interest-earning assets decreased 48 basis points to 4.56% for the three months ended June 30, 2014 as compared to 5.04% for the same period in 2013. The loan portfolio yielded 4.96% for the three months ended June 30, 2014 as compared to 5.58% for the three months ended June 30, 2013.
Interest expense was $1.2 million for the three months ended June 30, 2014, an increase of $0.4 million compared to interest expense of $0.8 million for the three months ended June 30, 2013, as a result of an increase in the volume of interest-bearing liabilities, offset by a decrease in cost of such liabilities. The cost of interest-bearing liabilities decreased 9 basis points to 0.81% for the three months ended June 30, 2014 compared to the same period in 2013. In particular, the weighted average rate paid on certificates of deposit decreased 8 basis
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points during the three months ended June 30, 2014 compared to same period in 2013. The decrease in deposit rates was driven by competitive factors and the general interest rate environment, as well as our strategy to cross-sell using lower cost deposits.
Average Balances and Yields. The following table sets forth average balance sheet data, including all major categories of interest-earning assets and interest-bearing liabilities, together with the interest earned or paid and the average yield or rate paid on each such category for the three months ended June 30, 2014 and 2013. Averages presented below are daily averages (dollars in thousands):
Assets
Interest-earning assets:
Securities:
Taxable
Tax-exempt
Interest-bearing balances with banks
Total interest-earning assets
Intangible assets
Allowance for loan losses
Liabilities and shareholders’ equity
Interest-bearing liabilities:
Interest-bearing demand
Savings deposits
Total interest-bearing deposits
Short-term borrowings
Long-term debt
Total interest-bearing liabilities
Noninterest-bearing deposits
Other liabilities
Stockholders’ equity
Total liability and stockholders’ equity
Net interest income/net interest margin
The average balances of nonaccruing assets are included in the table above.
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Volume/Rate Analysis. The following table sets forth a summary of the changes in interest earned and interest paid resulting from changes in volume and rates for the three months ended June 30, 2014 compared to the same period in 2013 (dollars in thousands):
Interest income:
Interest expense:
Interest-bearing demand deposits
Change in net interest income
Six months ended June 30, 2014 vs. six months ended June 30, 2013. Net interest income increased 49.4% to $12.1 million for the six months ended June 30, 2014 from $8.1 million for the same period in 2013. Net interest margin was 3.89% for the six months ended June 30, 2014, down 21 basis points from 4.10% for the six months ended June 30, 2013. The increase in net interest income resulted from increases in the volume of interest-earning assets and decreases in the cost of interest-bearing liabilities, offset by declines in the rate paid on interest-earning assets and an increase in the volume of interest-bearing liabilities. For the six months ended June 30, 2014, average loans increased approximately $205.7 million as compared to the same period in 2013, while average investment securities increased approximately $21.4 million. Over the same comparative period, average interest-bearing liabilities increased approximately $215.4 million. All of these changes were driven both by the impact of the assets acquired and liabilities assumed in connection with the FCB acquisition as well as organic loan and deposit growth.
Interest income was $14.4 million for the six months ended June 30, 2014 compared to $9.6 million for the same period in 2013 as a result of an increase in the volume of interest-earning assets, offset by a decrease in the rate paid on such assets. As the average balances table below illustrates, loan interest income made up substantially all of our interest income for the six months ended June 30, 2014 and 2013. Competitive factors and the prolonged low interest rate environment contributed to a lower yield on earning assets. The overall yield on interest-earning assets decreased 26 basis points to 4.61% for the six months ended June 30, 2014 as compared to 4.87% for the same period in 2013. The loan portfolio yielded 5.02% for the six months ended June 30, 2014 as compared to 5.39% for the six months ended June 30, 2013.
Interest expense was $2.2 million for the six months ended June 30, 2014, an increase of $0.7 million compared to interest expense of $1.5 million for the six months ended June 30, 2013, as a result of an increase in the volume of interest-bearing liabilities, offset by a decrease in the cost of such liabilities. The cost of interest-bearing liabilities decreased 9 basis points to 0.82% for the six months ended June 30, 2014 compared to the
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same period in 2013. In particular, the weighted average rate paid on certificates of deposit decreased 11 basis points during the six months ended June 30, 2014 compared to same period in 2013. The decrease in deposit rates was driven by competitive factors and the general interest rate environment, as well as our strategy to cross-sell using lower cost deposits.
Average Balances and Yields. The following table sets forth average balance sheet data, including all major categories of interest-earning assets and interest-bearing liabilities, together with the interest earned or paid and the average yield or rate paid on each such category for the six months ended June 30, 2014 and 2013. Averages presented below are daily averages (dollars in thousands):
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Volume/Rate Analysis. The following table sets forth a summary of the changes in interest earned and interest paid resulting from changes in volume and rates for the six months ended June 30, 2014 compared to the same period in 2013 (dollars in thousands):
Noninterest Income
Non-interest income includes, among other things, fees generated from our deposit services and in connection with our mortgage loan activities, securities gains, gains on sale of consumer loans and a non-recurring bargain purchase gain resulting from an acquisition. We expect to continue to develop new products that generate non-interest income, and enhance our existing products, in order to diversify our revenue sources.
Three months ended June 30, 2014 vs. three months ended June 30, 2013. Total non-interest income decreased $0.7 million, or 31.2%, to $1.5 million for the three months ended June 30, 2014 compared to $2.2 million for the three months ended June 30, 2013. Noninterest income for the three months ended June 30, 2013 included the $0.9 million bargain purchase gain recorded in connection with the FCB acquisition in May 2013. Excluding the bargain purchase gain, the $0.2 million increase in noninterest income for the second quarter of 2014 compared to the second quarter of 2013 resulted primarily from an increase of $0.5 million in gain on sale of consumer loans offset by a decrease of approximately $0.3 million in fee income on mortgage loans held for sale.
Fee income on mortgage loans held for sale is the largest component of our noninterest income. These fees decreased $0.3 million to $0.6 million for the three months ended June 30, 2014 from $0.9 million for the same period in 2013, as originations of mortgage loans held for sale decreased. The decrease in such fee income, as well as our originations of mortgage loans held for sale, is due to an industry-wide increase in mortgage loan rates in the latter half of 2013 that has continued into the second quarter of 2014. As interest rates remain high relative to prior years, we expect our mortgage loan originations, as well as fee income on mortgage loans held for sale, to remain flat and possibly even decline during the remainder of 2014.
Service charges on deposit accounts include maintenance fees on accounts, account enhancement charges for additional deposit account features, per item charges and overdraft fees. Service charges on deposits increased
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25.9% to $73,000 for the three months ended June 30, 2014 as compared to $58,000 for the same period in 2013. The increase can be attributed to increased deposits resulting from the FCB acquisition as well as organic deposit growth.
Other operating income was $0.3 million for the three months ended June 30, 2014 compared to $0.1 million for the same period in 2013. Other operating income consists of interchange fees, ATM surcharge income, loan servicing fees and rental income.
Six months ended June 30, 2014 vs. six months ended June 30, 2013. Total noninterest income decreased $0.8 million, or 23.4%, to $2.6 million for the six months ended June 30, 2014 compared to $3.4 million for the six months ended June 30, 2013. Noninterest income for the six months ended June 30, 2013 included the aforementioned $0.9 million bargain purchase gain. Excluding the bargain purchase gain, the $0.1 million increase in noninterest income was mainly attributable to an increase in other operating income.
Fee income on mortgage loans held for sale decreased $0.6 million to $1.1 million for the six months ended June 30, 2014 from $1.7 million for the same period in 2013, as originations of mortgage loans held for sale decreased. The decrease in such fee income, as well as our originations of mortgage loans held for sale, is due to an industry-wide increase in mortgage loan rates in the latter half of 2013 that has continued into the second quarter of 2014.
Gains on the sale of loans, other than mortgage loans, for the six months ended June 30, 2014 were $0.7 million as compared to $52,000 for the six months ended June 30, 2013. These gains were generated by sales of pools of our auto loans. We expect to continue to sell pools of our auto loans quarterly as part of our ongoing loan portfolio management.
Service charges on deposit accounts include maintenance fees on accounts, account enhancement charges for additional deposit account features, per item charges and overdraft fees. Service charges on deposits increased 58.1% to $136,000 for the six months ended June 30, 2014 as compared to $86,000 for the same period in 2013. The increase can be attributed to increased deposits resulting from the FCB acquisition as well as organic deposit growth.
Gains on the sale of investment securities for the six months ended June 30, 2014 decreased $144,000, or 46.6%, to $165,000 from $309,000 for the same period in 2013. The Company sells investment securities held as available for sale to fund loan demand, manage its asset/liability sensitivity or for other business purposes.
Other operating income was $0.5 million for the six months ended June 30, 2014 compared to $0.2 million for the same period in 2013. Other operating income consists of interchange fees, ATM surcharge income, loan servicing fees and rental income.
Noninterest Expense
Noninterest expense includes salaries and benefits and other costs associated with the conduct of our operations. We are committed to managing our costs within the framework of our operating strategy. However, since we are focused on growing both organically and through acquisition, we expect our expenses to continue to increase as we add employees and physical locations to accommodate our growing franchise.
Three months ended June 30, 2014 vs. three months ended June 30, 2013. Total noninterest expense was $5.7 million for the three months ended June 30, 2014, an increase of $1.1 million, or 24.1%, from $4.6 million for the same period in 2013. This increase was a result of increased costs associated with our expanded operations as a result of the FCB acquisition, the opening of our Lafayette branch and our organic growth.
Salaries and employee benefits increased $0.6 million, or 22.1%, to $3.5 million for the three months ended June 30, 2014, compared to $2.9 million for the same period in 2013. This increase was due to the 24 employees
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who joined the Bank upon the completion of the FCB acquisition as well as employees hired in connection with the opening of the Lafayette branch in the fourth quarter of 2013.
Net occupancy and equipment expense increased to $0.6 million for the three months ended June 30, 2014 from $0.5 million for the three months ended June 30, 2013. This increase is primarily attributable to the costs associated with the two branches we acquired in the FCB acquisition and the costs associated with our new branch in Lafayette.
Data processing expenses increased to $0.3 million for the three months ended June 30, 2014 from $0.2 million for the three months ended June 30, 2013. This increase is primarily a result of the additional processing expenses associated with the increased size of our loan portfolio resulting from the FCB acquisition as well as our organic growth, particularly with respect to servicing our consumer loan portfolio, the amount of which fluctuates.
Other operating expenses include security, business development, charitable contributions, training, filing fees and duplicating costs. Other operating expenses increased $0.1 million to $0.6 million for the three months ended June 30, 2014 from $0.5 million for the same period in 2013. The increase is primarily the result of the FCB acquisition and the opening of our Lafayette branch as well as our organic growth.
Six months ended June 30, 2014 vs. six months ended June 30, 2013. Total noninterest expense was $11.1 million for the six months ended June 30, 2014, an increase of $2.9 million, or 35.8%, from $8.2 million for the same period in 2013. This increase in total noninterest expense, as well as the increases of the components therein, discussed below, were results of the same factors discussed above with respect to the quarter over quarter discussion.
Salaries and employee benefits increased $1.9 million, or 36.2%, to $7.0 million for the six months ended June 30, 2014, compared to $5.1 million for the same period in 2013.
Net occupancy and equipment expense increased to $1.2 million for the six months ended June 30, 2014 from $0.8 million for the six months ended June 30, 2013.
Data processing expenses increased to $0.6 million for the six months ended June 30, 2014 from $0.4 million for the six months ended June 30, 2013.
Software amortization and expenses increased $66,000 to $0.2 million for the six months ended June 30, 2014 from $162,000 for the same period in 2013, which is also attributable to the increased servicing volume of consumer loans.
Other expenses include an increase in FDIC and OFI assessments of $89,000 to $0.2 million for the six months ended June 30, 2014 compared to $0.1 million for the six months ended June 30, 2013, due to the increase in average total assets.
Other operating expenses include security, business development, charitable contributions, training, filing fees and duplicating costs. Other operating expenses increased $0.2 million to $1.1 million for the six months ended June 30, 2014 from $0.9 million for the same period in 2013.
Income Tax Expense
Income tax expense for the three months ended June 30, 2014 was $0.5 million, an increase of $0.1 million from $0.4 million for the three months ended June 30, 2013. The effective tax rate for the three months ending June 30, 2014 and 2013 was 32.5% and 21.1%, respectively.
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Income tax expense for the six months ended June 30, 2014 was $0.9 million, an increase of $0.2 million from $0.7 million for the six months ended June 30, 2013. The effective tax rate for the six months ending June 30, 2014 and 2013 was 32.5% and 24.1%, respectively.
Risk Management
The primary risks associated with our operations are credit, interest rate and liquidity risk. Credit 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 Loan Losses
General. The risk of loss should a borrower default on a loan is inherent in any lending activity. Our portfolio and related credit risk are monitored and managed on an ongoing basis by our risk management department, the board of directors’ loan committee and the full board of directors. We utilize a ten point risk-rating system, which assigns a risk grade to each borrower based on a number of quantitative and qualitative factors associated with a loan transaction. The risk grade categorizes the loan into one of five risk categories, based on information about the ability of borrowers to service the debt. The information includes, among other factors, current financial information about the borrower, historical payment experience, credit documentation, public information and current economic trends. These categories assist management in monitoring our credit quality. The following describes each of the risk categories, which are consistent with the definitions used in guidance promulgated by federal banking regulators:
At June 30, 2014 and December 31, 2013, there were no loans classified as Doubtful or Loss, while there were $4.2 million of loans classified as Substandard at June 30, 2014 and December 31, 2013 and $0.7 million and $1.2 million, respectively, of loans classified as Special Mention as of such dates. Of the $4.9 million in total
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Substandard and Special Mention loans at June 30, 2014, $4.2 million was acquired in the FCB acquisition and marked to fair value at the time of their acquisition, while $4.9 million of the $5.4 million of total Substandard and Special Mention loans at December 31, 2013 was acquired in the FCB acquisition and marked to fair value.
An external loan review consultant is engaged annually by the risk management department to review approximately 40% of commercial loans, utilizing a risk-based approach designed to maximize the effectiveness of the review. In addition, credit analysts periodically review smaller dollar commercial loans to identify negative financial trends related to any one borrower, any related groups of borrowers or an industry. For collateral dependent loans, new appraisals are obtained on an annual basis. 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 sent to the board of directors’ loan committee for charge-off approval.
Allowance for Loan Losses. The allowance for loan losses is an amount that management believes will be adequate to absorb probable losses inherent in the entire loan portfolio. The appropriate level of the allowance is based on an ongoing analysis of the loan portfolio and represents an amount that management deems adequate to provide for inherent losses, including collective impairment as recognized under ASC 450, Contingencies. Collective impairment is calculated based on loans grouped by grade. Another component of the allowance is losses on loans assessed as impaired under ASC 310, Receivables. The balance of these loans and their related allowance is included in management’s estimation and analysis of the allowance for loan losses. Other considerations in establishing the allowance for loan losses include the nature and volume of the loan portfolio, overall portfolio quality, historical loan loss, review of specific problem loans and current economic conditions that may affect the borrower’s ability to pay, as well as trends within each of these factors. The allowance for loan losses is established after input from management as well as our risk management department and our special assets committee. We evaluate the adequacy of the allowance for loan losses on a quarterly basis. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available. The allowance for loan losses was $3.9 million at June 30, 2014, an increase from $3.4 million at December 31, 2013, as we increased our loan loss provisioning to reflect our organic loan growth.
A loan is considered impaired when, based on current information and events, it is probable that we will be unable to collect the scheduled payments of principal and interest when due according to the contractual terms of the loan agreement. Determination of impairment is treated the same across all classes of loans. Impairment is measured on a loan-by-loan basis for, among others, all loans of $500,000 or greater, nonaccrual loans and a sample of loans between $250,000 – $500,000. When we identify a loan as impaired, we measure the extent of 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 is the operation or liquidation of the collateral. In these cases when foreclosure is probable, we use the current fair value of the collateral, less selling costs, instead of discounted cash flows. For real estate collateral, the fair value of the collateral is based upon a recent appraisal by a qualified and licensed appraiser. If we determine that the value of the impaired loan is less than the recorded investment in the loan (net of previous charge-offs, deferred loan fees or costs and unamortized premium or discount), we recognize impairment through an allowance estimate or a charge-off to the allowance. When the ultimate collectability of the total principal of an impaired loan is in doubt and the loan is on nonaccrual, all payments are applied to principal, under the cost recovery method. When the ultimate collectability of the total principal of an impaired loan is not in doubt and the loan is on nonaccrual, contractual interest is credited to interest income when received, under the cash basis method.
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Impaired loans at June 30, 2014 were $4.2 million, including impaired loans acquired in the FCB acquisition in the amount of $3.9 million, and $4.2 million, including impaired loans acquired in the FCB acquisition in the amount of $3.8 million, at December 31, 2013. At June 30, 2014 and December 31, 2013, $64,000 and $37,000, respectively, of the allowance for loan losses was specifically allocated to impaired loans.
The provision for loan losses is a charge to income in an amount that management believes is necessary to maintain an adequate allowance for loan losses. The provision is based on management’s regular evaluation of current economic conditions in our specific markets as well as regionally and nationally, changes in the character and size of the loan portfolio, underlying collateral values securing loans, and other factors which deserve recognition in estimating loan losses. For the three months ended June 30, 2014 and 2013, the provision for loan losses was $0.4 million and $0.1 million, respectively. For the six months ended June 30, 2014, the provision for loan losses was $0.7 million, an increase of $0.5 million from $0.2 million during the same period in 2013. The increases over both periods are due primarily to the overall growth in our loan portfolio, including our commercial real estate loans.
Acquired loans that are accounted for under ASC 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality, were marked to market on the date we acquired the loans to values which, in management’s opinion, reflected the estimated future cash flows, based on the facts and circumstances surrounding each respective loan at the date of acquisition. Acquired FCB loans had a carrying value of $78.4 million and a fair value of $77.5 million on the acquisition date. We continually monitor these loans as part of our normal credit review and monitoring procedures for changes in the estimated future cash flows. Because ASC 310-30 does not permit carry over or recognition of an allowance for loan losses, we may be required to reserve for these loans in the allowance for loan losses through future provision for loan losses if future cash flows deteriorate below initial projections. There was no provision for loan losses charged to operating expense attributable to loans accounted for under ASC 310-30 for the three and six months ended June 30, 2014 and 2013.
The following table presents the allocation of the allowance for loan losses by loan category at the dates indicated (dollars in thousands):
1-4 family
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The following table presents the amount of the allowance for loan losses allocated to each loan category as a percentage of total loans at the dates indicated:
As discussed above, the balance in the allowance for loan losses is principally influenced by the provision for loan losses and by net loan loss experience. Additions to the allowance are charged to the provision for loan 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 loan losses for the periods indicated (dollars in thousands):
Allowance at beginning of period
Charge-offs:
Total charge-offs
Recoveries:
Total recoveries
Net charge-offs
Balance at end of period
Net charge-offs to:
Loans-average
Allowance for loan losses to:
Nonperforming loans
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The allowance for loan losses to total loans ratio increased to 0.69% at June 30, 2014 compared to 0.66% at June 30, 2013. The allowance for loan losses to nonperforming loans ratio increased to 296.24% at June 30, 2014 from 141.01% at June 30, 2013.
Charge-offs reflect the realization of losses in the portfolio that were recognized previously through the provision for loan losses. Net charge-offs for the three and six months ended June 30, 2014 were $0.1 million and $0.2 million, respectively, equal to 0.02% and 0.03%, respectively, of our average loan balance as of such dates. Net charge-offs for the three and six months ended June 30, 2013 were $35,000 and $0.2 million, respectively, equal to 0.01% and 0.05%, respectively, of our average loan balance as of such dates. For the three and six months ended June 30, 2014 and June 30, 2013, the majority of our charge-offs were auto loans. Net charge-offs of our auto loans as a percentage of average auto loans for the three and six months ended June 30, 2014 were 0.04% and 0.08% for both periods, while net charge-offs of our auto loans as a percentage of average auto loans for the three and six months ended June 30, 2013 were 0.02% and 0.06%, respectively. Through June 30, 2014, we have charged off an aggregate of $67,000 of loans that we acquired in connection with our FCB acquisition.
Management believes the allowance for loan losses at June 30, 2014 is sufficient to provide adequate protection against losses in our portfolio. Although the allowance for loan losses is considered adequate by management, 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 unanticipated adverse changes in the economy or discrete events adversely affecting specific customers or industries. Our results of operations and financial condition could be materially, adversely affected to the extent that the allowance is insufficient to cover such changes or events.
Nonperforming Assets and Restructured Loans. Nonperforming assets consist of nonperforming loans and 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. However, 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. Nonaccrual loans are returned to accrual status when the financial position of the borrower indicates there is no longer any reasonable doubt as to the payment of principal or interest.
Another category of assets which contributes to our credit risk is troubled debt restructurings, or restructured loans. A restructured loan is a loan for which a not-insignificant concession has been granted to the borrower due to a deterioration of the borrower’s financial condition and which is performing in accordance with the new terms. Such concessions may include reduction in interest rates, deferral of interest or principal payments, principal forgiveness and other actions intended to minimize the economic loss and to avoid foreclosure or repossession of the collateral. We strive to identify borrowers in financial difficulty early and work with them to modify to more affordable terms before such loan reaches nonaccrual status. In evaluating whether to restructure a loan, management analyzes the long-term financial condition of the borrower, including guarantor and collateral support, to determine whether the proposed concessions will increase the likelihood of repayment of principal and interest. Restructured loans that are not performing in accordance with their restructured terms and that are either contractually 90 days past due or placed on nonaccrual status are reported as nonperforming loans.
All of our restructured loans, consisting of six credits, were acquired from FCB. All six credits were considered restructured loans due to a modification of term through adjustments to maturity. As of June 30, 2014, there have been no subsequent defaults on our restructured loans.
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The following table shows the principal amounts of nonperforming and restructured loans as of June 30, 2014 and December 31, 2013. All loans where information exists about possible credit problems that would cause us to have serious doubts about the borrower’s ability to comply with the current repayment terms of the loan have been reflected in the table below (dollars in thousands):
Nonaccrual loans
Accruing loans past due 90 days or more
Total nonperforming loans
Restructured loans
Total nonperforming and restructured loans
Interest income recognized on nonaccruing and restructured loans
Interest income foregone on nonaccruing and restructured loans
Of our total nonaccrual loans at June 30, 2014 and December 31, 2013, $0.8 million and $1.2 million, respectively, were acquired in the FCB acquisition. Nonperforming loans outstanding represented 0.23% of total loans at June 30, 2014. Nonperforming loans other than those acquired through an acquisition represented 0.09% and nonperforming acquired loans represented 0.14% of total loans at such date. Nonperforming loans outstanding, including acquired loans, represented 0.30% of total loans at December 31, 2013.
Real estate owned consists of properties acquired through foreclosure or acceptance of a deed in lieu of foreclosure. These properties are carried at the lower of cost or fair market value based on appraised value less estimated selling costs. Losses arising at the time of foreclosure of properties are charged against the allowance for loan losses. Real estate owned with a cost basis of $0.4 million and $0.5 million was sold during the three and six months ended June 30, 2014, resulting in a net loss of $5,000 and $7,000 for the periods. For the three and six months ended June 30, 2013, real estate owned with a cost basis of $0.6 million was sold resulting in a net gain of $91,000.
At June 30, 2014, $1.5 million of our real estate owned was related to our acquisition of FCB compared to $1.6 million at December 31, 2013. In connection with our acquisition of FCB, the Bank agreed to share with the former FCB shareholders the proceeds that we receive in connection with the sale of one piece of property, which had a carrying value and a fair market value of $637,000 as of each of June 30, 2014 and December 31, 2013. Under this arrangement, if this property is sold within four years of the closing date of our acquisition of FCB, then we are entitled to retain the first $714,000 of the sale proceeds plus an amount necessary to cover our selling expenses, with the remaining proceeds, if any, to be paid to former FCB shareholders. After the fourth anniversary of the closing date, which is May 1, 2017, we are entitled to retain all sales proceeds arising upon the sale of this property.
The following table provides details of our real estate owned as of the dates indicated (dollars in thousands):
Total real estate owned
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Changes in real estate owned were as follows for the periods presented (dollars in thousands):
Transfers from loans
Transfers from acquired loans
Acquired real estate owned
Sales of real estate owned
Write-downs
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-taking 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 Asset Liability Committee 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.
We monitor the impact of changes in interest rates on our net interest income using gap analysis. The gap represents the net position of our assets and liabilities subject to repricing in specified time periods. During any given time period, if the amount of rate-sensitive liabilities exceeds the amount of rate-sensitive assets, a financial institution would generally be considered to have a negative gap position and would benefit from falling rates over that period of time. Conversely, a financial institution with a positive gap position would generally benefit from rising rates.
Within the gap position that management directs, we attempt to structure our assets and liabilities to minimize the risk of either a rising or falling interest rate environment. We manage our gap position for time horizons of one month, two months, three months, 4-6 months, 7-12 months, 13-24 months, 25-36 months, 37-60 months and more than 60 months. The goal of our asset/liability management is for the Bank to maintain a net interest income at risk in an up or down 100 basis point environment at less than (5)%. At June 30, 2014 and December 31, 2013 the bank was within the policy guidelines.
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The following table depicts the estimated impact on net interest income of immediate changes in interest rates at the specified levels for the period presented:
Six months ended June 30, 2014
Changes in Interest Rates (in basis points)
Estimated Increase/Decrease in Net Interest Income(1)
+400
+300
+200
+100
-100
-200
-300
The computation of the prospective effects of hypothetical interest rate changes requires numerous assumptions regarding characteristics of new business and the behavior of existing positions. These business assumptions are based upon our experience, business plans and published industry experience. Key assumptions include asset prepayment speeds, competitive factors, the relative price sensitivity of certain assets and liabilities and the expected life of non-maturity deposits. However, there are a number of factors that influence the effect of interest rate fluctuations on us which are difficult to measure and predict. For example, a rapid drop in interest rates might cause our loans to repay at a more rapid pace and certain mortgage-related investments to prepay more quickly than projected. This could mitigate some of the benefits of falling rates as are expected when we are in a negatively-gapped position. Conversely, a rapid rise in rates could give us an opportunity to increase our margins and stifle the rate of repayment on our mortgage-related loans which would increase our returns. As a result, because these assumptions are inherently uncertain, actual results will differ from simulated results.
Liquidity and Capital Resources
Liquidity. Liquidity is a measure of the ability to fund loan commitments and meet deposit maturities and withdrawals in a timely and cost-effective way. Cash flow requirements can be met by generating net income, attracting new deposits, converting assets to cash or borrowing funds. While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit outflows, loan prepayments, loan sales and borrowings are greatly influenced by general interest rates, economic conditions and the competitive environment in which we operate. To minimize funding risks, we closely monitor our liquidity position through periodic reviews of maturity profiles, yield and rate behaviors, and loan and deposit forecasts. Excess short-term liquidity is usually invested in overnight federal funds sold.
Our core deposits, which are deposits excluding time deposits greater than $250,000 and deposits of municipalities and other political entities, are our most stable source of liquidity to meet our cash flow needs due to the nature of the long-term relationships generally established with our customers. Maintaining the ability to acquire these funds as needed in a variety of markets, and within ALCO compliance targets, is essential to ensuring our liquidity. At June 30, 2014 and December 31, 2013, 76.94% and 82.2% 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. Some securities are pledged to secure certain deposit types or short-term borrowings (such as FHLB advances), which impacts their liquidity. At June 30, 2014, securities with a carrying
value of $57.2 million were pledged to secure deposits or borrowings, compared to $41.7 million in pledged securities as of December 31, 2013.
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Other sources available for meeting liquidity needs include advances from the FHLB, repurchase agreements and other borrowings. FHLB advances are primarily used to match-fund fixed rate loans in order to minimize interest rate risk and also may be used to meet day to day liquidity needs, particularly if the prevailing interest rate on an FHLB advance compares favorably to the rates that we would be required to pay to attract deposits. At June 30, 2014, the balance of our outstanding advances with the FHLB was $68.4 million, an increase from $30.8 million at December 31, 2013. The total amount of the remaining credit available to us from the FHLB at June 30, 2014 was $158.5 million. 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 U.S. Treasury and agency securities. We had $11.4 million of repurchase agreements outstanding as of June 30, 2014, compared to $10.2 million of outstanding repurchase agreements as December 31, 2013. Finally, we maintain lines of credit with other commercial banks totaling $33.6 million. One line of credit, in the amount of $5.0 million, is secured by all of the stock of the Bank, while the other lines of credit are unsecured, uncommitted lines of credit. The lines of credit mature at various times within the next twelve months. In June 2014, we borrowed $5.0 million on our secured line of credit to support our balance sheet growth while maintaining the Bank’s capital at levels set by management until the completion of the Offering. We used a portion of the proceeds of the Offering to repay in full amounts outstanding under this line of credit.
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. We do not hold any brokered deposits, as defined for federal regulatory purposes, although we do hold QwikRate® deposits which we obtain via the internet to address liquidity needs when rates on such deposits compare favorably with deposit rates in our markets. At June 30, 2014, we held $56.8 million of QwikRate® deposits, an increase from $54.3 million at December 31, 2013.
The following tables presents, by type, our funding sources, which consist of total average deposits and borrowed funds, as a percentage of total funds and the total cost of each funding source for the three and six months ended June 30, 2014 and 2013:
Three months
ended June 30,
Six months
Noninterest-bearing demand
Savings
Borrowed funds
Total deposits and borrowed funds
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Capital Management. Our primary sources of capital include retained earnings, capital obtained through acquisitions and proceeds from the sale of our capital stock. We are subject to various regulatory capital requirements administered by the Federal Reserve and the FDIC which specify capital tiers, including the following classifications:
Capital Tiers
Well capitalized
Adequately capitalized
Undercapitalized
Significantly undercapitalized
Critically undercapitalized
The Company and the Bank each were in compliance with all regulatory capital requirements as of June 30, 2014 and December 31, 2013. The Bank also was considered “well-capitalized” under the FDIC’s prompt corrective action regulations as of all 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):
Investar Holding Corporation:
Tier 1 capital to average assets (leverage)
Tier 1 capital to risk-weighted assets
Total capital to risk-weighted assets
Investar Bank:
Off-Balance Sheet Transactions
The Bank enters into loan commitments and standby letters of credit in the normal course of its business. Loan commitments are made to meet the financing needs of our customers, while standby letters of credit commit the Bank to make payments on behalf of customers when certain specified future events occur. The credit risks associated with loan commitments and standby letters of credit are essentially the same as those involved in making loans to our customers. Accordingly, our normal credit policies apply to these arrangements. Collateral (e.g., securities, receivables, inventory, equipment, etc.) is obtained based on management’s credit assessment of the customer.
Loan commitments 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
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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 were as follows at the dates indicated (dollars in thousands):
Commitments to extend credit:
Loan commitments
Standby letters of credit
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.
For the six months ended June 30, 2014 and for the year ended December 31, 2013, 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.
Contractual Obligations
There have been no material changes outside the ordinary course of business in the contractual obligations set forth in the table of contractual obligations as of December 31, 2013 contained in our Registration Statement on Form S-1.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Quantitative and qualitative disclosures about market risk as of December 31, 2013 are set forth in the Company’s Registration Statement on Form S-1 filed with the SEC on May 16, 2014, and subsequently amended. There have been no material changes in the Company’s market risk since December 31, 2013. Please refer to the information in Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations, under the heading “Risk-Management-Interest Rate Risk” for additional information about the Company’s market risk.
Item 4. Controls and Procedures
Based on their evaluation as of the end of the period covered by this quarterly report on Form 10-Q, the Company’s Principal Executive Officer and Principal Financial Officer have concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) are effective for ensuring that information the Company is required to disclose in the reports that it files or submits under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. There were no changes in the Company’s internal control over financial reporting during the fiscal quarter covered by this quarterly report that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1A. Risk Factors
There have been no material changes from the risk factors previously disclosed in the Registration Statement on Form S-1 filed by Investar Holding Corporation (the “Company”) with the Securities and Exchange Commission (the “SEC”) on May 16, 2014, and subsequently amended.
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Unregistered Sales of Equity Securities
None.
Use of Proceeds
On June 30, 2014, the Company’s Registration Statement on Form S-1 (File No. 333-196014), which related to our initial public offering, was declared effective by the SEC. Pursuant to that registration statement, we registered the offer and sale of up to 3,306,250 shares of our common stock, $1.00 par value per share, at a price to the public of $14.00 per share (for an aggregate offering price of $46.3 million). The offering commenced on June 30, 2014, and we sold an aggregate of 3,285,300 shares of our common stock (which includes 410,300 shares sold pursuant to the underwriters’ purchase option). Upon completion of the sale of our common stock referred to in the preceding sentence, our initial public offering terminated. Sandler O’Neill & Partners, L.P. and Sterne, Agee & Leach, Inc. served as underwriters for the offering. The Company received net proceeds of $41.6 million from the sale of such shares (the “Net Proceeds”) after deducting approximately $3.0 million in underwriting commissions and approximately $1.4 million in offering expenses payable by the Company (none of such expenses were payable to our affiliates, officers, directors or their associates or to persons owning 10% or more of our common stock). There has been no material change in the planned use of proceeds from our initial public offering as described in the Company’s final prospectus filed with the SEC on July 1, 2014 pursuant to Rule 424(b). As described in the final prospectus, the Company used approximately $5.0 million of the Net Proceeds to repay in full amounts outstanding under the Company’s line of credit.
Issuer Purchases of Equity Securities
The following table provides the information with respect to purchases made by the Company of shares of its common stock during each of the months during the three month period ended June 30, 2014:
Period
April 1, 2014 to April 30, 2014
May 1, 2014 to May 31, 2014
June 1, 2014 to June 30, 2014
The Company’s ability to pay dividends to its shareholders may be limited on account of the junior subordinated debentures that the Company assumed in connection with its acquisition of First Community Bank, which are senior to shares of the Company’s common stock. The Company must make payments on the junior subordinated debentures before any dividends can be paid on its common stock.
In addition, as a Louisiana corporation, the Company’s status as a bank holding company also affects its ability to pay dividends, in two ways:
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Item 6. Exhibits
The Company does not have any long-term debt instruments under which securities are authorized exceeding 10% of the total assets of the Company and its subsidiaries on a consolidated basis. The Company will furnish to the Securities and Exchange Commission, upon its request, a copy of all long-term debt instruments.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
/s/ John J. D’Angelo
/s/ Rachel P. Cherco
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EXHIBIT INDEX
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