Investar Holding Corp - FORM 10-Q

Attached files

file	filename
EX-32.2 - EXHIBIT 32.2 - Investar Holding Corp	exhibit322.htm
EX-32.1 - EXHIBIT 32.1 - Investar Holding Corp	exhibit321.htm
EX-31.2 - EXHIBIT 31.2 - Investar Holding Corp	exhibit312.htm
EX-31.1 - EXHIBIT 31.1 - Investar Holding Corp	exhibit311.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington D.C. 20549

_____________________________________

FORM 10-Q

_____________________________________

(Mark One)



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

For the quarterly period ended March 31, 2017



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

For the transition period from to

Commission File Number: 001-36522

_____________________________________

Investar Holding Corporation

(Exact name of registrant as specified in its charter)



Louisiana	27-1560715
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

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 ☐

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 ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):



Large accelerated filer	☐	Accelerated filer	þ
Non-accelerated filer	☐ (Do not check if a smaller reporting company)	Smaller reporting company	☐
		Emerging growth company	þ

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. þ

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

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, 8,801,629 shares outstanding as of May 4, 2017.

TABLE OF CONTENTS



Special Note Regarding Forward-Looking Statements		3

Part I. Financial Information

Item 1.	Financial Statements (Unaudited)	4
	Consolidated Balance Sheets as of March 31, 2017 and December 31, 2016	4
	Consolidated Statements of Operations for the three months ended March 31, 2017 and 2016	5
	Consolidated Statements of Comprehensive Income for the three months ended March 31, 2017 and 2016	6
	Consolidated Statements of Changes in Stockholders’ Equity	7
	Consolidated Statements of Cash Flows for the three months ended March 31, 2017 and 2016	8
	Notes to the Consolidated Financial Statements	9
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	31
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	48
Item 4.	Controls and Procedures	48

Part II. Other Information		49

Item 1A.	Risk Factors	49
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	49
Item 6.	Exhibits	50
Signatures		52
Exhibit Index		53

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. A number of important factors could cause actual results to differ materially from those indicated by the forward-looking statements. These factors include, but are not limited to, the following, any one or more of which could materially affect the outcome of future events:


•	business and economic conditions generally and in the financial services industry in particular, whether nationally, regionally or in the markets in which we operate;


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


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


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


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


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


•	inaccuracy of the assumptions and estimates we make in establishing reserves for probable loan losses and other estimates;


•	the concentration of our business within our geographic areas of operation in Louisiana; and


•	concentration of credit exposure.

These factors should not be construed as exhaustive. Additional information on these and other risk factors can be found in Item 1A. “Risk Factors” and Item 7. “Special Note Regarding Forward-Looking Statements” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016, filed with the Securities and Exchange Commission.

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.

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

INVESTAR HOLDING CORPORATION

CONSOLIDATED BALANCE SHEETS

(Amounts in thousands, except share data)



	March 31, 2017			December 31, 2016
	(Unaudited)
ASSETS
Cash and due from banks	$	8,043		$	9,773
Interest-bearing balances due from other banks	18,600			19,569
Federal funds sold	—			106
Cash and cash equivalents	26,643			29,448

Available for sale securities at fair value (amortized cost of $176,363 and $166,258, respectively)	174,139			163,051
Held to maturity securities at amortized cost (estimated fair value of $19,422 and $19,612, respectively)	19,648			20,091
Loans, net of allowance for loan losses of $7,243 and $7,051, respectively	894,905			886,375
Other equity securities	6,320			5,362
Bank premises and equipment, net of accumulated depreciation of $7,117 and $6,751, respectively	31,434			31,722
Other real estate owned, net	4,045			4,065
Accrued interest receivable	3,243			3,218
Deferred tax asset	2,601			2,868
Goodwill and other intangible assets, net	3,224			3,234
Bank owned life insurance	7,248			7,201
Other assets	2,385			2,325
Total assets	$	1,175,835		$	1,158,960

LIABILITIES
Deposits:
Noninterest-bearing	$	112,514		$	108,404
Interest-bearing	756,040			799,383
Total deposits	868,554			907,787
Advances from Federal Home Loan Bank	82,413			82,803
Repurchase agreements	36,361			39,087
Subordinated debt, net of unamortized issuance costs	18,133			—
Junior subordinated debt	3,609			3,609
Other borrowings	78			1,000
Accrued taxes and other liabilities	18,351			11,917
Total liabilities	1,027,499			1,046,203

STOCKHOLDERS’ EQUITY
Preferred stock, no par value per share; 5,000,000 shares authorized	—			—
Common stock, $1.00 par value per share; 40,000,000 shares authorized; 8,805,810 and 7,101,851 shares issued and outstanding, respectively	8,806			7,102
Surplus	112,927			81,499
Retained earnings	27,916			26,227
Accumulated other comprehensive loss	(1,313		)	(2,071		)
Total stockholders’ equity	148,336			112,757
Total liabilities and stockholders’ equity	$	1,175,835		$	1,158,960

See accompanying notes to the consolidated financial statements.

INVESTAR HOLDING CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

(Amounts in thousands, except share data)

(Unaudited)



	Three months ended March 31,
	2017		2016
INTEREST INCOME
Interest and fees on loans	$	10,004	$	9,485
Interest on investment securities	1,029		856
Other interest income	60		37
Total interest income	11,093		10,378

INTEREST EXPENSE
Interest on deposits	1,853		1,515
Interest on borrowings	380		316
Total interest expense	2,233		1,831
Net interest income	8,860		8,547

Provision for loan losses	350		454
Net interest income after provision for loan losses	8,510		8,093

NONINTEREST INCOME
Service charges on deposit accounts	97		97
Gain on sale of investment securities, net	106		80
Gain on sale of fixed assets, net	23		—
Gain on sale of other real estate owned, net	5		1
Gain on sale of loans, net	—		313
Servicing fees and fee income on serviced loans	423		591
Other operating income	231		205
Total noninterest income	885		1,287
Income before noninterest expense	9,395		9,380

NONINTEREST EXPENSE
Depreciation and amortization	376		370
Salaries and employee benefits	3,950		3,873
Occupancy	264		236
Data processing	368		374
Marketing	28		112
Professional fees	232		279
Acquisition expense	145		—
Other operating expenses	1,321		1,140
Total noninterest expense	6,684		6,384
Income before income tax expense	2,711		2,996
Income tax expense	847		1,006
Net income	$	1,864	$	1,990

EARNINGS PER SHARE
Basic earnings per share	$	0.26	$	0.28
Diluted earnings per share	0.26		0.28
Cash dividends declared per common share	0.02		0.01

See accompanying notes to the consolidated financial statements.

INVESTAR HOLDING CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Amounts in thousands)

(Unaudited)



	Three months ended March 31,
	2017			2016
Net income	$	1,864		$	1,990
Other comprehensive income (loss):
Unrealized gain (loss) on investment securities:
Unrealized gain, available for sale, net of tax expense of $381 and $480, respectively	707			891
Reclassification of realized gain, net of tax benefit of $37 and $28, respectively	(69		)	(52		)
Unrealized loss, transfer from available for sale to held to maturity, net of tax benefit of $0 and $0, respectively	—			(1		)
Fair value of derivative financial instruments:
Change in fair value of interest rate swap designated as a cash flow hedge, net of tax expense (benefit) of $64 and ($242), respectively	120			(449		)
Total other comprehensive income	758			389
Total comprehensive income	$	2,622		$	2,379

See accompanying notes to the consolidated financial statements.

INVESTAR HOLDING CORPORATION

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(Amounts in thousands, except share data)



	Common Stock			Surplus			Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Total Stockholders’ Equity
Balance, December 31, 2015	$	7,264		$	84,099		$	18,650		$	(663	)	$	109,350
Surrendered shares	(4		)	(61		)	—			—			(65		)
Shares repurchased	(222		)	(3,251		)	—			—			(3,473		)
Options and warrants exercised	12			153			—			—			165
Dividends declared, $0.04 per share	—			—			(303		)	—			(303		)
Stock-based compensation	52			557			—			—			609
Net tax effect of stock-based compensation	—			2			—			—			2
Net income	—			—			7,880			—			7,880
Other comprehensive loss, net	—			—			—			(1,408		)	(1,408		)
Balance, December 31, 2016	$	7,102		$	81,499		$	26,227		$	(2,071	)	$	112,757
Common stock issued in offering, net of direct costs of $1,948	1,624			30,929			—			—			32,553
Surrendered shares	(4		)	(69		)	—			—			(73		)
Options and warrants exercised	35			438			—			—			473
Dividends declared, $0.02 per share	—			—			(175		)	—			(175		)
Stock-based compensation	49			130			—			—			179
Net income	—			—			1,864			—			1,864
Other comprehensive income, net	—			—			—			758			758
Balance, March 31, 2017 (Unaudited)	$	8,806		$	112,927		$	27,916		$	(1,313	)	$	148,336

See accompanying notes to the consolidated financial statements.

INVESTAR HOLDING CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in thousands)

(Unaudited)



	Three months ended March 31,
	2017			2016
Cash flows from operating activities:
Net income	$	1,864		$	1,990
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	376			370
Provision for loan losses	350			454
Amortization of purchase accounting adjustments	—			(17		)
Net amortization of securities	331			230
Gain on sale of securities, net	(106		)	(80		)
Gain on sale of fixed assets, net	(23		)	—
Gain on sale of other real estate owned, net	(5		)	(1		)
FHLB stock dividend	(18		)	(11		)
Stock-based compensation	179			141
Deferred taxes	(141		)	(228		)
Net change in value of bank owned life insurance	(47		)	(42		)
Loans held for sale:
Originations	—			(495		)
Proceeds from sales	—			23,837
Gain on sale of loans	—			(313		)
Net change in:
Accrued interest receivable	(25		)	(148		)
Other assets	125			927
Accrued taxes and other liabilities	6,272			807
Net cash provided by operating activities	9,132			27,421

Cash flows from investing activities:
Proceeds from sales of investment securities available for sale	10,325			3,440
Funds invested in securities available for sale	(26,577		)	(19,594		)
Proceeds from maturities, prepayments and calls of investment securities available for sale	5,944			2,111
Proceeds from maturities, prepayments and calls of investment securities held to maturity	421			143
Purchase of other equity securities	(940		)	(1,338		)
Net increase in loans	(8,881		)	(45,779		)
Proceeds from sales of other real estate owned	25			62
Proceeds from the sales of fixed assets	291			—
Purchases of fixed assets	(346		)	(489		)
Acquisition of trademark intangible	—			(100		)
Purchase of bank owned life insurance	—			(3,500		)
Net cash used in investing activities	(19,738		)	(65,044		)

Cash flows from financing activities:
Net (decrease) increase in customer deposits	(39,233		)	71,317
Net decrease in repurchase agreements	(2,726		)	(9,422		)
Net decrease in short-term FHLB advances	(5,000		)	(21,903		)
Proceeds from long-term FHLB advances	5,000			—
Repayment of long-term FHLB advances	(390		)	(1,633		)
Proceeds from other borrowings	78			—
Repayment of other borrowings	(1,000		)	—
Proceeds from subordinated debt, net of issuance costs	18,133			—
Cash dividends paid on common stock	(87		)	(63		)
Proceeds from public offering of common stock, net of issuance costs	32,553			—
Proceeds from stock options and warrants exercised	473			—
Payments to repurchase common stock	—			(315		)
Net cash provided by financing activities	7,801			37,981

Net (decrease) increase in cash and cash equivalents	(2,805		)	358
Cash and cash equivalents, beginning of period	29,448			20,966
Cash and cash equivalents, end of period	$	26,643		$	21,324

See accompanying notes to the consolidated financial statements.

INVESTAR HOLDING CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The accompanying unaudited consolidated financial statements of Investar Holding Corporation (the “Company”) have been prepared in accordance with United States generally accepted accounting principles (“GAAP”) for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include information or footnotes necessary for a complete presentation of financial position, results of operations, and cash flows in conformity with GAAP. However, in the opinion of management, all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation of the financial statements have been included. The results of operations for the three month period ended March 31, 2017 are not necessarily indicative of the results that may be expected for the entire fiscal year. These statements should be read in conjunction with the Company’s audited consolidated financial statements for the year ended December 31, 2016, including the notes thereto, which were included as part of the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 9, 2017.

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 10 full service banking offices located throughout its market and had 152 employees at March 31, 2017.

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 U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements as well as the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates, and such differences could be material.

Material estimates that are particularly susceptible to significant change relate to the determination of the allowance for loan losses. While management uses available information to recognize losses on loans, future additions to the allowance may be necessary based on changes in local economic conditions. In addition, regulatory agencies, as an integral part of their examination process, periodically review the Company’s allowance for loan losses. Such agencies may require the Company to recognize additions to the allowance based on their judgments about information available to them at the time of their examination. Because of these factors, it is reasonably possible that the allowance for loan losses may change materially in the near term. However, the amount of the change that is reasonably possible cannot be estimated.

Other estimates that are susceptible to significant change in the near term relate to the determination of other-than-temporary impairments of securities and the fair value of financial instruments.

Reclassifications

Certain reclassifications have been made to the 2016 financial statements to be consistent with the 2017 presentation.

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 have 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.

INVESTAR HOLDING CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Recent Accounting Pronouncements

FASB ASC Subtopic 310-20 “Receivables – Nonrefundable Fees and Other Costs, Premium Amortization on Purchased Callable Debt Securities” Update No. 2017-08. The Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2017-08 in March 2017. The amendments in the ASU shorten the amortization period for certain callable debt securities held at a premium. Specifically, the amendments require the premium to be amortized to the earliest call date. The amendments do not require an accounting change for securities held at a discount; the discount continues to be amortized to maturity. Update 2017-08 will be effective for the Company beginning January 1, 2019. Early adoption is permitted, including adoption in an interim period. If an entity early adopts in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. The amendments should be applied on a modified retrospective basis, with a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. The Company is assessing the impact of ASU 2017-08 on its accounting and disclosures.

FASB ASC Topic 350 “Intangibles – Goodwill and Other: Simplifying the Test for Goodwill Impairment” Update No. 2017-04. The FASB issued ASU No. 2017-04 in January 2017. The ASU simplifies how an entity is required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment test. Therefore, any carrying amount which exceeds the reporting unit’s fair value, up to the amount of goodwill recorded, will be recognized as an impairment loss. ASU 2017-04 will be effective for the Company on January 1, 2020. The amendments will be applied prospectively on or after the effective date. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. Based on recent goodwill impairments tests, which did not require the application of Step 2, the Company does not expect the adoption of this ASU to have an immediate impact.

FASB ASC Topic 805 “Business Combinations: Clarifying the Definition of a Business” Update No. 2017-01. The FASB issued ASU No. 2017-01 in January 2017. The amendments in the ASU are intended to clarify the definition and the current interpretation of a business to assist companies and other reporting organizations with evaluating whether transactions should be accounted for as acquisitions or disposals of assets or businesses. The ASU will be effective for the Company beginning January 1, 2018. The amendments will be applied prospectively on or after the effective date. Early application of the amendments in this ASU is allowed for transactions, including when a subsidiary or group of assets is deconsolidated/derecognized, in which the acquisition date occurs before the issuance date or effective date of the amendments, only when the transaction has not been reported in financial statements that have been issued or made available for issuance. The adoption of this standard is not expected to have a material impact on the Company’s financial statements.

FASB ASC Topic 230 “Statement of Cash Flows – Classification of Certain Cash Receipts and Cash Payments” Update No. 2016-15. The FASB issued ASU No. 2016-15 in August 2016. The amendments in the ASU address eight specific cash flow issues with the objective of reducing the existing diversity in practice, as the issues are either unclear or do not have specific guidance under current GAAP. ASU 2016-15 will be effective on January 1, 2018. The adoption of this standard is not expected to have a material impact on the Company’s consolidated financial statements.

FASB ASC Topic 326 “Financial Instruments – Credit Losses: Measurement of Credit Losses on Financial Instruments” Update No. 2016-13. The FASB issued ASU No. 2016-13 in June 2016. The amendments introduce an impairment model that is based on expected credit losses, rather than incurred losses, to estimate credit losses on certain types of financial instruments (e.g., loans and held-to-maturity securities), including certain off-balance sheet financial instruments (e.g., loan commitments). The expected credit losses should consider historical information, current information, and reasonable and supportable forecasts, including estimates of prepayments, over the contractual term. Financial instruments with similar risk characteristics may be grouped together when estimating expected credit losses. The ASU also amends the current AFS security impairment model for debt securities. The new model will require an estimate of expected credit losses when the fair value is below the amortized cost of the asset through the use of an allowance to record estimated credit losses (and subsequent recoveries). Non-credit related losses will continue to be recognized through other comprehensive income. In addition, the amendments provide for a simplified accounting model for purchased financial assets with a more-than-insignificant amount of credit deterioration since their origination. The initial estimate of expected credit losses would be recognized through an allowance for loan losses with an offset (i.e., increase) to the cost basis of the related financial asset at acquisition.

INVESTAR HOLDING CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

ASU 2016-13 will be effective for the Company beginning January 1, 2020. The amendments will be applied through a modified-retrospective approach, resulting in a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective. A prospective transition approach is required for debt securities for which other-than-temporary impairment had been recognized before the effective date. Amounts previously recognized in accumulated other comprehensive income as of the date of adoption that relate to improvements in cash flows expected to be collected should continue to be accreted into income over the remaining life of the asset. Recoveries of amounts previously written off relating to improvements in cash flows after the date of adoption should be recorded in earnings when received. Management is currently evaluating the potential impact of ASU 2016-13 on the Company’s consolidated financial statements.

FASB ASC Topic 825 “Financial Instruments – Overall” Update No. 2016-1. The FASB issued ASU No. 2016-1 in January 2016 to address certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. The ASU will not change the guidance for classifying and measuring investments in debt securities or loans; however, it will impact how entities measure certain equity investments, recognize changes in the fair value of financial liabilities measured under the fair value option that are attributable to instrument-specific credit risk, and disclose and present financial assets and liabilities in financial statements. The main provisions require investments in equity securities to be measured at fair value through net income, unless they qualify for a new practicability exception, the equity method of accounting, or consolidation, and require fair value changes arising from changes in instrument-specific credit risk for financial liabilities that are measured under the fair value option to be recognized in other comprehensive income. The amendments will also require entities to present financial assets and financial liabilities separately, grouped by measurement category and form of financial asset in the statement of financial position or in the accompanying notes to the financial statements. Entities will also no longer have to disclose the methods and significant assumptions for financial instruments measured at amortized cost, but will be required to measure such instruments under the “exit price” notion for disclosure purposes.

The amendments in this ASU are effective for the Company beginning January 1, 2018. The Company will record a cumulative-effect adjustment to beginning retained earnings as of the beginning of the first reporting period in which the guidance is adopted, with two exceptions. The amendments related to equity investments without readily determinable fair values will be effective prospectively. The requirement to use the exit price notion to measure fair value of financial instruments for disclosure purposes will also be applied prospectively.

The Company does not expect a significant cumulative-effect adjustment to be recorded at adoption or any significant impact to the consolidated financial statements associated with the accounting for its current equity investments. The Company does anticipate financial statement disclosures to be impacted, specifically related to financial instruments measured at amortized cost whose fair values are disclosed under the “entry price” notion, but is currently still in the process of determining the impact.

FASB ASC Topic 606 “Revenue from Contracts with Customers” Update No. 2014-9. The FASB issued ASU No. 2014-9 in May 2014 which implements a common revenue standard and clarifies the principles used for recognizing revenue. The amendments in the ASU clarify 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. As part of that principle, the entity should identify the contract(s) with the customer, identify the performance obligation(s) of the contract, determine the transaction price, allocate that transaction price to the performance obligation(s), and then recognize revenue when or as the entity satisfies the performance obligation(s). The amendments also provide additional guidance/principles associated with gross vs. net presentation (i.e., principal versus agency considerations).

The amendments in ASU No. 2014-9 will be effective for the Company beginning January 1, 2018. Earlier application is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that annual reporting period. The amendments will be applied through the election of one of two retrospective methods.

The Company intends to adopt the amendments beginning January 1, 2018 and does not expect to recognize a significant cumulative adjustment to equity upon implementation of the standard. Further, the Company does not expect a significant impact to the Company’s consolidated statements of comprehensive income or consolidated balance sheets from either a presentation or timing perspective, but is still analyzing some contracts.

INVESTAR HOLDING CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 2. EARNINGS PER SHARE

The following is a summary of the information used in the computation of basic and diluted earnings per common share for the three months ended March 31, 2017 and 2016 (in thousands, except share data).



	Three months ended March 31,
	2017		2016
Net income available to common shareholders	$	1,864	$	1,990
Weighted average number of common shares outstanding used in computation of basic earnings per common share	7,205,942		7,194,558
Effect of dilutive securities:
Restricted stock	20,604		15,353
Stock options	26,838		14,854
Stock warrants	23,485		11,267
Weighted average number of common shares outstanding plus effect of dilutive securities used in computation of diluted earnings per common share	7,276,869		7,236,032
Basic earnings per share	$	0.26	$	0.28
Diluted earnings per share	$	0.26	$	0.28

NOTE 3. INVESTMENT SECURITIES

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



	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
March 31, 2017	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Obligations of other U.S. government agencies and corporations	$	40,555	$	65	$	(320	)	$	40,300
Obligations of state and political subdivisions	28,715		36		(1,063		)	27,688
Corporate bonds	15,271		51		(348		)	14,974
Residential mortgage-backed securities	88,604		167		(744		)	88,027
Commercial mortgage-backed securities	2,507		—		(62		)	2,445
Equity securities	711		48		(54		)	705
Total	$	176,363	$	367	$	(2,591	)	$	174,139



	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
December 31, 2016	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Obligations of other U.S. government agencies and corporations	$	29,809	$	68	$	(387	)	$	29,490
Obligations of state and political subdivisions	29,631		15		(1,791		)	27,855
Corporate bonds	15,292		54		(378		)	14,968
Residential mortgage-backed securities	88,295		193		(900		)	87,588
Commercial mortgage-backed securities	2,520		—		(76		)	2,444
Equity securities	711		46		(51		)	706
Total	$	166,258	$	376	$	(3,583	)	$	163,051

INVESTAR HOLDING CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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



	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
March 31, 2017	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Obligations of state and political subdivisions	$	12,870	$	7	$	(172	)	$	12,705
Residential mortgage-backed securities	6,778		5		(66		)	6,717
Total	$	19,648	$	12	$	(238	)	$	19,422



	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
December 31, 2016	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Obligations of state and political subdivisions	$	12,976	$	2	$	(429	)	$	12,549
Residential mortgage-backed securities	7,115		8		(60		)	7,063
Total	$	20,091	$	10	$	(489	)	$	19,612

Securities are classified in the consolidated balance sheets according to management’s intent. The Company had no securities classified as trading as of March 31, 2017 or December 31, 2016.

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.

The following table presents, by type and number of securities, the age of gross unrealized losses and approximate fair value by investment category for securities available for sale as of the dates presented (dollars in thousands).



		Less than 12 Months					12 Months or More					Total
	Count	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
March 31, 2017	Count	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
Obligations of other U.S. government agencies and corporations	47	$	25,563	$	(316	)	$	440	$	(4	)	$	26,003	$	(320	)
Obligations of state and political subdivisions	22	23,027		(1,063		)	—		—			23,027		(1,063		)
Corporate bonds	25	2,745		(103		)	7,180		(245		)	9,925		(348		)
Residential mortgage-backed securities	104	56,232		(732		)	1,988		(12		)	58,220		(744		)
Commercial mortgage-backed securities	4	2,445		(62		)	—		—			2,445		(62		)
Equity securities	3	5		(1		)	486		(53		)	491		(54		)
Total	205	$	110,017	$	(2,277	)	$	10,094	$	(314	)	$	120,111	$	(2,591	)



		Less than 12 Months					12 Months or More					Total
	Count	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
December 31, 2016	Count	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
Obligations of other U.S. government agencies and corporations	45	$	22,819	$	(382	)	$	448	$	(5	)	$	23,267	$	(387	)
Obligations of state and political subdivisions	33	25,764		(1,791		)	—		—			25,764		(1,791		)
Corporate bonds	27	3,724		(132		)	6,929		(246		)	10,653		(378		)
Residential mortgage-backed securities	110	60,433		(883		)	1,778		(17		)	62,211		(900		)
Commercial mortgage-backed securities	4	2,444		(76		)	—		—			2,444		(76		)
Equity securities	3	50		(4		)	492		(47		)	542		(51		)
Total	222	$	115,234	$	(3,268	)	$	9,647	$	(315	)	$	124,881	$	(3,583	)

INVESTAR HOLDING CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The following table presents, by type and number of securities, the age of gross unrealized losses and approximate fair value by investment category for securities held to maturity as of the dates presented (dollars in thousands).



		Less than 12 Months					12 Months or More				Total
	Count	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
March 31, 2017	Count	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
Obligations of state and political subdivisions	3	$	8,048	$	(172	)	$	—	$	—	$	8,048	$	(172	)
Residential mortgage-backed securities	6	4,494		(66		)	—		—		4,494		(66		)
Total	9	$	12,542	$	(238	)	$	—	$	—	$	12,542	$	(238	)



		Less than 12 Months					12 Months or More				Total
	Count	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
December 31, 2016	Count	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
Obligations of state and political subdivisions	5	$	9,597	$	(429	)	$	—	$	—	$	9,597	$	(429	)
Residential mortgage-backed securities	6	4,677		(60		)	—		—		4,677		(60		)
Total	11	$	14,274	$	(489	)	$	—	$	—	$	14,274	$	(489	)

The unrealized losses in the Company’s investment portfolio, caused by interest rate increases, are not credit issues and the Company does not intend to sell the securities. Furthermore, it is not more likely than not that the Company will be required to sell the securities before recovery of their amortized cost bases. The Company does not consider these securities to be other-than-temporarily impaired at March 31, 2017 or December 31, 2016.

The weighted average tax equivalent yield, amortized cost and approximate fair value of debt securities, by contractual maturity (including mortgage-backed securities), are shown below as of the dates presented. Actual maturities may 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).



	Securities Available for Sale						Securities Held to Maturity
	Weighted Average T.E. Yield		Amortized Cost		Fair Value		Weighted Average T.E. Yield		Amortized Cost		Fair Value
March 31, 2017	Weighted Average T.E. Yield		Amortized Cost		Fair Value		Weighted Average T.E. Yield		Amortized Cost		Fair Value
Due within one year	2.05	%	$	900	$	898	7.17	%	$	685	$	686
Due after one year through five years	2.33		11,641		11,654		7.17		3,095		3,100
Due after five years through ten years	2.93		26,963		26,611		7.17		2,745		2,730
Due after ten years	2.53		136,148		134,271		3.54		13,123		12,906
Total debt securities			$	175,652	$	173,434			$	19,648	$	19,422



	Securities Available for Sale						Securities Held to Maturity
	Weighted Average T.E. Yield		Amortized Cost		Fair Value		Weighted Average T.E. Yield		Amortized Cost		Fair Value
December 31, 2016	Weighted Average T.E. Yield		Amortized Cost		Fair Value		Weighted Average T.E. Yield		Amortized Cost		Fair Value
Due within one year	1.61	%	$	1,753	$	1,750	7.17	%	$	685	$	686
Due after one year through five years	2.27		10,509		10,476		7.17		3,095		3,089
Due after five years through ten years	2.77		27,173		26,771		7.17		2,745		2,637
Due after ten years	2.51		126,112		123,348		3.17		13,566		13,200
Total debt securities			$	165,547	$	162,345			$	20,091	$	19,612

INVESTAR HOLDING CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 4. LOANS

The Company’s loan portfolio consists of the following categories of loans as of the dates presented (dollars in thousands).



	March 31, 2017		December 31, 2016
Construction and development	$	95,541	$	90,737
1-4 Family	172,148		177,205
Multifamily	47,776		42,759
Farmland	7,994		8,207
Commercial real estate	392,464		380,716
Total mortgage loans on real estate	715,923		699,624
Commercial and industrial	90,352		85,377
Consumer	95,873		108,425
Total loans	$	902,148	$	893,426

The table below provides an analysis of the aging of loans as of the dates presented (dollars in thousands).



	March 31, 2017
	Past Due and Accruing
	30-59 days		60-89 days		90 or more days		Nonaccrual		Total Past Due & Nonaccrual		Current		Total Loans
Construction and development	$	—	$	—	$	—	$	478	$	478	$	95,063	$	95,541
1-4 Family	—		—		—		46		46		172,102		172,148
Multifamily	—		—		—		—		—		47,776		47,776
Farmland	—		—		—		—		—		7,994		7,994
Commercial real estate	—		—		—		—		—		392,464		392,464
Total mortgage loans on real estate	—		—		—		524		524		715,399		715,923
Commercial and industrial	24		5		—		438		467		89,885		90,352
Consumer	122		74		8		1,173		1,377		94,496		95,873
Total loans	$	146	$	79	$	8	$	2,135	$	2,368	$	899,780	$	902,148



	December 31, 2016
	Past Due and Accruing
	30-59 days		60-89 days		90 or more days		Nonaccrual		Total Past Due & Nonaccrual		Current		Total Loans
Construction and development	$	48	$	—	$	—	$	480	$	528	$	90,209	$	90,737
1-4 Family	427		—		—		47		474		176,731		177,205
Multifamily	—		—		—		—		—		42,759		42,759
Farmland	—		—		—		—		—		8,207		8,207
Commercial real estate	—		—		—		—		—		380,716		380,716
Total mortgage loans on real estate	475		—		—		527		1,002		698,622		699,624
Commercial and industrial	30		—		—		443		473		84,904		85,377
Consumer	378		149		1		1,008		1,536		106,889		108,425
Total loans	$	883	$	149	$	1	$	1,978	$	3,011	$	890,415	$	893,426

INVESTAR HOLDING CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Credit Quality Indicators

Loans are categorized into risk categories based on relevant information about the ability of borrowers to service their debt, such as current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The following definitions are utilized for risk ratings, which are consistent with the definitions used in supervisory guidance:

Pass - Loans not meeting the criteria below are considered pass. These loans have high credit characteristics and financial strength. The borrowers at least generate profits and cash flow that are in line with peer and industry standards and have debt service coverage ratios above loan covenants and our policy guidelines. For some of these loans, a guaranty from a financially capable party mitigates characteristics of the borrower that might otherwise result in a lower grade.

Special Mention - Loans classified as special mention possess some credit deficiencies that need to be corrected to avoid a greater risk of default in the future. For example, financial ratios relating to the borrower may have deteriorated. Often, a special mention categorization is temporary while certain factors are analyzed or matters addressed before the loan is re-categorized as either pass or substandard.

Substandard - Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the borrower or the liquidation value of any collateral. If deficiencies are not addressed, it is likely that this category of loan will result in the Bank incurring a loss. Where a borrower has been unable to adjust to industry or general economic conditions, the borrower’s loan is often categorized as substandard.

Doubtful - Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.

Loss - Loans classified as loss are considered uncollectible and of such little value that their continuance as recorded assets is not warranted. This classification does not mean that the assets have absolutely no recovery or salvage value, but rather it is not practical or desirable to defer writing off these assets.

The table below presents the Company’s loan portfolio by category and credit quality indicator as of the dates presented (dollars in thousands).



	March 31, 2017
	Pass		Special Mention		Substandard		Total
Construction and development	$	95,044	$	—	$	497	$	95,541
1-4 Family	172,056		—		92		172,148
Multifamily	46,919		—		857		47,776
Farmland	7,994		—		—		7,994
Commercial real estate	391,892		—		572		392,464
Total mortgage loans on real estate	713,905		—		2,018		715,923
Commercial and industrial	87,349		—		3,003		90,352
Consumer	94,278		422		1,173		95,873
Total loans	$	895,532	$	422	$	6,194	$	902,148

INVESTAR HOLDING CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



	December 31, 2016
	Pass		Special Mention		Substandard		Total
Construction and development	$	90,238	$	—	$	499	$	90,737
1-4 Family	177,091		20		94		177,205
Multifamily	42,759		—		—		42,759
Farmland	8,207		—		—		8,207
Commercial real estate	380,716		—		—		380,716
Total mortgage loans on real estate	699,011		20		593		699,624
Commercial and industrial	83,215		59		2,103		85,377
Consumer	106,916		501		1,008		108,425
Total loans	$	889,142	$	580	$	3,704	$	893,426

The Company had no loans that were classified as doubtful or loss as of March 31, 2017 or December 31, 2016.

Loan participations and whole loans sold to and serviced for others are not included in the accompanying consolidated balance sheets. The balances of the participations and whole loans sold were $248.6 million and $274.9 million as of March 31, 2017 and December 31, 2016, respectively. The unpaid principal balances of these loans were approximately $295.8 million and $319.6 million as of March 31, 2017 and December 31, 2016, respectively.

In the ordinary course of business, the Company makes loans to its executive officers, principal stockholders, directors and to companies in which these individuals are principal owners. Loans outstanding to such related party borrowers (including companies in which they are principal owners) amounted to approximately $20.7 million and $20.0 million as of March 31, 2017 and December 31, 2016, 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.

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



	March 31, 2017			December 31, 2016
Balance, beginning of period	$	19,957		$	17,992
New loans	2,462			5,058
Repayments and changes in relationship	(1,731		)	(3,093		)
Balance, end of period	$	20,688		$	19,957

INVESTAR HOLDING CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Loans Acquired with Deteriorated Credit Quality

The Company elected to account for certain loans acquired as acquired impaired loans under 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 changes in the carrying value, net of allowance for loan losses, of acquired impaired loans, or loans accounted for under ASC 310-30, for the periods presented (dollars in thousands).



	Acquired Impaired
	Acquired Impaired
Carrying value, net at December 31, 2015	$	2,690
Accretion to interest income	121
Net transfers from (to) nonaccretable difference to (from) accretable yield	1
Payments received, net	(551		)
Charge-offs	(85		)
Carrying value, net at December 31, 2016	$	2,176
Accretion to interest income	25
Payments received, net	(8		)
Carrying value, net at March 31, 2017	$	2,193

The table below shows the changes in the accretable yield on acquired impaired loans for the periods presented (dollars in thousands).



	Acquired Impaired
	Acquired Impaired
Balance, period ended December 31, 2015	$	395
Net transfers from (to) nonaccretable difference to (from) accretable yield	1
Accretion to interest income	(121		)
Balance, period ended December 31, 2016	$	275
Accretion to interest income	(25		)
Balance, period ended March 31, 2017	$	250

NOTE 5. ALLOWANCE FOR LOAN LOSSES

The table below shows a summary of the activity in the allowance for loan losses for the three months ended March 31, 2017 and 2016 (dollars in thousands).



	Three months ended March 31,
	2017			2016
Balance, beginning of period	$	7,051		$	6,128
Provision for loan losses	350			454
Loans charged off	(166		)	(156		)
Recoveries	8			37
Balance, end of period	$	7,243		$	6,463

INVESTAR HOLDING CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The following tables outline the activity in the allowance for loan losses by collateral type for the three months ended March 31, 2017 and 2016, and show both the allowances and portfolio balances for loans individually and collectively evaluated for impairment as of March 31, 2017 and 2016 (dollars in thousands).



	Three months ended March 31, 2017
	Construction & Development		Farmland			1-4 Family			Multifamily		Commercial Real Estate		Commercial & Industrial			Consumer			Total
Allowance for loan losses:
Beginning balance	$	579	$	60		$	1,377		$	355	$	2,499	$	759		$	1,422		7,051
Provision	112		(6		)	(141		)	19		409		(15		)	(28		)	350
Charge-offs	—		—			—			—		—		—			(166		)	(166		)
Recoveries	3		—			1			—		—		—			4			8
Ending balance	$	694	$	54		$	1,237		$	374	$	2,908	$	744		$	1,232		$	7,243
Ending allowance balance for loans individually evaluated for impairment	—		—			—			—		—		130			329			459
Ending allowance balance for loans collectively evaluated for impairment	$	694	$	54		$	1,237		$	374	$	2,908	$	614		$	903		$	6,784
Ending allowance balance for loans acquired with deteriorated credit quality	$	—	$	—		$	—		$	—	$	—	$	—		$	—		$	—
Loans receivable:
Balance of loans individually evaluated for impairment	$	640	$	—		$	1,662		$	—	$	606	$	438		$	1,173		$	4,519
Balance of loans collectively evaluated for impairment	94,901		7,994			170,486			47,776		391,858		89,914			94,700			897,629
Total period-end balance	$	95,541	$	7,994		$	172,148		$	47,776	$	392,464	$	90,352		$	95,873		$	902,148
Balance of loans acquired with deteriorated credit quality	$	658	$	—		$	489		$	1,046	$	—	$	—		$	—		$	2,193



	Three months ended March 31, 2016
	Construction & Development			Farmland		1-4 Family			Multifamily		Commercial Real Estate		Commercial & Industrial		Consumer			Total
Allowance for loan losses:
Beginning balance	$	644		$	22	$	1,213		$	246	$	2,156	$	513	$	1,334		$	6,128
Provision	89			24		44			33		135		17		112			454
Charge-offs	(7		)	—		(7		)	—		—		—		(142		)	(156		)
Recoveries	3			—		7			—		1		20		6			37
Ending balance	$	729		$	46	$	1,257		$	279	$	2,292	$	550	$	1,310		$	6,463
Ending allowance balance for loans individually evaluated for impairment	—			—		—			—		—		—		233			233
Ending allowance balance for loans collectively evaluated for impairment	$	729		$	46	$	1,257		$	279	$	2,292	$	550	$	1,077		$	6,230
Ending allowance balance for loans acquired with deteriorated credit quality	$	—		$	—	$	—		$	—	$	—	$	—	$	—		$	—
Loans receivable:
Balance of loans individually evaluated for impairment	$	1,215		$	—	$	1,824		$	—	$	625	$	18	$	795		$	4,477
Balance of loans collectively evaluated for impairment	94,138			6,366		160,488			33,609		315,134		74,972		108,438			793,145
Total period-end balance	$	95,353		$	6,366	$	162,312		$	33,609	$	315,759	$	74,990	$	109,233		$	797,622
Balance of loans acquired with deteriorated credit quality	$	685		$	—	$	809		$	1,052	$	—	$	—	$	37		$	2,583

INVESTAR HOLDING CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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. Generally, those loans rated special mention or lower are evaluated for impairment each quarter. 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 for loan losses.

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.

As of March 31, 2017 and December 31, 2016, the Company was not committed to lend additional funds to any customer whose loan was classified as impaired.

The following tables include the recorded investment and unpaid principal balances for impaired loans with the associated allowance amount, if applicable, as of the dates indicated. 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 estimated selling cost, was used to determine the specific allowance recorded (dollars in thousands).



	March 31, 2017
	Recorded Investment		Unpaid Principal Balance		Related Allowance
With no related allowance recorded:
Construction and development	$	640	$	657	$	—
1-4 Family	1,662		1,691		—
Commercial real estate	606		621		—
Total mortgage loans on real estate	2,908		2,969		—
Commercial and industrial	34		34		—
Consumer	160		176		—
Total	3,102		3,179		—

With related allowance recorded:
Commercial and industrial	404		406		130
Consumer	1,013		1,036		329
Total	1,417		1,442		459

Total loans:
Construction and development	640		657		—
1-4 Family	1,662		1,691		—
Commercial real estate	606		621		—
Total mortgage loans on real estate	2,908		2,969		—
Commercial and industrial	438		440		130
Consumer	1,173		1,212		329
Total	$	4,519	$	4,621	$	459

INVESTAR HOLDING CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



	December 31, 2016
	Recorded Investment		Unpaid Principal Balance		Related Allowance
With no related allowance recorded:
Construction and development	$	645	$	661	$	—
1-4 Family	1,673		1,701		—
Commercial real estate	608		623		—
Total mortgage loans on real estate	2,926		2,985		—
Commercial and industrial	15		16
Consumer	153		166		—
Total	3,094		3,167		—

With related allowance recorded:
Commercial and industrial	428		430		136
Consumer	855		873		287
Total	1,283		1,303		423

Total loans:
Construction and development	645		661		—
1-4 Family	1,673		1,701		—
Commercial real estate	608		623		—
Total mortgage loans on real estate	2,926		2,985		—
Commercial and industrial	443		446		136
Consumer	1,008		1,039		287
Total	$	4,377	$	4,470	$	423

INVESTAR HOLDING CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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



	Three months ended March 31,
	2017				2016
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded:
Construction and development	$	641	$	5	$	1,226	$	10
1-4 Family	1,666		17		1,702		17
Commercial real estate	607		2		626		1
Total mortgage loans on real estate	2,914		24		3,554		28
Commercial and industrial	37		—		13		—
Consumer	226		1		204		2
Total	3,177		25		3,771		30

With related allowance recorded:
Commercial and industrial	404		—		—		—
Consumer	925		1		574		3
Total	1,329		1		574		3

Total loans:
Construction and development	641		5		1,226		10
1-4 Family	1,666		17		1,702		17
Commercial real estate	607		2		626		1
Total mortgage loans on real estate	2,914		24		3,554		28
Commercial and industrial	441		—		13		—
Consumer	1,151		2		778		5
Total	$	4,506	$	26	$	4,345	$	33

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 their loans to more affordable terms before such loans reach 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 in which 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 eighteen credits, totaled approximately $2.4 million at both March 31, 2017 and December 31, 2016. Eight of the restructured loans were considered TDRs due to modification of terms through adjustments to maturity, nine of the restructured loans were considered TDRs due to a reduction in the interest rate to a rate lower than the current market rate, and one restructured loan was considered a TDR due to modification of terms through principal payment forbearance, paying interest only for a specified period of time. As of March 31, 2017 and December 31, 2016, all restructured loans were performing under their modified terms. The Company individually evaluates each TDR for allowance purposes, primarily based on collateral value, and excludes these loans from the loan population that is evaluated by applying qualitative factors.

As of March 31, 2017 and December 31, 2016, the Company was not committed to lend additional funds to any customer whose loan was classified as a TDR.

INVESTAR HOLDING CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The table below presents the TDR pre- and post-modification outstanding recorded investments by loan categories for loans modified during the three month periods ended March 31, 2017 and 2016 (dollars in thousands).



	March 31, 2017					March 31, 2016
	Number of Contracts	Pre- Modification Outstanding Recorded Investment		Post- Modification Outstanding Recorded Investment		Number of Contracts	Pre- Modification Outstanding Recorded Investment		Post- Modification Outstanding Recorded Investment
Troubled Debt Restructurings	Number of Contracts	Pre- Modification Outstanding Recorded Investment		Post- Modification Outstanding Recorded Investment		Number of Contracts	Pre- Modification Outstanding Recorded Investment		Post- Modification Outstanding Recorded Investment
1-4 Family	—	$	—	$	—	9	$	457	$	457
Total		$	—	$	—		$	457	$	457

There were no loans modified under troubled debt restructurings during the previous twelve month period that subsequently defaulted during the three months ended March 31, 2017 and 2016.

NOTE 6. SUBORDINATED DEBT SECURITIES

On March 24, 2017, the Company issued and sold $18.6 million in aggregate principal amount of its 6.00% Fixed-to-Floating Rate Subordinated Notes due March 30, 2027. Beginning on March 30, 2022, the Company may redeem the Notes, in whole or in part, at their principal amount plus any accrued and unpaid interest. The Notes bear an interest rate of 6.00% per annum until March 30, 2022, on which date the interest rate will reset quarterly to an annual interest rate equal to the then-current LIBOR plus 394.5 basis points.

The carrying value of subordinated debt was $18.1 million at March 31, 2017. The subordinated debt securities were recorded net of issuance costs of $0.5 million. The issuance costs are being amortized using the straight-line method over the life of the Notes.

NOTE 7. STOCKHOLDERS’ EQUITY

On March 22, 2017, the Company completed a common stock offering of approximately 1.6 million shares of its common stock at a price of $21.25 per share. The common stock offering generated net proceeds of $32.6 million. Total stockholders' equity was $148.3 million at March 31, 2017, compared to $112.8 million at December 31, 2016.

NOTE 8. STOCK-BASED COMPENSATION

Equity Incentive Plan. The Company’s 2014 Long-Term Incentive Compensation Plan (the “Plan”) authorizes the grant of various types of equity grants and awards, such as restricted stock, stock options and stock appreciation rights to eligible participants, which include all of the Company’s employees and non-employee directors. The Plan has reserved 600,000 shares of common stock for grant, award or issuance to directors and employees, including shares underlying granted options. The Plan is administered by the Compensation Committee of the Company’s Board of Directors, which determines, within the provisions of the Plan, those eligible employees to whom, and the times at which, grants and awards will be made. The Compensation Committee, in its discretion, may delegate its authority and duties under the Plan to specified officers; however, only the Compensation Committee may approve the terms of grants and awards to the Company’s executive officers.

Stock Options

The Company uses a Black-Scholes option pricing model to estimate the fair value of share-based awards. The Black-Scholes option pricing model incorporates various and highly subjective assumptions, including expected term and expected volatility. Stock option expense in the accompanying consolidated statement of operations for the three months ended March 31, 2017 and 2016 were $51,000 and $43,000, respectively.

INVESTAR HOLDING CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The assumptions presented below were used for the options granted during the three months ended March 31, 2017.




Expected dividends	0.22		%
Expected volatility	20.46		%
Risk-free interest rate	2.19		%
Expected term (in years)	7.0
Weighted-average grant date fair value	$	5.39

At March 31, 2017, there was $0.8 million of unrecognized compensation cost related to stock options that is expected to be recognized over a weighted-average period of 3.5 years.

The table below summarizes stock option activity for the periods presented.



	Three months ended March 31,
	2017				2016
	Number of Options		Weighted Average Exercise Price		Number of Options	Weighted Average Exercise Price
Outstanding at beginning of period	319,364		$	14.37	278,352	$	14.37
Granted	36,177		20.25		46,512	14.28
Forfeited	(5,334	)	14.00		—	—
Exercised	(15,041	)	13.45		—	—
Outstanding at end of period	335,166		$	15.05	324,864	$	14.36
Exercisable at end of period	82,310		$	14.30	47,351	$	13.82

At March 31, 2017, the shares underlying outstanding stock options and exercisable stock options had aggregate intrinsic values of $2.3 million and $0.6 million, respectively.

Time Vested Restricted Stock Awards

During the three months ended March 31, 2017 and 2016, the Company issued shares of time vested restricted stock with vesting terms ranging from two to five years. The total share-based compensation expense to be recognized for these awards is determined based on the market price of the Company’s common stock at the grant date applied to the total number of shares awarded and is amortized over the vesting period.

The table below summarizes the time vested restricted stock award activity for the periods presented.



	Three months ended March 31,
	2017				2016
	Shares		Weighted Average Grant Date Fair Value		Shares		Weighted Average Grant Date Fair Value
Balance at beginning of period	93,366		$	14.75	60,592		$	14.85
Granted	51,702		20.10		54,175		14.66
Forfeited	(3,035	)	14.72		(1,157	)	16.32
Earned and issued	(13,168	)	14.93		(1,159	)	15.33
Balance at end of period	128,865		$	16.88	112,451		$	14.74

At March 31, 2017, there was $2.0 million of unrecognized compensation cost related to time vested restricted stock awards that is expected to be recognized over a weighted average period of 3.7 years.

INVESTAR HOLDING CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 9. DERIVATIVE FINANCIAL INSTRUMENTS

The Company currently holds interest rate swap contracts to manage exposure against the variability in the expected future cash flows (future interest payments) attributable to changes in the 1-month LIBOR associated with the forecasted issuances of 1-month fixed rate debt arising from a rollover strategy. An interest rate swap is an agreement whereby one party agrees to pay a fixed rate of interest on a notional principal amount in exchange for receiving a floating rate of interest on the same notional amount, for a predetermined period of time, from a second party. The amounts relating to the notional principal amount are not actually exchanged. The maximum length of time over which the Company is currently hedging its exposure to the variability in future cash flows for forecasted transactions is approximately 3.4 years. The total notional amount of the derivative contracts is $50.0 million.

For the three months ended March 31, 2017 and 2016, a gain of $0.1 million and a loss of $0.4 million, respectively, have been recognized in "Other comprehensive income (loss)" in the accompanying consolidated statements of comprehensive income for the change in fair value of the interest rate swaps. The swap contracts had a fair value of $0.2 million as of March 31, 2017 and have been recorded in "Other assets" in the accompanying consolidated balance sheet. The accumulated gain of $0.1 million included in "Accumulated other comprehensive loss" in the accompanying consolidated balance sheet would be reclassified to current earnings if the hedge transactions become probable of not occurring. The Company expects the hedges to remain fully effective during the remaining term of the swap contracts.

NOTE 10. 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.

Fair Value Hierarchy

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

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

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

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

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

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

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

INVESTAR HOLDING CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

Investment Securities and Other Equity Securities – Where quoted prices are available in an active market, the Company classifies the securities within level 1 of the valuation hierarchy. Securities are defined as both long and short positions. Level 1 securities include 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 securities are valued based on market quoted prices and are classified in level 1 as they are actively traded.

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 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, which are loans for which the accrual of interest has stopped or loans that are contractually 90 past due on which interest continues to accrue, are estimated using discounted cash flow analyses or underlying collateral values, where applicable. The Company classifies loans in level 3 of the fair value hierarchy.

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

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. The Company classifies these borrowings in level 2 of the fair value hierarchy.

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 is therefore classified in level 3 in the fair value hierarchy.

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

Commitments – The fair value of commitments to extend credit was not significant.

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

INVESTAR HOLDING CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Fair Value of Assets and Liabilities Measured on a Recurring Basis

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



	Estimated Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
March 31, 2017
Assets:
Obligations of other U.S. government agencies	$	40,300	$	—	$	40,300	$	—
Obligations of state and political subdivisions	27,688		—		9,385		18,303
Corporate bonds	14,974		—		13,649		1,325
Residential mortgage-backed securities	88,027		—		88,027		—
Commercial mortgage-backed securities	2,445		—		2,445		—
Equity securities	705		705		—		—
Derivative financial instruments	192		—		192		—
Total assets	$	174,331	$	705	$	153,998	$	19,628

December 31, 2016
Assets:
Obligations of other U.S. government agencies	$	29,490	$	—	$	29,490	$	—
Obligations of state and political subdivisions	27,855		—		10,199		17,656
Corporate bonds	14,968		—		14,344		624
Residential mortgage-backed securities	87,588		—		87,588		—
Commercial mortgage-backed securities	2,444		—		2,444		—
Equity securities	706		706		—		—
Derivative financial instruments	8		—		8		—
Total assets	$	163,059	$	706	$	144,073	$	18,280

The Company reviews fair value hierarchy classifications on a quarterly basis. Changes in the Company’s ability to observe inputs to the valuation may cause reclassification of certain assets or liabilities within the fair value hierarchy. The tables below provide a reconciliation for assets measured at fair value on a recurring basis using significant unobservable inputs, or Level 3 inputs, for the three months ended March 31, 2017 and March 31, 2016 (dollars in thousands).



	Obligations of State and Political Subdivisions		Corporate Bonds		Total
Balance at December 31, 2016	$	17,656	$	624	$	18,280
Realized gains (losses) included in net income	—		—		—
Unrealized gains (losses) included in other comprehensive income	647		1		648
Purchases	—		700		700
Sales	—		—		—
Transfers into Level 3	—		—		—
Transfers out of Level 3	—		—		—
Balance at March 31, 2017	$	18,303	$	1,325	$	19,628

INVESTAR HOLDING CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



	Obligations of State and Political Subdivisions		Corporate Bonds			Total
Balance at December 31, 2015	$	10,395	$	1,136		$	11,531
Realized gains (losses) included in net income	—		—			—
Unrealized gains (losses) included in other comprehensive income	166		(9		)	157
Purchases	—		—			—
Sales	—		—			—
Transfers into Level 3	—		—			—
Transfers out of Level 3	—		—			—
Balance at March 31, 2016	$	10,561	$	1,127		$	11,688

Fair Value of Assets Measured on a Nonrecurring Basis

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

Estimated
Fair Value

Valuation Technique

Unobservable Inputs

Range of Discounts

Weighted Average Discount

March 31, 2017

Impaired loans

251

Discounted cash flows, Underlying collateral value

Collateral discounts and estimated costs to sell

0% - 100%

30%

December 31, 2016

Impaired loans

801

Discounted cash flows, Underlying collateral value

Collateral discounts and estimated costs to sell

1% - 100%

32%

There were no liabilities measured on a nonrecurring basis at March 31, 2017 or December 31, 2016.

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



	March 31, 2017
	Carrying Amount		Estimated Fair Value		Level 1		Level 2		Level 3
Financial assets:
Cash and due from banks	$	26,643	$	26,643	$	26,643	$	—	$	—
Investment securities	193,787		193,561		705		160,522		32,334
Other equity securities	6,320		6,320		—		6,320		—
Loans, net of allowance	894,905		898,801		—		—		898,801
Derivative financial instruments	192		192		—		192		—

Financial liabilities:
Deposits, noninterest-bearing	$	112,514	$	112,514	$	—	$	112,514	$	—
Deposits, interest-bearing	756,040		736,314		—		—		736,314
FHLB short-term advances and repurchase agreements	110,674		110,674		—		110,674		—
FHLB long-term advances	8,100		8,007		—		—		8,007
Junior subordinated debt	3,609		2,908		—		—		2,908
Subordinated debt	18,600		18,613		—		18,613		—
Other borrowings	78		78		—		78		—

INVESTAR HOLDING CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



	December 31, 2016
	Carrying Amount		Estimated Fair Value		Level 1		Level 2		Level 3
Financial assets:
Cash and due from banks	$	29,342	$	29,342	$	29,342	$	—	$	—
Federal funds sold	106		106		106		—		—
Investment securities	183,142		182,663		706		151,128		30,829
Other equity securities	5,362		5,362		—		5,362		—
Loans, net of allowance	886,375		890,949		—		—		890,949
Derivative financial instruments	8		8		—		8		—

Financial liabilities:
Deposits, noninterest-bearing	$	108,404	$	108,404	$	—	$	108,404	$	—
Deposits, interest-bearing	799,383		779,397		—		—		779,397
FHLB short-term advances and repurchase agreements	112,690		112,690		—		112,690		—
FHLB long-term advances	9,200		9,233		—		—		9,233
Junior subordinated debt	3,609		3,635		—		—		3,635
Other borrowings	1,000		1,001		—		1,001		—

NOTE 11. INCOME TAXES

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



	Three months ended March 31,
	2017			2016
Income tax expense	$	847		$	1,006
Effective tax rate	31.2		%	33.6		%

The effective tax rates differ from the statutory tax rate of 35% largely due to tax exempt interest income earned on certain investment securities.

INVESTAR HOLDING CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 12. 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 consisting of loan commitments and standby letters of 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, 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 standby letters of credit issued have expiration dates within one year.

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



	March 31, 2017		December 31, 2016
Commitments to extend credit
Loan commitments	$	139,168	$	142,891
Standby letters of credit	1,008		1,008

Additionally, at March 31, 2017, the Company had unfunded commitments of $0.9 million for its investment in Small Business Investment Company qualified funds

During the first quarter of 2017, the Company announced that it has entered into a definitive agreement to acquire Citizens Bancshares, Inc. (“Citizens”) and its wholly-owned subsidiary, Citizens Bank, in Ville Platte, Louisiana, which has three branches in Evangeline Parish. The proposed acquisition transactions are expected to be completed in the third quarter of 2017. The Company’s acquisition of Citizens, which would be the first acquisition since the completion of its initial public offering, would expand its branch footprint in Louisiana, further bolstering its core deposit base and positioning the Company to continue to build on its existing record of growth and client service under the leadership of its current management team. Consequently, the Company recognized approximately $145,000 of expenses related to the potential acquisition, which is included in noninterest expense on the statement of operations for the three months ended March 31, 2017.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This section presents management’s perspective on the consolidated 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 for the year ended December 31, 2016, including the notes thereto, and the related Management’s Discussion and Analysis of Financial Condition and Results of Operations in the Annual Report on Form 10-K that the Company filed with the Securities and Exchange Commission (“SEC”) on March 9, 2017.

Overview

Through our wholly-owned subsidiary Investar Bank, we provide full banking services, excluding trust services, tailored primarily to meet the needs of individuals and small to medium-sized businesses in our primary areas of operation in South Louisiana: Baton Rouge, New Orleans, Lafayette, Hammond and their surrounding metropolitan areas. Our Bank commenced operations in 2006 and we completed our initial public offering in July 2014. Our strategy includes organic growth through high quality loans, and growth through acquisitions. We currently operate 10 full service branches. We have completed construction of one new branch in Gonzales, Louisiana in our Baton Rouge market area, expected to open in 2017, and in September 2015, acquired land and a building for an additional branch in our New Orleans market area. We continue to focus on growing our deposit base in our markets. We completed acquisitions in 2011 and 2013 and regularly review acquisition opportunities.

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

During the first quarter of 2017, we announced that we have entered into a definitive agreement to acquire Citizens Bancshares, Inc. (“Citizens”) and its wholly-owned subsidiary, Citizens Bank, in Ville Platte, Louisiana, which has three branches in Evangeline Parish. The proposed acquisition transactions are expected to be completed in the third quarter of 2017. The acquisition of Citizens, which would be the first acquisition since the completion of our initial public offering, would expand our branch footprint in Louisiana, further bolstering our core deposit base and positioning the Company to continue to build on its existing record of growth and client service under the leadership of our current management team. Consequently, we recognized approximately $145,000 of expenses related to the potential acquisition, which is included in noninterest expense on the statement of operations for the three months ended March 31, 2017.

Shortly after the announcement of the signing of the definitive agreement, we announced both a common stock offering and a subordinated debt issuance. The common stock offering generated net proceeds of $32.6 million through the issuance of approximately 1.6 million common shares at a price of $21.25 per share. We intend to use the net proceeds from the common stock offering for general corporate purposes and potential strategic acquisitions. We also issued and sold $18.6 million in fixed-to-floating rate subordinated notes due in 2027. We intend to use the net proceeds from the debt issuance to fund a portion of the proposed acquisition of Citizens and its wholly-owned subsidiary, Citizens Bank.

Discussion and Analysis of Financial Condition

For the three months ended March 31, 2017, net income was $1.9 million, or $0.26 per basic and diluted share, compared to net income of $2.0 million, or $0.28 per basic and diluted share for the three months ended March 31, 2016. For the three months ended March 31, 2017, our net interest margin was 3.27%, return on average assets was 0.65%, and return on average equity was 6.44%. From December 31, 2016 to March 31, 2017, total loans increased $8.7 million, or 1.0%, and total deposits decreased $39.2 million, or 4.3%. As of March 31, 2017, the Company and Bank each were in compliance with all regulatory capital requirements, and the Bank was considered “well-capitalized” under the FDIC’s prompt corrective action regulations.

Loans

General. Loans constitute our most significant asset, comprising 76.7% and 77.1% of our total assets at March 31, 2017 and December 31, 2016, respectively. Total loans increased $8.7 million, or 1.0%, to $902.1 million at March 31, 2017 compared to $893.4 million at December 31, 2016 as a result of organic growth in our business. Excluding indirect auto loans, total loans increased $19.8 million, or 2.5%, to $821.2 million at March 31, 2017 compared to $801.4 million at December 31, 2016. This represents an annualized growth rate of 10%.

The table below sets forth the composition of the Company’s loan portfolio as of the dates indicated (dollars in thousands).



	March 31, 2017				December 31, 2016
	Amount		Percentage of Total Loans		Amount		Percentage of Total Loans
Construction and development	$	95,541	10.6	%	$	90,737	10.2	%
1-4 Family	172,148		19.1		177,205		19.8
Multifamily	47,776		5.3		42,759		4.8
Farmland	7,994		0.9		8,207		0.9
Commercial real estate
Owner-occupied	181,590		20.1		180,458		20.2
Nonowner-occupied	210,874		23.4		200,258		22.4
Total mortgage loans on real estate	715,923		79.4		699,624		78.3
Commercial and industrial	90,352		10.0		85,377		9.6
Consumer	95,873		10.6		108,425		12.1
Total loans	$	902,148	100.0	%	$	893,426	100.0	%

The following table sets forth loans outstanding at March 31, 2017, which, based on remaining scheduled repayments of principal, are due in the periods indicated. Loans with balloon payments and longer amortizations are often repriced and extended beyond the initial maturity when credit conditions remain satisfactory. Demand loans, loans having no stated schedule of repayments and no stated maturity and overdrafts are reported below as due in one year or less.



(dollars in thousands)	One Year or Less		After One Year Through Five Years		After Five Years Through Ten Years		After Ten Years Through Fifteen Years		After Fifteen Years		Total
Construction and development	$	78,798	$	9,456	$	5,414	$	1,379	$	494	$	95,541
1-4 Family	24,357		39,035		40,340		26,164		42,252		172,148
Multifamily	732		27,397		17,955		118		1,574		47,776
Farmland	3,333		16		2,732		1,913		—		7,994
Commercial real estate
Owner-occupied	15,406		49,256		71,633		35,489		9,806		181,590
Nonowner-occupied	21,627		91,115		76,958		20,410		764		210,874
Total mortgage loans on real estate	144,253		216,275		215,032		85,473		54,890		715,923
Commercial and industrial	39,019		36,395		14,269		—		669		90,352
Consumer	1,830		75,159		18,375		372		137		95,873
Total loans	$	185,102	$	327,829	$	247,676	$	85,845	$	55,696	$	902,148

Loans Held for Sale. There were no loans held for sale at March 31, 2017 and December 31, 2016. Since the Bank discontinued accepting indirect auto loan applications at the end of 2015, which was the primary source of its consumer loan portfolio and loans held for sale, the consumer loan portfolio is expected to decrease over time, and loans are no longer held for sale. There were no gains on the sale of consumer loans recognized for the three months ended March 31, 2017, compared to $0.3 million for the three months ended March 31, 2016.

Loan Concentrations. Loan concentrations are considered to exist when there are amounts loaned to multiple borrowers engaged in similar activities that would cause them to be similarly impacted by economic or other conditions. At March 31, 2017 and December 31, 2016, we had no concentrations of loans exceeding 10% of total loans other than loans in the categories listed in the table above.

We continue to monitor our loan portfolio for exposure to potential negative impacts of low oil and gas prices. We consider our direct exposure to the energy sector not to be significant, at less than one percent of the total loan portfolio at March 31, 2017. However, should the price of oil and gas decline further and/or remain at the current low price for an extended period, the general economic conditions in our South Louisiana markets could be negatively affected and could negatively impact borrowers’ ability to service their debt.

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 represented 16.5% of our total assets and totaled $193.8 million at March 31, 2017, an increase of $10.7 million, or 5.8%, from $183.1 million at December 31, 2016. The increase in investment securities at March 31, 2017 compared to December 31, 2016 resulted from purchases of various investment types in our current portfolio to manage liquidity.

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



	March 31, 2017				December 31, 2016
	Balance		Percentage of Portfolio		Balance		Percentage of Portfolio
Obligations of other U.S. government agencies and corporations	$	40,300	20.8	%	$	29,490	16.1	%
Obligations of state and political subdivisions	40,558		20.9		40,831		22.3
Corporate bonds	14,974		7.7		14,968		8.2
Residential mortgage-backed securities	94,805		48.9		94,703		51.7
Commercial mortgage-backed securities	2,445		1.3		2,444		1.3
Equity securities	705		0.4		706		0.4
Total	$	193,787	100.0	%	$	183,142	100.0	%

The investment portfolio consists of available for sale and held to maturity securities. We classify debt securities as held to maturity if management has the positive intent and ability to hold the securities to maturity. Held to maturity securities are stated at amortized cost. Securities not classified as held to maturity or trading are classified as available for sale. 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 table below sets forth the stated maturities and weighted average yields of our investment debt securities based on the amortized cost of our investment portfolio as of March 31, 2017 (dollars in thousands).



	One Year or Less				After One Year Through Five Years				After Five Years Through Ten Years				After Ten Years
	Amount		Yield		Amount		Yield		Amount		Yield		Amount		Yield
Held to maturity:
Obligations of states and political subdivisions	$	685	7.17	%	$	3,095	7.17	%	$	2,745	7.17	%	$	6,345	4.38	%
Residential mortgage-backed securities	—		—		—		—		—		—		6,778		2.75
Available for sale:
Obligations of other U.S. government agencies and corporations	—		—		1,330		2.61		7,912		2.40		31,313		2.43
Obligations of states and political subdivisions	—		—		5,546		2.21		3,616		3.17		19,553		4.11
Corporate bonds	900		2.05		4,766		2.39		9,355		3.68		250		4.00
Residential mortgage-backed securities	—		—		—		—		3,572		2.20		85,032		2.20
Commercial mortgage-backed securities	—		—		—		—		2,507		2.11		—		—
	$	1,585			$	14,737			$	29,707			$	149,271

The maturity of mortgage-backed securities reflects scheduled repayments based upon the contractual maturities of the securities. Weighted average yields on tax-exempt obligations have been computed on a fully tax equivalent basis assuming a federal tax rate of 35%.

Deposits

The following table sets forth the composition of our deposits and the percentage of each deposit type to total deposits at March 31, 2017 and December 31, 2016 (dollars in thousands).



	March 31, 2017				December 31, 2016
	Amount		Percentage of Total Deposits		Amount		Percentage of Total Deposits
Noninterest-bearing demand deposits	$	112,514	13.0	%	$	108,404	11.9	%
NOW accounts	168,860		19.4		171,556		18.9
Money market deposit accounts	124,604		14.3		123,079		13.6
Savings accounts	52,682		6.1		52,860		5.8
Time deposits	409,894		47.2		451,888		49.8
Total deposits	$	868,554	100.0	%	$	907,787	100.0	%

Total deposits were $868.6 million at March 31, 2017, a decrease of $39.2 million, or 4.3%, compared to December 31, 2016. The decrease in total deposits was driven by a decrease in time deposits of $42.0 million, or 9.3%. The decrease in time deposits is primarily a result of the withdrawal of deposits by other financial institutions in search of higher rates. During the third quarter of 2016, the Company began lowering its rates on time deposits in an effort to begin reducing its cost of funds and its dependency on certificates of deposit. As a result of this strategy, as time deposits mature, many have not renewed with the Bank. Noninterest-bearing demand deposits experienced the greatest growth with an increase of $4.1 million, or 3.8%, compared to December 31, 2016.

The following table shows the contractual maturities of certificates of deposit and other time deposits greater than $100,000 at March 31, 2017 and December 31, 2016 (dollars in thousands).



	March 31, 2017				December 31, 2016
	Certificates of Deposit		Other Time Deposits		Certificates of Deposit		Other Time Deposits
Time remaining until maturity:
Three months or less	$	45,631	$	359	$	59,639	$	100
Over three months through six months	8,662		304		25,695		358
Over six months through twelve months	50,080		1,120		20,327		660
Over one year through three years	49,753		1,197		65,865		1,388
Over three years	6,150		298		8,684		297
	$	160,276	$	3,278	$	180,210	$	2,803

Borrowings

Total borrowings include securities sold under agreements to repurchase, advances from the Federal Home Loan Bank (“FHLB”), unsecured lines of credit with First National Bankers Bank (“FNBB”) and The Independent Bankers Bank (“TIB”), junior subordinated debentures, and a secured revolving line of credit with TIB. In addition, in connection with its definitive agreement to acquire Citizens, on March 24, 2017, the Company issued and sold $18.6 million in aggregate principal amount of its 6.00% Fixed-to-Floating Rate Subordinated Notes due March 30, 2027. Beginning on March 30, 2022, the Company may redeem the Notes, in whole or in part, at their principal amount plus any accrued and unpaid interest. The Notes bear an interest rate of 6.00% per annum until March 30, 2022, on which date the interest rate will reset quarterly to an annual interest rate equal to the then-current LIBOR plus 394.5 basis points.

Securities sold under agreements to repurchase decreased $2.7 million to $36.4 million at March 31, 2017 from $39.1 million at December 31, 2016. Our advances from the FHLB were $82.4 million at March 31, 2017, a decrease of $0.4 million, or 0.5%, from FHLB advances of $82.8 million at December 31, 2016. We had $0.1 million drawn on an unsecured line of credit at March 31, 2017, compared to no balance outstanding at December 31, 2016. There was no outstanding balance on the secured revolving line of credit with TIB at March 31, 2017, compared to $1.0 million at December 31, 2016. The $3.6 million in junior subordinated debt at March 31, 2017 and December 31, 2016 represents the junior subordinated debentures that we assumed through acquisition. The carrying value of subordinated debt was $18.1 million at March 31, 2017. The subordinated debt securities were recorded net of issuance costs of $0.5 million. The issuance costs are being amortized using the effective interest method over the life of the Notes.

The average balances and cost of funds of short-term borrowings for the three months ended March 31, 2017 and 2016 are summarized in the table below (dollars in thousands).



	Average Balances				Cost of Funds
	March 31, 2017		March 31, 2016		March 31, 2017		March 31, 2016
Federal funds purchased and other short-term borrowings	$	84,371	$	102,363	1.27	%	0.90	%
Securities sold under agreements to repurchase	36,552		30,476		0.20		0.20
Total short-term borrowings	$	120,923	$	132,839	0.95	%	0.73	%

Results of Operations

Performance Summary

Three months ended March 31, 2017 vs. three months ended March 31, 2016. For the three months ended March 31, 2017, net income was $1.9 million, or $0.26 per basic and diluted share, compared to net income of $2.0 million, or $0.28 per basic and diluted share for the three months ended March 31, 2016. Return on average assets decreased to 0.65% for the three months ended March 31, 2017 compared to 0.76% for the three months ended March 31, 2016 primarily due to a $112.7 million increase in average assets, as well as a $0.1 million decrease in net income, attributable to $145,000 in acquisition expenses related to the Company’s announcement of its definitive agreement to acquire Citizens, as discussed above in "Overview." Return on average equity was 6.44% for the three months ended March 31, 2017 compared to 7.20% for the three months ended March 31, 2016 due to a $6.6 million increase in average equity.

Net Interest Income

Net interest income, which is the largest component of our earnings, is the difference between interest earned on assets, such as loans and investments, and the cost of interest-bearing liabilities, such as deposits and borrowings. 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.

Three months ended March 31, 2017 vs. three months ended March 31, 2016. Net interest income increased 3.7% to $8.9 million for the three months ended March 31, 2017 compared to $8.5 million for the same period in 2016. This increase is due primarily to the $60.2 million and $45.0 million increases in average loans and average investment securities, respectively, when compared to the same period in 2016, resulting in a $0.7 million increase in interest income, discussed in more detail below. Average interest-bearing deposits increased approximately $101.4 million and short- and long-term borrowings decreased $17.4 million for the three months ended March 31, 2017 when compared to the same period in 2016, resulting in a $0.4 million increase in interest expense, also discussed in more detail below. The increases in both average interest-earning assets and interest-bearing liabilities are a result of organic growth of the Company.

Interest income was $11.1 million for the three months ended March 31, 2017 compared to $10.4 million for the same period in 2016. Loan interest income made up substantially all of our interest income for the three months ended March 31, 2017 and 2016. Increases in interest income can be attributed to an increase in the volume of interest-earning assets. The overall yield on interest-earning assets decreased 11 basis points to 4.10% for the three months ended March 31, 2017 compared to 4.21% for the same period in 2016. The reduction in yield on interest-earning assets is the result of a prolonged low interest rate environment. The loan portfolio yielded 4.55% for the three months ended March 31, 2017 compared to 4.57% for the three months ended March 31, 2016, while the yield on the investment portfolio was 2.31% for the three months ended March 31, 2017 compared to 2.53% for the three months ended March 31, 2016.

Interest expense was $2.2 million for the three months ended March 31, 2017, an increase of $0.4 million compared to interest expense of $1.8 million for the three months ended March 31, 2016, as a result of an increase of $0.2 million attributed to volume and $0.2 million attributed to the increase in the rate of interest-bearing liabilities. Average interest-bearing liabilities increased approximately $84.0 million for the three months ended March 31, 2017 compared to the same period in 2016 mainly as a result of our organic deposit growth. The cost of interest-bearing liabilities increased 10 basis points to 0.98% for the three months ended March 31, 2017 compared to 0.88% for the same period in 2016, primarily as a result of an increase in rates offered to our customers for time deposits and an increase in the cost of short- and long-term borrowings. During the third quarter of 2016, the Company began lowering its rates on time deposits in an effort to begin reducing the cost of funds and its dependency on certificates of deposit.

Net interest margin was 3.27% for the three months ended March 31, 2017, a decrease of 20 basis points from 3.47% for the three months ended March 31, 2016. The decrease in net interest margin is attributable to the decrease in the overall yield on interest-earning assets and the increase in the overall cost of funds.

Average Balances and Yields. The following table sets forth average balance sheet data, including all major categories of interest-earning assets and interest-bearing liabilities, together with the interest earned or paid and the average yield or rate paid on each such category for the three months ended March 31, 2017 and 2016. Averages presented in the table below are daily averages (dollars in thousands).



	Three months ended March 31,
	2017							2016
	Average Balance			Interest Income/ Expense ⁽¹⁾		Yield/ Rate⁽¹⁾		Average Balance			Interest Income/ Expense⁽¹⁾		Yield/ Rate⁽¹⁾
Assets
Interest-earning assets:
Loans	$	892,546		$	10,004	4.55	%	$	832,368		$	9,485	4.57	%
Securities:
Taxable	150,139			839		2.27		113,446			712		2.52
Tax-exempt	30,540			190		2.52		22,199			144		2.60
Interest-earning balances with banks	24,591			60		0.99		20,766			37		0.71
Total interest-earning assets	1,097,816			11,093		4.10		988,779			10,378		4.21
Cash and due from banks	8,546							7,222
Intangible assets	3,227							3,179
Other assets	55,190							52,121
Allowance for loan losses	(7,125		)					(6,308		)
Total assets	$	1,157,654						$	1,044,993
Liabilities and stockholders’ equity
Interest-bearing liabilities:
Deposits:
Interest-bearing demand	$	291,855		$	488	0.68	%	$	239,844		$	380	0.64	%
Savings deposits	53,237			86		0.66		53,144			88		0.66
Time deposits	433,170			1,279		1.20		383,838			1,047		1.09
Total interest-bearing deposits	778,262			1,853		0.97		676,826			1,515		0.90
Short-term borrowings	120,923			282		0.95		132,839			243		0.73
Long-term debt	21,175			98		1.88		26,667			73		1.10
Total interest-bearing liabilities	920,360			2,233		0.98		836,332			1,831		0.88
Noninterest-bearing deposits	110,410							87,319
Other liabilities	9,387							10,469
Stockholders’ equity	117,497							110,873
Total liabilities and stockholders’ equity	$	1,157,654						$	1,044,993
Net interest income/net interest margin				$	8,860	3.27	%				$	8,547	3.47	%


⁽¹⁾	Interest income and net interest margin are expressed as a percentage of average interest-earning assets outstanding for the indicated periods. Interest expense is expressed as a percentage of average interest-bearing liabilities for the indicated periods.

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 March 31, 2017 compared to the same period in 2016 (dollars in thousands).



	Three months ended March 31, 2017 vs. three months ended March 31, 2016
	Volume			Rate			Net⁽¹⁾
Interest income:
Loans	$	678		$	(159	)	$	519
Securities:
Taxable	228			(101		)	127
Tax-exempt	54			(8		)	46
Interest-earning balances with banks	7			16			23
Total interest-earning assets	967			(252		)	715
Interest expense:
Interest-bearing demand deposits	82			26			108
Savings deposits	—			(2		)	(2		)
Time deposits	133			99			232
Short-term borrowings	(22		)	61			39
Long-term debt	(15		)	40			25
Total interest-bearing liabilities	178			224			402
Change in net interest income	$	789		$	(476	)	$	313


⁽¹⁾	Changes in interest due to both volume and rate have been allocated on a pro-rata basis using the absolute ratio value of amounts calculated.

Noninterest Income

Noninterest income includes, among other things, fees generated from our deposit services, gain on sale of investment securities, fixed assets, other real estate owned, and loans, servicing fees and fee income on serviced loans. We expect to continue to develop new products that generate noninterest income, and enhance our existing products, in order to diversify our revenue sources.

Three months ended March 31, 2017 vs. three months ended March 31, 2016. Total noninterest income decreased $0.4 million, or 31.2%, to $0.9 million for the three months ended March 31, 2017 compared to $1.3 million for the three months ended March 31, 2016. The decrease in noninterest income is mainly attributable to the $0.3 million decrease in the gain on sale of loans. As discussed in Loans above, the gain on sale of loans decreased due to the Bank’s decision to exit the indirect auto loan origination business at the end of 2015.

Servicing fees and fee income on serviced loans decreased $0.2 million, or 28.4%, to $0.4 million for the three months ended March 31, 2017 compared to $0.6 million for the same period in 2016. The Bank’s servicing portfolio primarily consists of indirect auto loans. As this portfolio of loans ages, and consequently decreases in principal value, the servicing fees and fee income on serviced loans earned will continue to decrease.

Noninterest Expense

Three months ended March 31, 2017 vs. three months ended March 31, 2016. Total noninterest expense was $6.7 million for the three months ended March 31, 2017, an increase of $0.3 million, or 4.7%, compared to the same period in 2016. The increase is primarily due to a $0.2 million increase in other operating expenses which was driven by increases in FDIC and OFI assessments, bank shares taxes, and expenses related to other real estate owned, as well as a $0.1 million increase in acquisition expenses related to the Company’s announcement of its definitive agreement to acquire Citizens, as discussed above in "Overview."

Income Tax Expense

Income tax expense for the three months ended March 31, 2017 was $0.8 million, a decrease of $0.2 million, compared to the three months ended March 31, 2016. The effective tax rate for the three months ended March 31, 2017 and 2016 was 31.2% and 33.6%, 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.

•

Pass (grades 1-6) – Loans not falling into one of the categories below are considered pass. These loans have high credit characteristics and financial strength. The borrowers at least generate profits and cash flow that are in line with peer and industry standards and have debt service coverage ratios above loan covenants and our policy guidelines. For some of these loans, a guaranty from a financially capable party mitigates characteristics of the borrower that might otherwise result in a lower grade.

•

Special Mention (grade 7) – Loans classified as special mention possess some credit deficiencies that need to be corrected to avoid a greater risk of default in the future. For example, financial ratios relating to the borrower may have deteriorated. Often, a special mention categorization is temporary while certain factors are analyzed or matters addressed before the loan is re-categorized as either pass or substandard.

•

Substandard (grade 8) – Loans rated as substandard are inadequately protected by the current net worth and paying capacity of the borrower or the liquidation value of any collateral. If deficiencies are not addressed, it is likely that this category of loan will result in the Bank incurring a loss. Where a borrower has been unable to adjust to industry or general economic conditions, the borrower’s loan is often categorized as substandard.


•	Doubtful (grade 9) – Doubtful loans are substandard loans with one or more additional negative factors that makes full collection of amounts outstanding, either through repayment or liquidation of collateral, highly questionable and improbable.

•

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

At March 31, 2017 and December 31, 2016, there were no loans classified as doubtful or loss, while there were $6.2 million and $3.7 million, respectively, of loans classified as substandard. At March 31, 2017 and December 31, 2016, $0.4 million and $0.6 million, respectively, of loans were classified as special mention.

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. 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, with fees associated with the foreclosure being deducted from the sales price. The purchase price is applied to the outstanding loan balance. If the loan balance is greater than the sales proceeds, the deficient balance is charged-off.

Allowance for 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 our borrowers’ 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 $7.2 million at March 31, 2017, up from $7.1 million at December 31, 2016, as we increased our loan loss provisioning to reflect our nonperforming loans and 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 and $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 recorded against 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.

Impaired loans at March 31, 2017 were $4.5 million compared to $4.4 million at December 31, 2016. At March 31, 2017 and December 31, 2016, $0.5 million and $0.4 million, respectively, of the allowance for loan losses was specifically allocated to impaired loans.

The provision for loan losses is a charge to expense 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 March 31, 2017 and 2016, the provision for loan losses was $0.4 million and $0.5 million, respectively. The decrease over the three-month comparative period can be attributed to the decrease in the growth rate of the loan portfolio, which was 1.0% for the three months ended March 31, 2017 compared to 7.0% for the same period in 2016.

Acquired loans that are accounted for under ASC 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality (“ASC 310-30”), 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. 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.

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



	March 31, 2017		December 31, 2016
Construction and development	$	694	$	579
1-4 Family	1,237		1,377
Multifamily	374		355
Farmland	54		60
Commercial real estate	2,908		2,499
Total mortgage loans on real estate	5,267		4,870
Commercial and industrial	744		759
Consumer	1,232		1,422
Total	$	7,243	$	7,051

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).



	Three months ended March 31,
	2017			2016
Allowance at beginning of period	$	7,051		$	6,128
Provision for loan losses	350			454
Charge-offs:
Mortgage loans on real estate:
Construction and development	—			(7		)
1-4 Family	—			(7		)
Consumer	(166		)	(142		)
Total charge-offs	(166		)	(156		)
Recoveries
Mortgage loans on real estate:
Construction and development	3			3
1-4 Family	1			7
Commercial real estate	—			1
Commercial and industrial	—			20
Consumer	4			6
Total recoveries	8			37
Net (charge-offs) recoveries	(158		)	(119		)
Balance at end of period	$	7,243		$	6,463
Net charge-offs to:
Loans - average	0.02		%	0.02		%
Allowance for loan losses	2.18		%	1.84		%
Allowance for loan losses to:
Total loans	0.80		%	0.81		%
Nonperforming loans	337.95		%	279.75		%

The allowance for loan losses to total loans ratio decreased to 0.80% at March 31, 2017 compared to 0.81% at March 31, 2016. The allowance for loan losses to nonperforming loans ratio increased to 337.95% at March 31, 2017 compared to 279.75% at March 31, 2016. The increase in the allowance for loan losses to nonperforming loans ratio is due to a $0.2 million decrease in nonperforming loans and a $0.8 million increase in the allowance for loan losses. Nonperforming loans were $2.1 million, or 0.24% of total loans, at March 31, 2017, compared to $2.0 million, or 0.22% of total loans at December 31, 2016.

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 months ended March 31, 2017 and 2016 were $158,000 and $119,000, respectively, equal to 0.02% of our average loan balance for both periods.

Management believes the allowance for loan losses at March 31, 2017 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 other real estate owned. Nonperforming loans are those on which the accrual of interest has stopped or loans which are contractually 90 days past due on which interest continues to accrue. Loans are ordinarily placed on nonaccrual when a loan is specifically determined to be impaired or when principal and interest is delinquent for 90 days or more. 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 (“TDR”), or restructured loans. A restructured loan is a loan for which a concession that is not insignificant 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 their loans 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 that are either contractually 90 days past due or placed on nonaccrual status are reported as nonperforming loans.

There were eighteen loans classified as TDRs at both March 31, 2017 and December 31, 2016 that totaled approximately $2.4 million. Eight restructured loans were considered TDRs due to a modification of terms through adjustments to maturity, nine restructured loans were considered TDRs due to a reduction in the interest rate to a rate lower than the current market rate, and one restructured loan was considered a TDR due to modification of terms through principal payment forbearance only for a specified period of time. As of March 31, 2017 and December 31, 2016, all restructured loans were performing under their modified terms. The Company individually evaluates each TDR for allowance purposes, primarily based on collateral value, and excludes these loans from the loan population that is evaluated by applying qualitative factors.

The following table shows the principal amounts of nonperforming and restructured loans as of the dates indicated. 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).



	March 31, 2017		December 31, 2016
Nonaccrual loans	$	2,135	$	1,978
Accruing loans past due 90 days or more	8		1
Total nonperforming loans	2,143		1,979
Restructured loans	2,384		2,399
Total nonperforming and restructured loans	$	4,527	$	4,378
Interest income recognized on nonperforming and restructured loans	$	43	$	169
Interest income foregone on nonperforming and restructured loans	$	48	$	159

Nonperforming loans are comprised of accruing loans past due 90 days or more and nonaccrual loans. Nonperforming loans outstanding represented 0.24% and 0.22% of total loans at March 31, 2017 and December 31, 2016, respectively.

Other Real Estate Owned. Other real estate owned consists of properties acquired through foreclosure or acceptance of a deed in lieu of foreclosure. These properties are 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 to the allowance for loan losses. Other real estate owned with a cost basis of $20,000 and $60,500 was sold during the three months ended March 31, 2017 and 2016, respectively, resulting in a net gain of $5,000 and $1,000 for the respective period.

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



	March 31, 2017		December 31, 2016
Construction and development	$	250	$	270
Commercial real estate	3,795		3,795
Total other real estate owned	$	4,045	$	4,065

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



	Three months ended March 31,
	2017			2016
Balance, beginning of period	$	4,065		$	725
Transfers from acquired loans	—			30
Sales of other real estate owned	(20		)	(60		)
Balance, end of period	$	4,045		$	695

Interest Rate Risk

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

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

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 March 31, 2017, the Bank was within the policy guidelines for asset/liability management.

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



As of March 31, 2017
Changes in Interest Rates (in basis points)	Estimated Increase/Decrease in Net Interest Income ⁽¹⁾
+300	(2.6	)%
+200	(1.4	)%
+100	(0.7	)%
-100	4.4	%
-200	2.2	%
-300	2.0	%


⁽¹⁾	The percentage change in this column represents the projected net interest income for 12 months on a flat balance sheet in a stable interest rate environment versus the projected net interest income in the various rate scenarios.

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

Liquidity and Capital Resources

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

Our core deposits, which are deposits excluding time deposits greater than $250,000 and deposits of municipalities and other political entities, are our most stable source of liquidity to meet our cash flow needs due to the nature of the long-term relationships generally established with our customers. Maintaining the ability to acquire these funds as needed in a variety of markets, and within ALCO compliance targets, is essential to ensuring our liquidity. At March 31, 2017 and December 31, 2016, 72% and 76% 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 March 31, 2017, securities with a carrying value of $72.4 million were pledged to secure certain deposits, borrowings, and other liabilities, compared to $77.5 million in pledged securities as of December 31, 2016.

Other sources available for meeting liquidity needs include advances from the FHLB, repurchase agreements and other borrowings. FHLB advances are primarily used to match-fund fixed rate loans in order to minimize interest rate risk and also may be used to meet day to day liquidity needs, particularly if the prevailing interest rate on an FHLB advance compares favorably to the rates that we would be required to pay to attract deposits. At March 31, 2017, the balance of our outstanding advances with the FHLB was $82.4 million, a decrease from $82.8 million at December 31, 2016. The total amount of the remaining credit available to us from the FHLB at March 31, 2017 was $357.9 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 $36.4 million of repurchase agreements outstanding as of March 31, 2017, compared to $39.1 million of outstanding repurchase agreements as of December 31, 2016. We maintain unsecured lines of credit with other commercial banks totaling $55.0 million. The lines of credit mature at various times within the next three months. The balance on one line of credit was $78,000 at March 31, 2017. There was no outstanding balance on any of the unsecured lines of credit at December 31, 2016. We also have a secured $20.0 million revolving line of credit with TIB maturing in June 2018. There were no amounts outstanding under the revolving line of credit at March 31, 2017 compared to a $1.0 million outstanding balance at December 31, 2016.

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, included in our time deposit balances, which we obtain via the internet to address liquidity needs when rates on such deposits compare favorably with deposit rates in our markets. At March 31, 2017, we held $93.5 million of QwikRate® deposits, down from $123.2 million at December 31, 2016.

The following table presents, by type, our funding sources, which consist of total average deposits and borrowed funds, as a percentage of total funds and the total cost of each funding source for the three months ended March 31, 2017 and 2016.



	Percentage of Total				Cost of Funds
	Three months ended March 31,				Three months ended March 31,
	2017		2016		2017		2016
Noninterest-bearing demand deposits	11	%	9	%	—	%	—	%
Interest-bearing demand deposits	28		26		0.68		0.64
Savings accounts	5		6		0.66		0.66
Time deposits	42		42		1.20		1.09
Short-term borrowings	12		14		0.95		0.73
Long-term borrowed funds	2		3		1.88		1.10
Total deposits and borrowed funds	100	%	100	%	0.88	%	0.80	%

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	Tier 1 Leverage Ratio	Common Equity Tier 1 Capital Ratio	Tier 1 Capital Ratio	Total Capital Ratio
Well capitalized	5% or above	6.5% or above	8% or above	10% or above
Adequately capitalized	4% or above	4.5% or above	6% or above	8% or above
Undercapitalized	Less than 4%	Less than 4.5%	Less than 6%	Less than 8%
Significantly undercapitalized	Less than 3%	Less than 3%	Less than 4%	Less than 6%
Critically undercapitalized			2% or less

The Company and the Bank each were in compliance with all regulatory capital requirements as of March 31, 2017 and December 31, 2016. The Bank also was considered “well-capitalized” under the FDIC’s prompt corrective action regulations as of these dates. The following table presents the actual capital amounts and regulatory capital ratios for the Company and the Bank as of the dates presented (dollars in thousands).



	Actual				Minimum Capital Requirement to be Well Capitalized
	Amount		Ratio		Amount		Ratio
March 31, 2017
Investar Holding Corporation:
Tier 1 leverage capital	$	150,030	12.97	%	$	—	—	%
Common equity tier 1 capital	146,530		14.84		—		—
Tier 1 capital	150,030		15.20		—		—
Total capital	175,406		17.77		—		—
Investar Bank:
Tier 1 leverage capital	164,508		14.23		57,783		5.00
Common equity tier 1 capital	164,508		16.68		64,110		6.50
Tier 1 capital	164,508		16.68		78,904		8.00
Total capital	171,751		17.41		98,630		10.00

December 31, 2016
Investar Holding Corporation:
Tier 1 leverage capital	$	115,312	10.10	%	$	—	—	%
Common equity tier 1 capital	111,812		11.40		—		—
Tier 1 capital	115,312		11.75		—		—
Total capital	122,363		12.47		—		—
Investar Bank:
Tier 1 leverage capital	114,417		10.03		57,063		5.00
Common equity tier 1 capital	114,417		11.67		63,706		6.50
Tier 1 capital	114,417		11.67		78,408		8.00
Total capital	121,468		12.39		98,010		10.00

We augmented our capital in the quarter ended March 31, 2017 through both a common stock offering and a subordinated debt issuance. See Note 6. Subordinated Debt Securities and Note 7. Stockholders’ Equity for further information.

Off-Balance Sheet Transactions

The Bank entered into interest rate swap contracts to manage exposure against the variability in the expected future cash flows (future interest payments) attributable to changes in the 1-month LIBOR associated with the forecasted issuances of 1-month fixed rate debt arising from a rollover strategy. An interest rate swap is an agreement whereby one party agrees to pay a fixed rate of interest on a notional principal amount in exchange for receiving a floating rate of interest on the same notional amount for a predetermined period of time, from a second party. The maximum length of time over which the Bank is currently hedging its exposure to the variability in future cash flows for forecasted transactions is approximately 3.4 years. The total notional amount of the derivative contracts is $50.0 million.

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 often expire without being drawn upon in full or at all. Virtually all of our standby letters of credit expire within one year. Our unfunded loan commitments and standby letters of credit outstanding are summarized below as of the dates indicated (dollars in thousands):



	March 31, 2017		December 31, 2016
Commitments to extend credit:
Loan commitments	$	139,168	$	142,891
Standby letters of credit	1,008		1,008

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

Additionally, at March 31, 2017, the Company had unfunded commitments of $0.9 million for its investment in Small Business Investment Company qualified funds.

For the three months ended March 31, 2017 and for the year ended December 31, 2016, except as disclosed herein and in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016, we engaged in no off-balance sheet transactions that we believe are reasonably likely to have a material effect on our financial condition, results of operations or cash flows.

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, 2016 contained in our Annual Report on Form 10-K for the year ended December 31, 2016.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Quantitative and qualitative disclosures about market risk as of December 31, 2016 are set forth in the Company’s Annual Report on Form 10-K filed with the SEC on March 9, 2017 in the section captioned “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Risk Management.” There have been no material changes in the Company’s market risk since December 31, 2016. Please refer to the information in Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations, under the heading “Risk Management” in this report for additional information about the Company’s market risk for the three months ended March 31, 2017.

Item 4. Controls and Procedures

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

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

PART II. OTHER INFORMATION

Item 1A. Risk Factors

There have been no material changes from the risk factors previously disclosed in the Annual Report on Form 10-K for the year ended December 31, 2016 filed by Investar Holding Corporation (the “Company”) with the SEC on March 9, 2017.

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

Unregistered Sales of Equity Securities and Use of Proceeds

None.

Issuer Purchases of Equity Securities

The table below 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 March 31, 2017.



Period	(a) Total Number of Shares (or Units) Purchased⁽¹⁾	(b) Average Price Paid per Share (or Unit)		(c ) Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs⁽²⁾	(d) Maximum Number (or Approximate Dollar Value) of Shares (or Units) That May Be Purchased Under the Plans or Programs⁽²⁾
January 1, 2017 to January 31, 2017	95	$	18.80	—	241,243
February 1, 2017 to February 28, 2017	25	18.77		—	241,243
March 1, 2017 to March 31, 2017	3,459	20.23		—	241,243
	3,579	$	20.18	—	241,243


⁽¹⁾	Represents shares surrendered to cover the payroll taxes due upon the vesting of restricted stock.

⁽²⁾

On February 19, 2015, the Company announced that its board of directors had authorized the repurchase of up to 250,000 shares of the Company’s common stock in open market transactions from time to time or through privately negotiated transactions in accordance with federal securities laws. In addition, on October 19, 2016, the Company announced that its board of directors authorized the repurchase of an additional 250,000 shares of the Company’s common stock under its stock repurchase plan.

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, the Company’s status as a bank holding company affects its ability to pay dividends, in two ways:


•	As a holding company with no material business activities, the Company’s ability to pay dividends is substantially dependent upon the ability of Investar Bank to transfer funds to the Company in the form of dividends, loans and advances. Investar Bank’s ability to pay dividends and make other distributions and payments is itself subject to various legal, regulatory and other restrictions.

•

As a holding company of a bank, the Company’s payment of dividends must comply with the policies and enforcement powers of the Federal Reserve. Under Federal Reserve policies, in general a bank holding company should pay dividends only when (1) its net income available to shareholders over the last four quarters (net of dividends paid) has been sufficient to fully fund the dividends, (2) the prospective rate of earnings retention appears to be consistent with the capital needs and overall current and prospective financial condition of the bank holding company and its subsidiaries, and (3) the bank holding company will continue to meet minimum regulatory capital adequacy ratios.

Item 6. Exhibits



Exhibit No.		Description of Exhibit

1.1		Underwriting Agreement, dated March 16, 2017, among Investar Holding Corporation, Investar Bank and Sandler O’Neill & Partners, L.P. as representative of the underwriters named herein⁽¹⁾

1.2		Underwriting Agreement, dated March 21, 2017, among Investar Holding Corporation, Investar Bank and Sandler O’Neill & Partners, L.P. as underwriter⁽²⁾

2.1		Agreement and Plan of Reorganization, dated March 8, 2017, by and among Investar Holding Corporation, Citizens Bancshares, Inc. and Investar Acquisition Company⁽³⁾

3.1		Restated Articles of Incorporation of Investar Holding Corporation⁽⁴⁾

3.2		By-laws of Investar Holding Corporation, as amended⁽⁵⁾

4.1		Specimen Common Stock Certificate⁽⁶⁾

4.2		Indenture, dated March 24, 2017, by and between Investar Holding Corporation and Wilmington Trust, National Association, as Trustee⁽⁷⁾

4.3		Supplemental Indenture, dated March 24, 2017, by and between Investar Holding Corporation and Wilmington Trust, National Association, as Trustee⁽⁸⁾

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

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

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

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

101.INS		XBRL Instance Document

101.SCH		XBRL Taxonomy Extension Schema Document

101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document

101.LAB		XBRL Taxonomy Extension Label Linkbase Document

101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document

101.DEF		XBRL Taxonomy Extension Definition Linkbase Document


⁽¹⁾	Filed as exhibit 1.1 to the Current Report on Form 8-K filed with the SEC on March 20, 2017 and incorporated herein by reference.


⁽²⁾	Filed as exhibit 1.1 to the Current Report on Form 8-K filed with the SEC on March 24, 2017 and incorporated herein by reference.


⁽³⁾	Filed as exhibit 2.1 to the Current Report on Form 8-K filed with the SEC on March 8, 2017 and incorporated herein by reference.


⁽⁴⁾	Filed as exhibit 3.1 to the Registration Statement on Form S-1 of the Company filed with the SEC on May 16, 2014 and incorporated herein by reference.


⁽⁵⁾	Filed as exhibit 3.2 to the Pre-Effective Amendment No. 1 to Registration Statement on Form S-1 of the Company filed with the SEC on June 4, 2014 and incorporated herein by reference.


⁽⁶⁾	Filed as exhibit 4.1 to the Registration Statement on Form S-1 of the Company filed with the SEC on May 16, 2014 and incorporated herein by reference.


⁽⁷⁾	Filed as exhibit 4.1 to the Current Report on Form 8-K filed with the SEC on March 24, 2017 and incorporated herein by reference.


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

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.

SIGNATURES

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



		INVESTAR HOLDING CORPORATION

Date: May 4, 2017		/s/ John J. D’Angelo
		John J. D’Angelo
		President and Chief Executive Officer
		(Principal Executive Officer)

Date: May 4, 2017		/s/ Christopher L. Hufft
		Christopher L. Hufft
		Chief Financial Officer
		(Principal Financial Officer)

EXHIBIT INDEX



Exhibit No.		Description of Exhibit

1.1		Underwriting Agreement, dated March 16, 2017, among Investar Holding Corporation, Investar Bank and Sandler O’Neill & Partners, L.P. as representative of the underwriters named herein⁽¹⁾

1.2		Underwriting Agreement, dated March 21, 2017, among Investar Holding Corporation, Investar Bank and Sandler O’Neill & Partners, L.P. as underwriter⁽²⁾

2.1		Agreement and Plan of Reorganization, dated March 8, 2017, by and among Investar Holding Corporation, Citizens Bancshares, Inc. and Investar Acquisition Company⁽³⁾

3.1		Restated Articles of Incorporation of Investar Holding Corporation⁽⁴⁾

3.2		By-laws of Investar Holding Corporation, as amended⁽⁵⁾

4.1		Specimen Common Stock Certificate⁽⁶⁾

4.2		Indenture, dated March 24, 2017, by and between Investar Holding Corporation and Wilmington Trust, National Association, as Trustee⁽⁷⁾

4.3		Supplemental Indenture, dated March 24, 2017, by and between Investar Holding Corporation and Wilmington Trust, National Association, as Trustee⁽⁸⁾

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

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

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

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

101.INS		XBRL Instance Document

101.SCH		XBRL Taxonomy Extension Schema Document

101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document

101.LAB		XBRL Taxonomy Extension Label Linkbase Document

101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document

101.DEF		XBRL Taxonomy Extension Definition Linkbase Document


⁽¹⁾	Filed as exhibit 1.1 to the Current Report on Form 8-K filed with the SEC on March 20, 2017 and incorporated herein by reference.


⁽²⁾	Filed as exhibit 1.1 to the Current Report on Form 8-K filed with the SEC on March 24, 2017 and incorporated herein by reference.


⁽³⁾	Filed as exhibit 2.1 to the Current Report on Form 8-K filed with the SEC on March 8, 2017 and incorporated herein by reference.


⁽⁴⁾	Filed as exhibit 3.1 to the Registration Statement on Form S-1 of the Company filed with the SEC on May 16, 2014 and incorporated herein by reference.


⁽⁵⁾	Filed as exhibit 3.2 to the Pre-Effective Amendment No. 1 to Registration Statement on Form S-1 of the Company filed with the SEC on June 4, 2014 and incorporated herein by reference.


⁽⁶⁾	Filed as exhibit 4.1 to the Registration Statement on Form S-1 of the Company filed with the SEC on May 16, 2014 and incorporated herein by reference.


⁽⁷⁾	Filed as exhibit 4.1 to the Current Report on Form 8-K filed with the SEC on March 24, 2017 and incorporated herein by reference.


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

Attached files

Investar Holding Corp Reports

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