On April 1, 2021, the Company completed the acquisition of Cheaha Financial Group, Inc. (“Cheaha”) and its wholly-owned subsidiary, Cheaha Bank, in Oxford, Alabama for an aggregate cash consideration of approximately $41.1 million. After fair value adjustments, the acquisition added $240.8 million in total assets, including $120.4 million in loans, and $207.0 million in deposits. As consideration paid was in excess of the net fair value of acquired assets, the Company recorded $11.9 million of goodwill. Goodwill resulted from a combination of synergies and cost savings, and further expansion into Alabama with the addition of 4 branch locations.

The table below shows the allocation of the consideration paid for Cheaha's common equity to the acquired identifiable assets and liabilities assumed and the goodwill generated from the transaction (dollars in thousands). The fair values listed below, primarily related to loans and deferred tax assets and liabilities, are subject to refinement for up to one year after the closing date of the acquisition as additional information becomes available.

The fair value of net assets acquired includes a fair value adjustment to loans as of the acquisition date. The adjustment for the acquired loan portfolio is based on current market interest rates at the time of acquisition, and the Company’s initial evaluation of credit losses identified. The contractually required principal and interest payments of the loans acquired from Cheaha total $134.8 million. Loans acquired from Cheaha that are considered to be purchased credit impaired loans had a balance of $0.2 million at the time of acquisition. The contractually required principal and interest payments of these loans total $0.2 million, of which $0.1 million is not expected to be collected.

There were 0 acquisition expenses recorded in the three months ended March 31, 2022. Acquisition related costs of $0.4 million are included in acquisition expense in the accompanying consolidated statements of income for the three months ended March 31, 2021 and are related to the acquisition of Cheaha.

The following is a summary of the information used in the computation of basic and diluted earnings per share for the three months ended March 31, 2022 and 2021 (in thousands, except share data).

The weighted average shares that have an antidilutive effect in the calculation of diluted earnings per common share and have been excluded from the computations above are shown below.

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

Proceeds from sales of investment securities classified as AFS and gross gains and losses are summarized below for the periods presented (dollars in thousands).

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

Securities are classified in the consolidated balance sheets according to management’s intent. The Company had 0 securities classified as trading as of March 31, 2022 or December 31, 2021.

The number of AFS securities, fair value, and unrealized losses, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, are summarized below as of the dates presented (amounts in thousands, except number of securities).

The number of HTM securities, fair value, and unrealized losses, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, are summarized below as of March 31, 2022 (amounts in thousands, except number of securities). There were no HTM securities in a continuous loss position as of December 31, 2021.

Unrealized losses are generally due to changes in interest rates. The Company has the intent to hold these securities either until maturity or a forecasted recovery, and it is more likely than not that the Company will not have to sell the securities before the recovery of their amortized cost basis. Due to the nature of the investment, current market prices, and the current interest rate environment, the Company does not consider these securities to be other-than-temporarily impaired at March 31, 2022 or December 31, 2021.

The amortized cost and approximate fair value of investment debt securities, by contractual maturity, are shown below as of the dates presented (dollars in thousands). Actual maturities may differ from contractual maturities due to mortgage-backed securities whereby borrowers may have the right to call or prepay obligations with or without call or prepayment penalties and certain callable bonds whereby the issuer has the option to call the bonds prior to contractual maturity.

At March 31, 2022, securities with a carrying value of $158.9 million were pledged to secure certain deposits, borrowings, and other liabilities, compared to $118.2 million in pledged securities at December 31, 2021.

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

Unamortized premiums and discounts on loans, included in the total loans balances above, were $1.1 million and $1.9 million at March 31, 2022 and December 31, 2021, respectively, and unearned income, or deferred fees, on loans was $1.5 million and $1.8 million at March 31, 2022 and December 31, 2021, respectively and is also included in the total loans balance in the table above.

The table below provides an analysis of the aging of loans, excluding loans held for sale, as of the dates presented (dollars in thousands).

Loans are considered past due if the required principal and interest payments have not been received as of the date such payments were due. Loans are placed on nonaccrual status when, in management’s opinion, the borrower may be unable to meet payment obligations as they become due, as well as when required by regulatory provisions. In determining whether or not a borrower may be unable to meet payment obligations for each class of loans, the borrower’s debt service capacity is considered through the analysis of current financial information, if available, and/or current information with regard to the collateral position. Regulatory provisions would typically require the placement of a loan on nonaccrual status if (i) principal or interest has been in default for a period of 90 days or more unless the loan is both well secured and in the process of collection or (ii) full payment of principal and interest is not expected. Loans may be placed on nonaccrual status regardless of whether or not such loans are considered past due. When interest accrual is discontinued, all unpaid accrued interest is reversed. Interest income on nonaccrual loans is recognized only to the extent that cash payments are received in excess of principal due. A loan may be returned to accrual status when all the principal and interest amounts contractually due are brought current and payment of future principal and interest amounts contractually due are reasonably assured, which is typically evidenced by a sustained period (at least six months) of repayment performance by the borrower.

The Company accounts 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 acquired impaired loans had 0 accretable yield recorded for the three months ended March 31, 2022 and 2021.

The following describes the risk characteristics relevant to each of the Company’s loan portfolio segments.

Construction and Development - Construction and development loans are generally made for the purpose of acquisition and development of land to be improved through the construction of commercial and residential buildings. The successful repayment of these types of loans is generally dependent upon a commitment for permanent financing from the Company, or from the sale of the constructed property. These loans carry more risk than commercial or residential real estate loans due to the dynamics of construction projects, changes in interest rates, the long-term financing market, and state and local government regulations. One such risk is that loan funds are advanced upon the security of the property under construction, which is of uncertain value prior to the completion of construction. Thus, it is more difficult to evaluate accurately the total loan funds required to complete a project and to calculate related loan-to-value ratios. The Company attempts to minimize the risks associated with construction lending by limiting loan-to-value ratios as described above. In addition, as to speculative development loans, the Company generally makes such loans only to borrowers that have a positive pre-existing relationship with us. The Company manages risk by using specific underwriting policies and procedures for these types of loans and by avoiding excessive concentrations in any one business or industry.

1-4 Family - The 1-4 family portfolio mainly consists of residential mortgage loans to consumers to finance a primary residence. The majority of these loans are secured by properties located in the Company’s market areas and carry risks associated with the creditworthiness of the borrower and changes in the value of the collateral and loan-to-value-ratios. The Company manages these risks through policies and procedures such as limiting loan-to-value ratios at origination, employing experienced underwriting personnel, requiring standards for appraisers, and not making subprime loans.

Multifamily - Multifamily loans are normally made to real estate investors to support permanent financing for multifamily residential income producing properties that rely on the successful operation of the property for repayment. This management mainly involves property maintenance and collection of rents due from tenants. This type of lending carries a lower level of risk, as compared to other commercial lending. In addition, underwriting requirements for multifamily properties are stricter than for other non-owner-occupied property types. The Company manages this risk by avoiding concentrations with any particular customer.

Farmland - Farmland loans are often for land improvements related to agricultural endeavors and may include construction of new specialized facilities. These loans are usually repaid through the conversion to permanent financing, or if scheduled loan amortization begins, for the long-term benefit of the borrower’s ongoing operations. Underwriting generally involves intensive analysis of the financial strength of the borrower and guarantor, liquidation value of the subject collateral, the associated unguaranteed exposure, and any available secondary sources of repayment, with the greatest emphasis given to a borrower’s capacity to meet cash flow coverage requirements as set forth by Bank policies.

Commercial Real Estate - Commercial real estate loans are extensions of credit secured by owner occupied and non-owner occupied collateral. Underwriting generally involves intensive analysis of the financial strength of the borrower and guarantor, liquidation value of the subject collateral, the associated unguaranteed exposure, and any available secondary sources of repayment, with the greatest emphasis given to a borrower’s capacity to meet cash flow coverage requirements as set forth by Bank policies. Repayment is commonly derived from the successful ongoing operations of the property. General market conditions and economic activity may impact the performance of these types of loans, including fluctuations in the value of real estate, new job creation trends, and tenant vacancy rates. The Company attempts to limit risk by analyzing a borrower’s cash flow and collateral value on an ongoing basis. The Company also typically requires personal guarantees from the principal owners of the property, supported by a review of their personal financial statements, as an additional means of mitigating our risk. The Company manages risk by avoiding concentrations in any one business or industry.

Commercial and Industrial - Commercial and industrial loans receive similar underwriting treatment as commercial real estate loans in that the repayment source is analyzed to determine its ability to meet cash flow coverage requirements as set forth by Bank policies. Repayment of these loans generally comes from the generation of cash flow as the result of the borrower’s business operations. Commercial lending generally involves different risks from those associated with commercial real estate lending or construction lending. Although commercial loans may be collateralized by equipment or other business assets (including real estate, if available as collateral), the repayment of these types of loans depends primarily on the creditworthiness and projected cash flow of the borrower (and any guarantors). Thus, the general business conditions of the local economy and the borrower’s ability to sell its products and services, thereby generating sufficient operating revenue to repay us under the agreed upon terms and conditions, are the chief considerations when assessing the risk of a commercial loan. The liquidation of collateral, if any, is considered a secondary source of repayment because equipment and other business assets may, among other things, be obsolete or of limited resale value. The Company actively monitors certain financial measures of the borrower, including advance rate, cash flow, collateral value and other appropriate credit factors.

In the second quarter of 2020, the Bank began participating as a lender in the Small Business Administration’s (“SBA”) and U.S. Department of Treasury’s Paycheck Protection Program (“PPP”) as established by the CARES Act and enhanced by the Paycheck Protection Program and Health Care Enhancement Act and the Paycheck Protection Program Flexibility Act of 2020 (“Flexibility Act”). The PPP was established to provide unsecured low interest rate loans to small businesses that have been impacted by the COVID-19 pandemic. The PPP loans are 100% guaranteed by the SBA. The loans have a fixed interest rate of 1% with deferred payments, and if originated before June 5, 2020, mature two years from origination, or if made on or after June 5, 2020, five years from origination. PPP loans are forgiven by the SBA (which makes forgiveness payments directly to the lender) to the extent the borrower uses the proceeds of the loan for certain purposes (primarily to fund payroll costs) during a certain time period following origination and maintains certain employee and compensation levels. Lenders receive processing fees from the SBA for originating the PPP loans which are based on a percentage of the loan amount. In July 2020, the CARES Act was amended to extend the SBA’s authority to make commitments under the PPP, which had previously expired on June 30, 2020. The PPP resumed taking applications on July 6, 2020, and the new deadline to apply for a PPP loan ended on August 8, 2020. On December 27, 2020, the CAA, a $900 billion aid package, was enacted that renewed the PPP and allocated additional funding for new first time PPP loans under the original PPP and also authorized second draw PPP loans for certain eligible borrowers that had previously received a PPP loan. The application period for the renewed PPP lasted from January 1, 2021 to May 31, 2021. At March 31, 2022 and December 31, 2021 the Company’s loan portfolio included PPP loans with balances of $13.2 million and $23.3 million, respectively, all of which are included in commercial and industrial loans.

Consumer - Consumer loans are offered by the Company in order to provide a full range of retail financial services to its customers and include auto loans, credit cards, and other consumer installment loans. Typically, the Company evaluates the borrower’s repayment ability through a review of credit scores and an evaluation of debt to income ratios. Repayment of consumer loans depends upon key consumer economic measures and upon the borrower’s financial stability, and is more likely to be adversely affected by divorce, job loss, illness and personal hardships than repayment of other loans. A shortfall in the value of any collateral also may pose a risk of loss to the Company for these types of loans.

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, excluding loans held for sale, by category and credit quality indicator as of the dates presented (dollars in thousands).

The Company had 0 loans that were classified as loss at March 31, 2022 or December 31, 2021.

Loan participations and whole loans sold to and serviced for others are not included in the accompanying consolidated balance sheets. The balance of the participations and whole loans sold were $28.0 million and $33.0 million at March 31, 2022 and December 31, 2021, respectively. The unpaid principal balance of these loans was approximately$85.8 million and $91.9 million at March 31, 2022 and December 31, 2021, respectively.

In the ordinary course of business, the Company makes loans to related parties including its executive officers, principal stockholders, directors and their immediate family members, as well as to companies in which these individuals are principal owners. Loans outstanding to such related party borrowers amounted to approximately $101.1 million and $97.6 million as of March 31, 2022 and December 31, 2021, respectively.

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

The table below shows a summary of the activity in the allowance for loan losses for the three months ended March 31, 2022 and 2021 (dollars in thousands).

The following tables outline the activity in the allowance for loan losses by collateral type for the three months ended March 31, 2022 and 2021, and show both the allowance and portfolio balances for loans individually and collectively evaluated for impairment as of March 31, 2022 and 2021 (dollars in thousands).

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

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

The following tables contain information on the Company’s impaired loans, which include TDRs, discussed in more detail below, and nonaccrual loans individually evaluated for impairment for purposes of determining the allowance for loan losses (dollars in thousands).

Presented in the tables below are 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).

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 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, or otherwise include a concession, the Company identifies the loan as a TDR and measures any impairment on the restructuring as previously noted for impaired loans. See Note 1. Summary of Significant Accounting Policies for further discussion of our treatment of TDRs in response to guidance from financial regulators.

Loans classified as TDRs, consisted of 24 credits, totaling approximately $7.4 million at March 31, 2022, compared to 29 credits totaling approximately $10.5 million at December 31, 2021. At March 31, 2022, elevenof the restructured loans were considered TDRs due to modification of terms through adjustments to maturity, seven of the restructured loans were considered TDRs due to a reduction in the interest rate to a rate lower than the current market rate, four restructured loans were considered TDRs due to principal payment forbearance paying interest only for a specified period of time, and two of the restructured loans were considered TDRs due to principal and interest payment forbearance.

As of March 31, 2022 and December 31, 2021, none of the TDRs were in default of their modified terms and included in nonaccrual loans. The Company individually evaluates each TDR for allowance purposes, primarily based on collateral value, and excludes these loans from the loan population that is collectively evaluated for impairment.

NaN TDRs defaulted on their modified terms during the three months ended March 31, 2022. There was one loan modified under TDR during the previous twelve month period that subsequently defaulted during the three months ended March 31, 2021.

At March 31, 2022 and December 31, 2021, there were 0 available balances on loans classified as TDRs that the Company was committed to lend.

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

As part of its liability management, the Company utilizes pay-fixed interest rate swaps to manage exposure against the variability in the expected future cash flows (future interest payments) attributable to changes in the 1-month LIBOR associated with the forecasted issuances of 1-month fixed rate debt arising from a rollover strategy. 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 7.4 years. At both March 31, 2022 and December 31, 2021 the Company had 0 current interest rate swap agreements, and forward starting interest rate swap agreements with a total notional amount of $60.0 million at March 31, 2022 compared to $115.0 million at December 31, 2021, all of which were designated as cash flow hedges. The interest rate swaps were determined to be fully effective during the periods presented, and therefore no amount of ineffectiveness has been included in net income. The derivative contracts are between the Company and two counterparties. To mitigate credit risk, securities are pledged to the Company by the counterparties in an amount greater than or equal to the gain position of the derivative contracts. Conversely, securities are pledged to the counterparties by the Company in an amount greater than or equal to the loss position of the derivative contracts, if applicable.

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

For the three months ended March 31, 2022, a gain of $3.2 million, net of a $0.8 million tax expense, has been recognized in “Other comprehensive (loss) income” in the accompanying consolidated statements of comprehensive (loss) income for the change in fair value of the interest rate swaps compared to a gain of $6.1 million, net of a $1.6 million tax expense, recognized for the three months ended March 31, 2021.

The fair value of the swap contracts consisted of gross assets of $3.3 million and 0 gross liabilities, netting to a fair value of $3.3 million recorded in “Other assets” in the accompanying consolidated balance sheet at March 31, 2022. The fair value of the swap contracts consisted of gross assets of $2.6 million and gross liabilities of $29,000, netting to a fair value of $2.6 million recorded in “Other assets” in the accompanying consolidated balance sheet at December 31, 2021. The accumulated gain of $2.6 million included in “Accumulated other comprehensive (loss) income” in the accompanying consolidated balance sheet as of March 31, 2022 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.

The Company enters into interest rate swaps that allow commercial loan customers to effectively convert a variable-rate commercial loan agreement to a fixed-rate commercial loan agreement. Under these agreements, the Company enters into a variable-rate loan agreement with a customer in addition to an interest rate swap agreement, which serves to effectively swap the customer’s variable-rate loan into a fixed-rate loan. The Company then enters into a corresponding swap agreement with a third party in order to economically hedge its exposure through the customer agreement. The interest rate swaps with both the customers and third parties are not designated as hedges under FASB ASC Topic 815,Derivatives and Hedging, and are marked to market through earnings. As the interest rate swaps are structured to offset each other, changes to the underlying benchmark interest rates considered in the valuation of these instruments do not result in an impact to earnings; however, there may be fair value adjustments related to credit quality variations between counterparties, which may impact earnings as required by FASB ASC Topic 820,Fair Value Measurement and Disclosure (“ASC 820”). The Company did not recognize any gains or losses in other operating income resulting from fair value adjustments of these swap agreements during the three months ended March 31, 2022 and 2021.

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

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

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

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

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

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

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

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

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

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

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

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

Based on market reference data, which may include reported trades; bids, offers or broker/dealer quotes; benchmark yields and spreads; as well as other reference data, management monitors the current placement of securities in the fair value hierarchy to determine whether transfers between levels may be warranted. At March 31, 2022 and December 31, 2021, the majority of our level 3 investments were obligations of state and political subdivisions. The Company estimated the fair value of these level 3 investments using discounted cash flow models, the key inputs of which are the coupon rate, current spreads to the yield curves, and expected repayment dates, adjusted for illiquidity of the local municipal market and sinking funds, if applicable. Option-adjusted models may be used for structured or callable notes, as appropriate.

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

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

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

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

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

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

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

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).

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 thethree months ended March 31, 2022 and 2021 (dollars in thousands).

There were no liabilities measured at fair value on a recurring basis using level 3 inputs at March 31, 2022 and December 31, 2021. For the three months ended March 31, 2022 and 2021, there were no gains or losses included in earnings related to the change in fair value of the assets measured on a recurring basis using significant unobservable inputs held at the end of the period.

The following table provides quantitative information about significant unobservable inputs used in fair value measurements of level 3 assets measured at fair value on a recurring basis at March 31, 2022 or December 31, 2021 (dollars in thousands):

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

Certain financial assets and financial liabilities are measured at fair value on a nonrecurring basis; that is, the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment). Quantitative information about assets measured at fair value on a nonrecurring basis based on significant unobservable inputs (level 3) is summarized below as of December 31, 2021. There were no assets measured on a nonrecurring basis at March 31, 2022, and there wereno liabilities measured on a nonrecurring basis at March 31, 2022 or December 31, 2021 (dollars in thousands).

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

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

For the three month period ended March 31, 2022, the effective tax rate differs from the statutory tax rate of 21% primarily due to tax exempt interest income earned on certain investment securities and bank owned life insurance. For the three month period ended March 31, 2021, the effective tax rate differs from the statutory tax rate of 21% primarily due to an increase in state taxes and the impact of share-based compensation.

The Company is a party to financial instruments with off-balance-sheet risk entered into in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit consisting of loan commitments and standby letters of credit, which are not included in the accompanying financial statements. Such financial instruments are recorded in the financial statements when they become payable. The credit risk associated with these commitments is evaluated in a manner similar to the allowance for loan losses. The reserve for unfunded loan commitments was $0.7 million at both March 31, 2022 and December 31, 2021 and is included in "Accrued taxes and other liabilities" in the consolidated balance sheets.

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

Additionally, at March 31, 2022, the Company had unfunded commitments of $1.9 million for its investment in Small Business Investment Company qualified funds.

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

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

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

Quantitative information regarding the Company’s operating leases is presented below as of and for the three months ended March 31, 2022 and 2021 (dollars in thousands).

At March 31, 2022, the Company’s lease ROU assets and related lease liabilities were $3.2 million and $3.3 million, respectively, and have remaining terms ranging from 2 to 10 years, including extension options if the Company is reasonably certain they will be exercised.

Future minimum lease payments due under non-cancelable operating leases at March 31, 2022 are presented below (dollars in thousands).

At March 31, 2022, the Company had not entered into any material leases that have not yet commenced.

The Bank owns its corporate headquarters building, the first floor of which is occupied by multiple tenants. All tenant leases are operating leases. The Bank, as lessor, recognized lease income of $85,000 and $79,000 for the three month periods ended March 31, 2022 and 2021, respectively.

On April 6, 2022, the Company entered into a Subordinated Note Purchase Agreement (the “Purchase Agreement”) with certain institutional accredited investors and qualified institutional buyers (the “Purchasers”) under which the Company issued an aggregate of $20.0 million in aggregate principal amount of its 5.125% Fixed-to-Floating Rate Subordinated Notes due 2032 (the “Notes”) to the Purchasers at a price equal to 100% of the aggregate principal amount of the Notes. The Purchase Agreement contained certain customary representations, warranties and covenants made by the Company, on the one hand, and the Purchasers, severally and not jointly, on the other hand. The Notes were offered and sold in reliance on the exemptions from registration provided by Section 4(a)(2) of the Securities Act of 1933, as amended, and Rule 506 of Regulation D thereunder.

The Notes were issued under an indenture, dated April 6, 2022 (the “Indenture”), by and among the Company and UMB Bank, National Association, as trustee (the “Trustee”). The Trustee will also serve as the initial paying agent and registrar with respect to the Notes.

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

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

On April 6, 2022, in connection with the issuance of the Notes, the Company entered into a Registration Rights Agreement (the “Registration Rights Agreement”) with the Purchasers, pursuant to which the Company has agreed to take steps, within certain time periods following the closing specified in the Purchase Agreement, to provide for the exchange of the Notes for subordinated notes that are registered with the Securities and Exchange Commission (the “SEC”) and have substantially the same terms as the Notes. Among other things, the Company has agreed to use its commercially reasonable efforts to file an exchange offer registration statement with the SEC not later than 60 days following the closing of the sale of the Notes and to complete the exchange offer within 45 days after the effectiveness of the registration statement. Under certain circumstances, if the Company fails to meet its obligations under the Registration Rights Agreement, it would be required to pay additional interest to the holders of the Notes.

The Company expects to utilize the net proceeds from the sale of the Notes to refinance the Company’s subordinated debt securities issued in 2017, for possible share repurchases and general corporate purposes.

ITEM2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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

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

•

the significant risks and uncertainties for our business, results of operations and financial condition, as well as our regulatory capital and liquidity ratios and other regulatory requirements in the United States caused by the ongoing COVID-19 pandemic, including but not limited to potential continued higher inflation and supply and labor constraints, which will depend on several factors, including the scope and duration of the pandemic, its continued influence on the economy and financial markets, the impact on market participants on which we rely, and actions taken by governmental authorities and other third parties in response to the pandemic;

•

business and economic conditions generally and in the financial services industry in particular, whether nationally, regionally or in the markets in which we operate, including evolving risks to economic activity and our customers posed by the COVID-19 pandemic and government actions taken to address the impact of COVID-19 or contain it and the potential impact of the termination of various pandemic-related government support programs;

•

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

•

changes (or the lack of changes) in interest rates, yield curves and interest rate spread relationships that affect our loan and deposit pricing, including potential continued increases in interest rates in 2022;

•

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

•

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

•

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, Texas and Alabama;

•

concentration of credit exposure;

•

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

•

a reduction in liquidity, including as a result of a reduction in the amount of deposits we hold or other sources of liquidity;

•

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

•

data processing system failures and errors;

•

cyberattacks and other security breaches;

•

potential impairment of our goodwill and other intangible assets;

•

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

Table of ~~that growth;~~Contents

~~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;~~

~~concentration of credit exposure;~~

~~the ability to effectively integrate employees, customers, operations and branches from our recent acquisition of Citizens Bancshares, Inc. and its wholly-owned subsidiary, Citizens Bank; and~~

~~the satisfaction of the conditions to closing the pending acquisition of BOJ Bancshares, Inc. and the ability to subsequently integrate it effectively.~~

•

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

•

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

•

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

•

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

•

governmental monetary and fiscal policies, including the potential for the Federal Reserve Board to raise target interest rates multiple times during 2022;

•

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

•

other circumstances, many of which are beyond our control.

These factors should not be construed as exhaustive. Additional information on these and other risk factors can be found in Item 1A. “Risk Factors” and Item 7. ~~“Special~~“Management’s Discussion and Analysis of Financial Condition and Results of Operations - Special Note Regarding Forward-Looking Statements” in the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2016,~~2021, filed with the ~~Securities~~SEC on March 9, 2022 (the “Annual Report”) and ~~Exchange Commission.~~

in Part II Item 1A. “Risk Factors” of this report.

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

~~PART I. FINANCIAL INFORMATION~~

~~ITEM 1. FINANCIAL STATEMENTS~~

~~INVESTAR HOLDING CORPORATION~~

~~CONSOLIDATED BALANCE SHEETS~~

~~(Amounts in thousands, except share data)~~

September 30, 2017 December 31, 2016
(Unaudited)
ASSETS
Cash and due from banks $ 17,942
$ 9,773
Interest-bearing balances due from other banks 30,566
19,569
Federal funds sold —
106
Cash and cash equivalents 48,508
29,448

Available for sale securities at fair value (amortized cost of $228,980 and $166,258, respectively) 227,562
163,051
Held to maturity securities at amortized cost (estimated fair value of $19,311 and $19,612, respectively) 19,306
20,091
Loans, net of allowance for loan losses of $7,605 and $7,051, respectively 1,102,916
886,375
Other equity securities 7,744
5,362
Bank premises and equipment, net of accumulated depreciation of $7,362 and $6,751, respectively 33,705
31,722
Other real estate owned, net 3,830
4,065
Accrued interest receivable 4,147
3,218
Deferred tax asset 2,604
2,868
Goodwill and other intangible assets, net 13,271
3,234
Bank owned life insurance 8,140
7,201
Other assets 4,690
2,325
Total assets $ 1,476,423
$ 1,158,960

LIABILITIES

Deposits:

Noninterest-bearing $ 175,130
$ 108,404
Interest-bearing 926,232
799,383
Total deposits 1,101,362
907,787
Advances from Federal Home Loan Bank 162,700
82,803
Repurchase agreements 24,892
39,087
Subordinated debt, net of unamortized issuance costs 18,157
—
Junior subordinated debt 3,609
3,609
Other borrowings —
1,000
Accrued taxes and other liabilities 12,827
11,917
Total liabilities 1,323,547
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; 8,704,562 and 7,101,851 shares issued and outstanding, respectively 8,705
7,102
Surplus 113,458
81,499
Retained earnings 31,508
26,227
Accumulated other comprehensive loss (795 ) (2,071 )
Total stockholders’ equity 152,876
112,757
Total liabilities and stockholders’ equity $ 1,476,423
$ 1,158,960

~~See accompanying notes to the consolidated financial statements.~~

~~INVESTAR HOLDING CORPORATION~~

~~CONSOLIDATED STATEMENTS OF INCOME~~

~~(Amounts in thousands, except share data)~~

~~(Unaudited)~~

Three months ended
September 30, Nine months ended
September 30,
2017 2016 2017 2016
INTEREST INCOME
Interest and fees on loans $ 12,893
$ 10,011
$ 33,456
$ 29,277
Interest on investment securities 1,399
920
3,627
2,667
Other interest income 150
62
296
146
Total interest income 14,442
10,993
37,379
32,090

INTEREST EXPENSE

Interest on deposits 2,137
1,934
5,817
5,212
Interest on borrowings 767
306
1,862
920
Total interest expense 2,904
2,240
�� 7,679
6,132
Net interest income 11,538
8,753
29,700
25,958

Provision for loan losses 420
450
1,145
1,704
Net interest income after provision for loan losses 11,118
8,303
28,555
24,254

NONINTEREST INCOME

Service charges on deposit accounts 281
79
474
264
Gain on sale of investment securities, net 27
204
242
428
Gain on sale of fixed assets, net 160
—
184
1,252
Gain on sale of other real estate owned, net 37
—
32
11
Gain on sale of loans, net —
—
—
313
Servicing fees and fee income on serviced loans 352
510
1,153
1,638
Other operating income 310
236
768
666
Total noninterest income 1,167
1,029
2,853
4,572
Income before noninterest expense 12,285
9,332
31,408
28,826

NONINTEREST EXPENSE

Depreciation and amortization 542
371
1,309
1,110
Salaries and employee benefits 5,136
3,945
13,195
11,708
Occupancy 317
265
826
743
Data processing 446
374
1,169
1,115
Marketing 124
102
271
316
Professional fees 263
312
726
966
Customer reimbursements —
—
—
584
Acquisition expense 824
—
1,049
—
Other operating expenses 1,470
1,179
4,189
3,494
Total noninterest expense 9,122
6,548
22,734
20,036
Income before income tax expense 3,163
2,784
8,674
8,790
Income tax expense 1,032
747
2,756
2,758
Net income $ 2,131
$ 2,037
$ 5,918
$ 6,032

EARNINGS PER SHARE

Basic earnings per share $ 0.24
$ 0.29
$ 0.72
$ 0.85
Diluted earnings per share 0.24
0.29
0.71
0.84
Cash dividends declared per common share 0.03
0.01
0.07
0.03

~~See accompanying notes to the consolidated financial statements.~~

~~INVESTAR HOLDING CORPORATION~~

~~CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME~~

~~(Amounts in thousands)~~

~~(Unaudited)~~

Three months ended September 30, Nine months ended September 30,
2017 2016 2017 2016
Net income $ 2,131
$ 2,037
$ 5,918
$ 6,032
Other comprehensive income (loss):

Unrealized gain (loss) on investment securities:

Unrealized gain (loss), available for sale, net of tax expense (benefit) of $51, ($98), $711 and $790, respectively
95
(182 ) 1,320
1,466
Reclassification of realized gain, net of tax expense of $10, $71, $85 and $150, respectively
(18 ) (133 ) (157 ) (278 )
Unrealized loss, transfer from available for sale to held to maturity, net of tax benefit of $0, $0, $0, and $1, respectively —
—
(1 ) (2 )
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 $20, $151, $62 and ($199), respectively
37
281
114
(370 )
Total other comprehensive income (loss) 114
(34 ) 1,276
816
Total comprehensive income $ 2,245
$ 2,003
$ 7,194
$ 6,848

~~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 $1,991 1,624
30,885
—
—
32,509
Surrendered shares (8 ) (158 ) —
—
(166 )
Shares repurchased (12 ) (252 ) —
—
(264 )
Options and warrants exercised 67
822
—
—
889
Dividends declared, $0.07 per share —
—
(637 ) —
(637 )
Stock-based compensation and other activity (68 ) 655
—
—
587
Net tax effect of stock-based compensation —
7
—
—
7
Net income —
—
5,918
—
5,918
Other comprehensive income, net —
—
—
1,276
1,276
Balance, September 30, 2017 (Unaudited) $ 8,705
$ 113,458
$ 31,508
$ (795 ) $ 152,876

~~See accompanying notes to the consolidated financial statements.~~

~~INVESTAR HOLDING CORPORATION~~

~~CONSOLIDATED STATEMENTS OF CASH FLOWS~~

~~(Amounts in thousands)~~

~~(Unaudited)~~

Nine months ended September 30,
2017 2016
Cash flows from operating activities:

Net income $ 5,918
$ 6,032
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 1,309
1,110
Provision for loan losses 1,145
1,704
Amortization of purchase accounting adjustments (234 ) (36 )
Provision for other real estate owned 183
7
Net amortization of securities 834
893
Gain on sale of securities, net (242 ) (428 )
Gain on sale of fixed assets, net (184 ) (1,252 )
Gain on sale of other real estate owned, net (32 ) (11 )
FHLB stock dividend (65 ) (48 )
Stock-based compensation 587
457
Deferred taxes (210 ) 92
Net change in value of bank owned life insurance (154 ) (137 )
Amortization of subordinated debt issuance costs 23
—
Loans held for sale:
Originations —
(495 )
Proceeds from sales —
23,837
Gain on sale of loans —
(313 )
Net change in:
Accrued interest receivable (276 ) (250 )
Other assets (195 ) (339 )
Accrued taxes and other liabilities (1,045 ) 2,232
Net cash provided by operating activities 7,362
33,055

Cash flows from investing activities:

Proceeds from sales of investment securities available for sale 82,537
14,416
Funds invested in securities available for sale (95,614 ) (60,664 )
Proceeds from maturities, prepayments and calls of investment securities available for sale 19,702
12,058
Proceeds from maturities, prepayments and calls of investment securities held to maturity 741
4,893
Proceeds from redemption of other equity securities 1,307
—
Purchase of other equity securities (3,624 ) (1,505 )
Net increase in loans (88,313 ) (84,951 )
Proceeds from sales of other real estate owned 513
480
Proceeds from the sales of fixed assets 601
2,649
Purchases of fixed assets (1,214 ) (3,682 )
Acquisition of trademark intangible —
(100 )
Purchase of bank owned life insurance —
(3,500 )
Purchase of other investments (624 ) (553 )
Distributions from investments 12
—
Cash paid for Citizens, net of cash acquired (1,235 ) —
Net cash used in investing activities (85,211 ) (120,459 )

Cash flows from financing activities:

Net (decrease) increase in customer deposits (18,603 ) 169,693
Net decrease in repurchase agreements (14,195 ) (15,545 )
Net increase (decrease) in short-term FHLB advances 38,500
(33,780 )
Proceeds from long-term FHLB advances 45,000
5,000
Repayment of long-term FHLB advances (3,603 ) (9,774 )
Cash dividends paid on common stock (457 ) (199 )
Proceeds from public offering of common stock, net of issuance costs 32,509
—
Proceeds from stock options and warrants exercised 889
30
Payments to repurchase common stock (264 ) (2,832 )
Proceeds from other borrowings 78
—
Repayment of other borrowings (1,078 ) —
Proceeds from subordinated debt, net of issuance costs 18,133
—
Net cash provided by financing activities 96,909
112,593

Net increase in cash and cash equivalents 19,060
25,189
Cash and cash equivalents, beginning of period 29,448
20,966
Cash and cash equivalents, end of period $ 48,508
$ 46,155

~~See accompanying notes to the consolidated financial statements.~~

~~INVESTAR HOLDING CORPORATION~~

~~NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Unaudited)~~

~~NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES~~

~~Basis of Presentation~~

The accompanying unaudited consolidated financial statements of Investar Holding Corporation (the “Company”) have been prepared in accordance with United States generally accepted accounting principles (“GAAP”) for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include information or footnotes necessary for a complete presentation of financial position, results of operations, and cash flows in conformity with GAAP. However, in the opinion of management, all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation of the financial statements have been included. The results of operations for the three and nine month periods ended September 30, 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. At September 30, 2017, the

Company ~~operated 15 full service banking offices located throughout its market and had 227 employees.~~

~~Principles of Consolidation~~

The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, the Bank. All significant intercompany accounts and transactions have been eliminated in consolidation.

~~Use of Estimates~~

The preparation of 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.~~

~~Investment Securities~~

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

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

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

~~INVESTAR HOLDING CORPORATION~~

~~NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Unaudited)~~

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

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

~~Loans~~

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

Loans for which management has the intent and ability to hold for the foreseeable future or until maturity or pay-off are stated at unpaid principal balances, adjusted by an allowance for loan losses. Interest on loans is calculated by using the simple interest method on daily balances of the principal amount outstanding. Loans are ordinarily placed on nonaccrual when a loan is specifically determined to be impaired or when principal or interest is delinquent for 90 days or more; however, management may elect to continue the accrual when the estimated net realizable value of collateral is sufficient to cover the principal balance and the accrued interest. Any unpaid interest previously accrued on nonaccrual loans is reversed from income. Interest income, generally, is not recognized on specific impaired loans unless the likelihood of further loss is remote. Interest payments received on such loans are applied as a reduction of the loan principal balance. Interest income on other nonaccrual loans is recognized only to the extent of interest payments received.

The Company considers a loan to be impaired when, based upon current information and events, it believes it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. The Company’s impaired loans include troubled debt restructurings and performing and non-performing loans for which full payment of principal or interest is not expected. Large groups of smaller balance homogenous loans are collectively evaluated for impairment. The Company calculates an allowance required for impaired loans based on the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s observable market price or the fair value of its collateral. If the recorded investment in the impaired loan exceeds the measure of fair value, a valuation allowance is required as a component of the allowance for loan losses. Changes to the valuation allowance are recorded as a component of the provision for loan losses.

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

~~Acquisition Accounting~~

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

Purchased loans acquired in a business combination are recorded at their estimated fair value as of the acquisition date. The fair value of loans acquired is determined using a discounted cash flow model based on assumptions regarding the amount and timing of principal and interest prepayments, estimated payments, estimated default rates, estimated loss severity in the event of defaults, and current market rates. Estimated credit losses are included in the determination of fair value; therefore, an allowance for loan losses is not recorded on the acquisition date. The fair value adjustment is amortized over the life of the loan using the effective interest method, except for those loans accounted for under ASC Topic 310-30, discussed below.

~~INVESTAR HOLDING CORPORATION~~

~~NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Unaudited)~~

The Company accounts for acquired impaired loans under ASC Topic 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality (“ASC 310-30”). An acquired loan is considered impaired when there is evidence of credit deterioration since origination and it is probable, at the date of acquisition, that we will be unable to collect all contractually required payments. ASC 310-30 prohibits the carryover of an allowance for loan losses for acquired impaired loans. Over the life of the acquired loans, we continually estimate the cash flows expected to be collected on individual loans or on pools of loans sharing common risk characteristics. As of the end of each fiscal quarter, we evaluate the present value of the acquired loans using the effective interest rates. For any increases in cash flows expected to be collected, we adjust the amount of accretable yield recognized on a prospective basis over the loan’s or pool’s remaining life, while we recognize a provision for loan loss in the consolidated statement of operations if the cash flows expected to be collected have decreased.

~~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 5, 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.

~~New Accounting Pronouncement~~

~~Accounting Standards Update (“ASU”) 2016-09,~~ ~~Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting~~ was effective for the Company on January 1, 2017. ASU 2016-09 requires that all income tax effects related to vestings of share-based payment awards be reported in earnings as an increase (or decrease) to income tax expense. Previously, excess income tax benefits of a vested award were reported as an increase (or decrease) to additional paid-in capital to the extent that those benefits were greater than (or less than) the income tax benefits recognized in earnings during the award’s vesting period. The requirement to report those income tax effects in earnings has been applied to vestings occurring on or after January 1, 2017 and resulted in recording a $83,000 tax benefit for thenine months ended September 30, 2017. ASU 2016-09 also requires that all income tax-related cash flows resulting from share-based payments be reported as operating activities in the statement of cash flows. We have elected to apply that change in cash flow classification on a prospective basis, and prior periods have not been adjusted. The impact of this change and that of the remaining provisions of ASU 2016-09 did not have a significant impact on our financial statements.

~~Recent Accounting Pronouncements~~

~~FASB ASC Topic 815 “Derivatives and Hedging” Update No. 2017-12.~~ The Financial Accounting Standards Board (“FASB”) issued ASU No. 2017-12 in August 2017. The ASU amends the hedge accounting model in Topic 815 to enable entities to better portray the economics of their risk management activities in the financial statements and enhance the transparency and understandability of hedge results. The amendments expand an entity’s ability to hedge nonfinancial and financial risk components and reduce complexity in fair value hedges of interest rate risk. The guidance eliminates the requirement to separately measure and report hedge ineffectiveness and generally requires the entire change in the fair value of a hedging instrument to be presented in the same income statement line as the hedged item. The guidance also eases certain documentation and assessment requirements and modifies the accounting for components excluded from the assessment of hedge effectiveness. This amended guidance is effective for the Company on January 1, 2019, and, given the current level of derivatives designated as hedges, is not expected to have a material impact on our consolidated operating results or financial condition.

~~FASB ASC Topic 718 “Compensation – Stock Compensation: Scope of Modification Accounting” Update No. 2017-09.~~ The FASB issued ASU No. 2017-09 in May 2017. The ASU clarifies when changes to terms or conditions of a share-based payment award must be accounted for as a modification. Under the new guidance, an entity will not apply modification accounting to a share-based payment award if all of the following are the same immediately before and after the change: (i) the fair value of the award, (ii) the vesting conditions of the award, and (iii) the classification of the award as either an equity or liability instrument. ASU 2017-09 will be effective for the Company beginning January 1, 2018. Early adoption is permitted. The guidance requires companies to apply the requirements prospectively to awards modified on or after the adoption date. ASU 2017-09 is not expected to have a significant impact on the Company’s consolidated financial statements.

~~INVESTAR HOLDING CORPORATION~~

~~NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Unaudited)~~

~~FASB ASC Subtopic 310-20 “Receivables – Nonrefundable Fees and Other Costs, Premium Amortization on Purchased Callable Debt Securities” Update No. 2017-08.~~ The FASB issued 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.

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.

~~INVESTAR HOLDING CORPORATION~~

~~NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Unaudited)~~

~~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 through the modified-retrospective transition method 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.

~~NOTE 2. BUSINESS COMBINATIONS~~

On July 1, 2017, the Company completed the acquisition of Citizens Bancshares, Inc. (“Citizens”) and its wholly-owned subsidiary, Citizens Bank, located in Evangeline Parish, Louisiana. The Company acquired 100% of Citizens’ outstanding common shares for an aggregate amount of cash consideration equal to $45.8 million, or approximately $419.20 per share. The acquisition of Citizens expands the Company’s branch footprint in Louisiana and increases the core deposit base to help position the Company to continue to grow. On the date of acquisition, Citizens had approximately $250 million in assets, $130 million in net loans, $212 million in deposits, and $36 million in stockholders’ equity, and served the residents of Evangeline Parish through its three branch locations.

Acquisition related costs of $0.8 million and $1.0 million are included in acquisition expenses in the accompanying consolidated statements of income, for the three and nine month periods ended September 30, 2017. These costs include system conversion and integrating operations charges as well as legal and consulting expenses.

~~INVESTAR HOLDING CORPORATION~~

~~NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Unaudited)~~

In connection with the acquisition, the Company recorded $8.7 million of goodwill. Goodwill resulted from a combination of synergies and cost savings, expansion in Louisiana with the addition of three branch locations, enhanced products and services and a lower cost of funds. The Company also recorded a core deposit intangible of $1.5 million. The change in goodwill and other intangibles at September 30, 2017 compared to December 31, 2016 is primarily attributable to the goodwilll and core deposit intangible recorded as a result of the Citizens acquisition.

The table below shows the allocation of the consideration paid for Citizens’ common equity to the acquired identifiable assets and liabilities assumed and the goodwill generated from the transaction (dollars in thousands). The fair values listed below, primarily related to loans, are subject to refinement for up to one year after the closing date of the acquisition as additional information becomes available.

Purchase price:
Cash paid $ 45,800

Fair value of assets acquired:
Cash and cash equivalents 44,565
Investment securities 69,897
Loans 129,189
Bank premises and equipment 3,337
Other intangible assets 1,462
Other assets 2,558
Total assets acquired 251,008

Fair value of liabilities acquired:
Deposits 212,228
Other liabilities 1,652
Total liabilities assumed 213,880

Fair value of net assets acquired 37,128
Goodwill $ 8,672

Fair value adjustments to assets acquired and liabilities assumed are generally amortized using either an effective yield or straight-line basis over periods consistent with the average life, useful life and/or contractual term of the related assets and liabilities.

~~The tables below present information about the loans acquired from Citizens as of the date of acquisition (dollars in thousands).~~

Purchase Credit Impaired
Contractually required principal $ 9,809
Non-accretable difference (1,546 )
Cash flows expected to be collected 8,263
Accretable yield —
Fair value of acquired loans $ 8,263

~~INVESTAR HOLDING CORPORATION~~

~~NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Unaudited)~~

Non-Credit Impaired
Contractually required principal $ 122,755
Cash flows expected to be collected 122,060
Accretable yield (1,134 )
Fair value of acquired loans $ 120,926

The following unaudited supplemental pro forma information is presented to show estimated results assuming Citizens was acquired as of January 1, 2016. These unaudited pro forma results are not necessarily indicative of the operating results that the Company would have achieved had it completed the acquisition as of January 1, 2016 and should not be considered representative of future operating results. The pro forma net income for the three and nine month periods ended September 30, 2017 excludes the tax-affected amounts of $0.8 million and $2.0 million, respectively, of acquisition expenses recorded in noninterest expense by both the Company and Citizens.

Unaudited Pro Forma for the
Three months ended September 30, Nine months ended September 30,
(dollars in thousands) 2017 2016 2017 2016
Interest income $ 14,442
$ 13,171
$ 41,635
$ 38,491
Noninterest income 1,167
1,254
3,350
5,241
Net income 2,686
2,582
7,510
7,710

~~NOTE 3. EARNINGS PER SHARE~~

The following is a summary of the information used in the computation of basic and diluted earnings per share for the three and nine months ended September 30, 2017 and 2016 (in thousands, except share data).

Three months ended September 30, Nine months ended September 30,
2017 2016 2017 2016
Net income $ 2,131
$ 2,037
$ 5,918
$ 6,032
Weighted average number of common shares outstanding used in computation of basic earnings per share 8,702,559
7,059,953
8,203,645
7,137,398
Effect of dilutive securities:
Restricted stock 27,741
15,546
18,756
8,991
Stock options 46,632
15,369
10,572
14,920
Stock warrants 20,585
11,575
47,022
11,360
Weighted average number of common shares outstanding plus effect of dilutive securities used in computation of diluted earnings per share 8,797,517
7,102,443
8,279,995
7,172,669
Basic earnings per share $ 0.24
$ 0.29
$ 0.72
$ 0.85
Diluted earnings per share $ 0.24
$ 0.29
$ 0.71
$ 0.84

~~INVESTAR HOLDING CORPORATION~~

~~NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Unaudited)~~

~~NOTE 4. 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
September 30, 2017
Obligations of other U.S. government agencies and corporations $ 55,789
$ 77
$ (370 ) $ 55,496
Obligations of state and political subdivisions 35,884
35
(388 ) 35,531
Corporate bonds 16,821
68
(331 ) 16,558
Residential mortgage-backed securities 116,246
197
(654 ) 115,789
Commercial mortgage-backed securities 3,218
5
(46 ) 3,177
Equity securities 1,022
23
(34 ) 1,011
Total $ 228,980
$ 405
$ (1,823 ) $ 227,562

Amortized Cost Gross
Unrealized
Gains Gross
Unrealized
Losses Fair
Value
December 31, 2016
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

~~Proceeds from sales of investment securities available for sale and gross gains and losses are summarized below as of the dates presented (dollars in thousands).~~

Three months ended September 30, Nine months ended September 30,
2017 2016 2017 2016
Proceeds from sale $ 63,488
$ 5,998
$ 82,537
$ 14,416
Gross gains $ 27
$ 204
$ 275
$ 428
Gross losses $ —
$ —
$ (33 ) $ —

~~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
September 30, 2017
Obligations of state and political subdivisions $ 12,655
$ 17
$ —
$ 12,672
Residential mortgage-backed securities 6,651
21
(33 ) 6,639
Total $ 19,306
$ 38
$ (33 ) $ 19,311

Amortized Cost Gross
Unrealized
Gains Gross
Unrealized
Losses Fair
Value
December 31, 2016
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

~~INVESTAR HOLDING CORPORATION~~

~~NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Unaudited)~~

~~Securities are classified in the consolidated balance sheets according to management’s intent. The Company had no securities classified as trading as of September 30, 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. Unrealized losses are generally due to changes in interest rates. The Company has the intent to hold these securities either until maturity or a forecasted recovery, and it is more likely than not that the Company will not have to sell the securities before the recovery of their cost basis. Due to the nature of the investment and current market prices, these unrealized losses are considered a temporary impairment of the securities.

The number of securities available for sale, fair value, and unrealized losses, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, are summarized below as of the dates presented (dollars in thousands).

Less than 12 Months 12 Months or More Total
Count Fair Value
Unrealized
Losses
Fair Value Unrealized
Losses Fair Value Unrealized
Losses
September 30, 2017
Obligations of other U.S. government agencies and corporations 73
$ 39,719
$ (351 ) $ 1,162
$ (19 ) $ 40,881
$ (370 )
Obligations of state and political subdivisions 24
16,960
(73 ) 9,367
(315 ) 26,327
(388 )
Corporate bonds 23
3,002
(63 ) 7,652
(268 ) 10,654
(331 )
Residential mortgage-backed securities 124
77,167
(597 ) 4,397
(57 ) 81,564
(654 )
Commercial mortgage-backed securities 4
1,960
(41 ) 200
(5 ) 2,160
(46 )
Equity securities 3
245
(9 ) 481
(25 ) 726
(34 )
Total 251
$ 139,053
$ (1,134 ) $ 23,259
$ (689 ) $ 162,312
$ (1,823 )

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
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 number of securities held to maturity, fair value, and unrealized losses, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, are summarized below as of the dates presented (dollars in thousands).

Less than 12 Months 12 Months or More Total
Count Fair Value Unrealized
Losses Fair Value Unrealized
Losses Fair Value Unrealized
Losses
September 30, 2017
Residential mortgage-backed securities 4
$ 2,655
$ (33 ) $ —
$ —
$ 2,655
$ (33 )
Total 4
$ 2,655
$ (33 ) $ —
$ —
$ 2,655
$ (33 )

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
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 September 30, 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
September 30, 2017
Due within one year 2.03 % $ 1,985
$ 1,985
7.17 % $ 685
$ 686
Due after one year through five years 2.36
15,748
15,772
7.17
3,095
3,101
Due after five years through ten years 2.88
27,635
27,274
7.17
2,745
2,750
Due after ten years 2.48
182,590
181,520
3.54
12,781
12,774
Total debt securities
$ 227,958
$ 226,551

$ 19,306
$ 19,311

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
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
3.52
13,566
13,200
Total debt securities
$ 165,547
$ 162,345

$ 20,091
$ 19,612

~~NOTE 5. LOANS~~

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

~~INVESTAR HOLDING CORPORATION~~

~~NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Unaudited)~~

September 30, 2017 December 31, 2016
Construction and development $ 122,501
$ 90,737
1-4 Family 252,003
177,205
Multifamily 50,770
42,759
Farmland 14,130
8,207
Commercial real estate 462,422
380,716
Total mortgage loans on real estate 901,826
699,624
Commercial and industrial 125,230
85,377
Consumer 83,465
108,425
Total loans $ 1,110,521
$ 893,426

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

September 30, 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 $ 27
$ 34
$ —
$ 29
$ 90
$ 122,411
$ 122,501
1-4 Family 241
340
267
555
1,403
250,600
252,003
Multifamily —
—
—
—
—
50,770
50,770
Farmland 111
—
67
—
178
13,952
14,130
Commercial real estate 626
—
—
67
693
461,729
462,422
Total mortgage loans on real estate 1,005
374
334
651
2,364
899,462
901,826
Commercial and industrial 11
10
—
6
27
125,203
125,230
Consumer 510
90
8
1,176
1,784
81,681
83,465
Total loans $ 1,526
$ 474
$ 342
$ 1,833
$ 4,175
$ 1,106,346
$ 1,110,521

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~~

~~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).~~

September 30, 2017
Pass
Special
Mention
Substandard Total
Construction and development $ 122,454
$ —
$ 47
$ 122,501
1-4 Family 251,010
64
929
252,003
Multifamily 49,927
—
843
50,770
Farmland 14,063
—
67
14,130
Commercial real estate 461,110
—
1,312
462,422
Total mortgage loans on real estate 898,564
64
3,198
901,826
Commercial and industrial 123,042
—
2,188
125,230
Consumer 81,883
406
1,176
83,465
Total loans $ 1,103,489
$ 470
$ 6,562
$ 1,110,521

~~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 September 30, 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 balance of loans serviced for others was $204.6 million and $274.9 million as of September 30, 2017 and December 31, 2016, respectively. The unpaid principal balance of these loans was approximately $258.3 million and $319.6 million as of September 30, 2017 and December 31, 2016, respectively. For the three and nine months ended September 30, 2017, the Company recognized $0.4 million and $1.2 million, respectively, of servicing fees and other fees collected on serviced loans.

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 $26.1 million and $20.0 million as of September 30, 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).~~

September 30, 2017 December 31, 2016
Balance, beginning of period $ 19,957
$ 17,992
New loans 10,047
5,058
Repayments and changes in relationship (3,896 ) (3,093 )
Balance, end of period $ 26,108
$ 19,957

~~Loans Acquired with Deteriorated Credit Quality~~

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

~~INVESTAR HOLDING CORPORATION~~

~~NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Unaudited)~~

Acquired
Impaired

Balance, period ended December 31, 2015 $ 395
Transfers from non-accretable difference to accretable yield 1
Accretion to interest income (121 )
Balance, period ended December 31, 2016 $ 275
Transfers from non-accretable difference to accretable yield 28
Accretion to interest income (303 )
Balance, period ended September 30, 2017
$ —

~~NOTE 6. ALLOWANCE FOR LOAN LOSSES~~

~~The table below shows a summary of the activity in the allowance for loan losses for the three and nine months ended September 30, 2017 and 2016 (dollars in thousands).~~

Three months ended September 30, Nine months ended September 30,
2017 2016 2017 2016
Balance, beginning of period $ 7,320
$ 7,091
$ 7,051
$ 6,128
Provision for loan losses 420
450
1,145
1,704
Loans charged off (155 ) (173 ) (635 ) (509 )
Recoveries 20
15
44
60
Balance, end of period $ 7,605
$ 7,383
$ 7,605
$ 7,383

The following tables outline the activity in the allowance for loan losses by collateral type for the three and nine months ended September 30, 2017 and 2016, and show both the allowances and portfolio balances for loans individually and collectively evaluated for impairment as of September 30, 2017 and 2016 (dollars in thousands).

Three months ended September 30, 2017
Construction &
Development Farmland 1-4
Family Multifamily Commercial
Real Estate Commercial &
Industrial Consumer Total
Allowance for loan losses:
Beginning balance $ 806
$ 54
$ 1,276
$ 361
$ 3,036
$ 683
$ 1,104
$ 7,320
Provision 28
6
(19 ) (21 ) 227
135
64
420
Charge-offs —
—
—
—
—
(77 ) (78 ) (155 )
Recoveries 14
—
2
—
—
—
4
20
Ending balance $ 848
$ 60
$ 1,259
$ 340
$ 3,263
$ 741
$ 1,094
$ 7,605

Three months ended September 30, 2016
Construction &
Development Farmland 1-4
Family Multifamily Commercial
Real Estate Commercial &
Industrial Consumer Total
Allowance for loan losses:
Beginning balance $ 779
$ 61
$ 1,280
$ 310
$ 2,430
$ 1,028
$ 1,203
$ 7,091
Provision (48 ) —
64
43
613
(336 ) 114
450
Charge-offs —
—
—
—
—
—
(173 ) (173 )
Recoveries 4
—
3
—
—
—
8
15
Ending balance $ 735
$ 61
$ 1,347
$ 353
$ 3,043
$ 692
$ 1,152
$ 7,383

~~INVESTAR HOLDING CORPORATION~~

~~NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Unaudited)~~

Nine months ended September 30, 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 241
—
(122 ) (15 ) 764
252
25
1,145
Charge-offs —
—
—
—
—
(270 ) (365 ) (635 )
Recoveries 28
—
4
—
—
—
12
44
Ending balance $ 848
$ 60
$ 1,259
$ 340
$ 3,263
$ 741
$ 1,094
$ 7,605
Ending allowance balance for loans individually evaluated for impairment —
—
—
—
—
—
336
336
Ending allowance balance for loans collectively evaluated for impairment $ 848
$ 60
$ 1,259
$ 340
$ 3,263
$ 741
$ 758
$ 7,269
Ending allowance balance for loans acquired with deteriorated credit quality $ —
$ —
$ —
$ —
$ —
$ —
$ —
$ —
Loans receivable:

Balance of loans individually evaluated for impairment $ 186
$ —
$ 1,452
$ —
$ 651
$ 6
$ 1,182
$ 3,477
Balance of loans collectively evaluated for impairment 122,315
14,130
250,551
50,770
461,771
125,224
82,283
1,107,044
Total period-end balance $ 122,501
$ 14,130
$ 252,003
$ 50,770
$ 462,422
$ 125,230
$ 83,465
$ 1,110,521
Balance of loans acquired with deteriorated credit quality $ 55
$ —
$ 2,814
$ 1,806
$ 3,033
$ 1,884
$ 5
$ 9,597

Nine months ended September 30, 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 95
39
130
107
886
159
288
1,704
Charge-offs (14 ) —
(7 ) —
—
—
(488 ) (509 )
Recoveries 10
—
11
—
1
20
18
60
Ending balance $ 735
$ 61
$ 1,347
$ 353
$ 3,043
$ 692
$ 1,152
$ 7,383
Ending allowance balance for loans individually evaluated for impairment —
—
—
—
331
149
267
747
Ending allowance balance for loans collectively evaluated for impairment $ 735
$ 61
$ 1,347
$ 353
$ 2,712
$ 543
$ 885
$ 6,636
Ending allowance balance for loans acquired with deteriorated credit quality $ —
$ —
$ —
$ —
$ —
$ —
$ —
$ —
Loans receivable:

Balance of loans individually evaluated for impairment $ 649
$ —
$ 1,975
$ —
$ 4,931
$ 3,063
$ 942
$ 11,560
Balance of loans collectively evaluated for impairment 91,706
8,281
173,417
42,560
360,291
74,249
84,764
835,268
Total period-end balance $ 92,355
$ 8,281
$ 175,392
$ 42,560
$ 365,222
$ 77,312
$ 85,706
$ 846,828
Balance of loans acquired with deteriorated credit quality $ 677
$ —
$ 564
$ 1,033
$ —
$ —
$ —
$ 2,274

~~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.

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 (dollars in thousands).

September 30, 2017

Recorded
Investment

Unpaid
Principal
Balance

Related
Allowance
With no related allowance recorded:

Construction and development $ 186
$ 205
$ —
1-4 Family 1,452
1,573
—
Commercial real estate 651
666
—
Total mortgage loans on real estate 2,289
2,444
—
Commercial and industrial 6
6
—
Consumer 185
199
—
Total 2,480
2,649
—

With related allowance recorded:

Consumer 997
1,032
336
Total 997
1,032
336

Total loans:

Construction and development 186
205
—
1-4 Family 1,452
1,573
—
Commercial real estate 651
666
—
Total mortgage loans on real estate 2,289
2,444
—
Commercial and industrial 6
6
—
Consumer 1,182
1,231
336
Total $ 3,477
$ 3,681
$ 336

~~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 September 30,
2017 2016

Average
Recorded
Investment

Interest
Income
Recognized

Average
Recorded
Investment

Interest
Income
Recognized
With no related allowance recorded:

Construction and development $ 187
$ 2
$ 1,014
$ 3
1-4 Family 1,231
18
2,082
8
Commercial real estate 632
8
702
2
Total mortgage loans on real estate 2,050
28
3,798
13
Commercial and industrial 22
—
1,692
—
Consumer 196
—
269
2
Total 2,268
28
5,759
15

With related allowance recorded:

Commercial real estate —
—
1,440
—
Total mortgage loans on real estate —
—
1,440
—
Commercial and industrial —

1,126
—
Consumer 933

668
—
Total 933
—
3,234
—

Total loans:

Construction and development 187
2
1,014
3
1-4 Family 1,231
18
2,082
8
Commercial real estate 632
8
2,142
2
Total mortgage loans on real estate 2,050
28
5,238
13
Commercial and industrial 22
—
2,818
—
Consumer 1,129
—
937
2
Total $ 3,201
$ 28
$ 8,993
$ 15

~~INVESTAR HOLDING CORPORATION~~

~~NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Unaudited)~~

Nine months ended September 30,
2017 2016
Average
Recorded
Investment Interest
Income
Recognized Average
Recorded
Investment Interest
Income
Recognized
With no related allowance recorded:

Construction and development $ 389
$ 8
$ 1,150
$ 80
1-4 Family 1,517
61
1,940
51
Commercial real estate 613
35
680
5
Total mortgage loans on real estate 2,519
104
3,770
136
Commercial and industrial 163
—
1,000
—
Consumer 322
1
396
9
Total 3,004
105
5,166
145

With related allowance recorded:
Commercial real estate —
—
480
—
Total mortgage loans on real estate —
—
480
—
Commercial and industrial —
—
596
—
Consumer 813
1
466
5
Total 813
1
1,542
5

Total loans:
Construction and development 389
8
1,150
80
1-4 Family 1,517
61
1,940
51
Commercial real estate 613
35
1,160
5
Total mortgage loans on real estate 2,519
104
4,250
136
Commercial and industrial 163
—
1,596
—
Consumer 1,135
2
862
14
Total $ 3,817
$ 106
$ 6,708
$ 150

~~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, or otherwise include a concession, the Company identifies the loan as a TDR and measures any impairment on the restructuring as previously noted for impaired loans.

Loans classified as TDRs, consisting of eighteen credits, totaled approximately $1.6 million at September 30, 2017, compared to eighteen credits totaling $2.4 million at 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 September 30, 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 collectively evaluated for impairment.

~~INVESTAR HOLDING CORPORATION~~

~~NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Unaudited)~~

~~At September 30, 2017 and December 31, 2016, there were no available balances on loans classified as TDRs that the Company was committed to lend.~~

The table below presents the TDR pre- and post-modification outstanding recorded investments by loan categories for loans modified during the nine month periods ended September 30, 2017 and 2016 (dollars in thousands).

September 30, 2017 September 30, 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
1-4 Family — $ —
$ —
10 $ 632
$ 632
Consumer 1 6
6
— —
—
Total $ 6
$ 6
$ 632
$ 632

~~There were no loans modified under TDRs during the previous twelve month period that subsequently defaulted during the three months ended September 30, 2017 and 2016.~~

~~INVESTAR HOLDING CORPORATION~~

~~NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Unaudited)~~

~~NOTE 7. 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 (the “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 $18.2 million at September 30, 2017. The subordinated debt securities are recorded net of issuance costs of $0.4 million, which are being amortized using the straight-line method over the life of the Notes.

~~NOTE 8. STOCKHOLDERS’ EQUITY~~

~~Common Stock~~

On March 22, 2017, the Company completed a common stock offering of 1.6 million shares of its common stock at a price of $21.25 per share. The common stock offering generated net proceeds of $32.5 million. Total stockholders’ equity was $152.9 million at September 30, 2017, compared to $112.8 million at December 31, 2016.

~~Accumulated Other Comprehensive Income (Loss)~~

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

Three months ended September 30,
2017 2016
Beginning of Period Net Change End of Period Beginning of Period Net Change End of Period
Unrealized gain (loss), available for sale, net $ 824
$ 95
$ 919
$ 2,747
$ (182 ) $ 2,565
Reclassification of realized gain, net (1,822 ) (18 ) (1,840 ) (1,541 ) (133 ) (1,674 )
Unrealized loss, transfer from available for sale to held to maturity, net 7
—
7
10
—
10
Change in fair value of interest rate swap designated as a cash flow hedge, net 82
37
119
(1,029 ) 281
(748 )
Accumulated other comprehensive income (loss) $ (909 ) $ 114
$ (795 ) $ 187
$ (34 ) $ 153

Nine months ended September 30,
2017 2016

Beginning of Period Net Change End of Period Beginning of Period Net Change End of Period
Unrealized gain (loss), available for sale, net $ (401 ) $ 1,320
$ 919
$ 1,099
$ 1,466
$ 2,565
Reclassification of realized gain, net (1,683 ) (157 ) (1,840 ) (1,396 ) (278 ) (1,674 )
Unrealized loss, transfer from available for sale to held to maturity, net 8
(1 ) 7
12
(2 ) 10
Change in fair value of interest rate swap designated as a cash flow hedge, net 5
114
119
(378 ) (370 ) (748 )
Accumulated other comprehensive income (loss) $ (2,071 ) $ 1,276
$ (795 ) $ (663 ) $ 816
$ 153

~~INVESTAR HOLDING CORPORATION~~

~~NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Unaudited)~~

~~NOTE 9. STOCK-BASED COMPENSATION~~

~~Equity Incentive Plan.~~ The Company previously granted equity awards to its employees and non-employee directors under its 2014 Long-Term Incentive Compensation Plan (the “2014 Plan”). Effective May 24, 2017, the Company’s shareholders approved its 2017 Long-Term Incentive Compensation Plan (the “Plan”) and ceased using the 2014 Plan. The Plan authorizes the grant of various types of equity grants and awards, such as restricted stock, stock options and stock appreciation rights to eligible participants, which include all of the Company’s employees, non-employee directors, and consultants. The Plan has reserved 600,000 shares of common stock for grant, award or issuance to eligible participants, 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 and directors.

~~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 highly subjective assumptions, including expected term and expected volatility. Stock option expense in the accompanying consolidated statements of income for the three and nine months ended September 30, 2017 was $57,000 and $0.2 million, respectively, and $48,000 and $0.1 million for the three and nine months ended September 30, 2016, respectively.

~~The assumptions presented below were used for the options granted during the nine months ended September 30, 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 September 30, 2017, there was $0.7 million of unrecognized compensation cost related to stock options that is expected to be recognized over a weighted-average period of 2.98 years.~~

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

Nine months ended September 30,
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 (17,791 ) 13.53
(2,166 ) 14.00
Outstanding at end of period 332,416
$ 15.06
322,698
$ 14.36
Exercisable at end of period 124,426
$ 14.38
91,383
$ 14.15

~~At September 30, 2017, the shares underlying outstanding stock options and exercisable stock options had aggregate intrinsic values of $3.0 million and $1.2 million, respectively.~~

~~Time Vested Restricted Stock Awards~~

During the nine months ended September 30, 2017 and 2016, the Company issued shares of time vested restricted stock with vesting terms ranging from 2 to 5 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.~~

~~INVESTAR HOLDING CORPORATION~~

~~NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Unaudited)~~

Nine months ended September 30,
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 54,724
20.18
54,837
14.67
Forfeited (8,259 ) 16.05
(2,550 ) 15.25
Earned and issued (25,949 ) 14.80
(15,255 ) 14.80
Balance at end of period 113,882
$ 17.25
97,624
$ 14.76

At September 30, 2017, there was $1.7 million of unrecognized compensation cost related to time vested restricted stock awards that is expected to be recognized over a weighted average period of 3.38 years.

~~NOTE 10. 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 2.9 years. The total notional amount of the derivative contracts is $50.0 million.

For the three and nine months ended September 30, 2017, a gain of $37,000 and $0.1 million, respectively, have been recognized in “Other comprehensive income” in the accompanying consolidated statements of comprehensive income for the change in fair value of the interest rate swaps compared to a gain of $0.3 million and a loss of $0.4 million, respectively, recognized for the three and nine months ended September 30, 2016. The swap contracts had a fair value of $0.2 million as of September 30, 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 11. 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.~~

~~INVESTAR HOLDING CORPORATION~~

~~NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Unaudited)~~

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

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

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

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

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

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

~~Investment Securities and 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, 1-4 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 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.~~

~~INVESTAR HOLDING CORPORATION~~

~~NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Unaudited)~~

~~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.~~

~~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)
September 30, 2017

Assets:

Obligations of other U.S. government agencies $ 55,496
$ —
$ 55,496
$ —
Obligations of state and political subdivisions 35,531
—
15,933
19,598
Corporate bonds 16,558
—
15,230
1,328
Residential mortgage-backed securities 115,789
—
115,789
—
Commercial mortgage-backed securities 3,177
—
3,177
—
Equity securities 1,011
1,011
—
—
Derivative financial instruments 184
—
184
—
Total assets $ 227,746
$ 1,011
$ 205,809
$ 20,926

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 September 30, 2017 and September 30, 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 1,942
4
1,946
Purchases —
700
700
Sales —
—
—
Transfers into Level 3 —
—
—
Transfers out of Level 3 —
—
—
Balance at September 30, 2017 $ 19,598
$ 1,328
$ 20,926

~~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 319
(27 ) 292
Purchases 9,065
—
9,065
Sales —
—
—
Transfers into Level 3 —
—
—
Transfers out of Level 3 —
(485 ) (485 )
Balance at September 30, 2016 $ 19,779
$ 624
$ 20,403

~~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
September 30, 2017
Impaired loans $ 384
Discounted cash flows, Underlying collateral value Collateral discounts and estimated costs to sell 0% - 100% 32%
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 at fair value on a nonrecurring basis at September 30, 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).~~

September 30, 2017

Carrying
Amount

Estimated
Fair Value
Level 1 Level 2 Level 3
Financial assets:
Cash and due from banks $ 48,508
$ 48,508
$ 48,508
$ —
$ —
Investment securities 246,868
246,873
1,011
212,264
33,598
Other equity securities 7,744
7,744
—
7,744
—
Loans, net of allowance 1,102,916
1,100,267
—
—
1,100,267
Derivative financial instruments 184
184
—
184
—

Financial liabilities:

Deposits, noninterest-bearing $ 175,130
$ 175,130
$ —
$ 175,130
$ —
Deposits, interest-bearing 926,232
903,300
—
—
903,300
FHLB short-term advances and repurchase agreements 144,492
144,492
—
144,492
—
FHLB long-term advances 43,100
42,777
—
—
42,777
Junior subordinated debt 3,609
3,316
—
—
3,316
Subordinated debt 18,600
18,820
—
18,820
—

~~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
—

~~INVESTAR HOLDING CORPORATION~~

~~NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Unaudited)~~

~~NOTE 12. INCOME TAXES~~

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

Three months ended September 30, Nine months ended September 30,
2017 2016 2017 2016
Income tax expense $ 1,032
$ 747
$ 2,756
$ 2,758
Effective tax rate 32.6 % 26.8 % 31.8 % 31.4 %

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

~~NOTE 13. COMMITMENTS AND CONTINGENCIES~~

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).~~

September 30, 2017 December 31, 2016
Commitments to extend credit
Loan commitments $ 176,517
$ 142,891
Standby letters of credit 703
1,008

~~Additionally, at September 30, 2017, the Company had unfunded commitments of $0.3 million for its investment in Small Business Investment Company qualified funds.~~

During the third quarter of 2017, the Company announced that it has entered into a definitive agreement (the “Agreement”) to acquire BOJ Bancshares, Inc. (“BOJ”) and its wholly-owned subsidiary, The Highlands Bank, in Jackson, Louisiana. The acquisition would add five branch locations in the Company’s existing Baton Rouge market. The transaction, which has been unanimously approved by each company’s board of directors, is expected to close in the fourth quarter of 2017 and is subject to customary closing conditions, including obtaining approval by BOJ’s shareholders. The BOJ special meeting of shareholders to vote upon the Agreement has been called for November 15, 2017. The Company has received regulatory approvals from the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, and the Louisiana Office of Financial Institutions.

Under the terms of the Agreement, consideration will be paid to the shareholders of BOJ in the form of cash and shares of the Company’s common stock. Shareholders of BOJ will be entitled to receive an aggregate amount of cash consideration equal to $3.95 million, subject to certain adjustments. BOJ will also be entitled to receive an aggregate of 799,559 shares of Investar common stock, subject to adjustment. Assuming no adjustments to the merger consideration under the terms of the Agreement, the transaction is valued at approximately $22.78 million based upon the closing price of Investar’s common stock of $23.55 on October 17, 2017. It is expected that shareholders of BOJ will own approximately 8% of the combined company following the acquisition.

~~INVESTAR HOLDING CORPORATION~~

~~NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Unaudited)~~

With respect to potential adjustments to the merger consideration, the Agreement includes two collar mechanisms that could result in a modification to the number of shares of the Company’s common stock to be issued. Fewer shares would be issued if the average closing price of the Company’s common stock for the ten consecutive trading days prior to the closing date is greater than $26.11, and more shares would be issued if such average closing price is less than $20.43. As a result of these collar mechanisms, the implied value of the aggregate merger consideration will not fluctuate above $24.8 million or below $20.3 million due to changes in the market price of the Company’s common stock. The parties are not obligated to close the transaction if such average closing price is not greater than $19.50. In addition, the aggregate merger consideration is subject to a dollar-for-dollar downward adjustment to the extent that BOJ’s adjusted tangible shareholders’ equity, as defined in the Agreement, is less than $16.5 million as of a date to be determined by BOJ that is within ten days prior to the closing of the merger. If this downward adjustment is triggered, both the aggregate cash consideration and aggregate stock consideration would be reduced pro rata.

At September 30, 2017, BOJ had, on a consolidated basis, approximately $154 million in assets, $108 million in net loans, $126 million in deposits, and $17 million in stockholders’ equity. The Highlands Bank offers a full range of banking products and services to the residents of East Feliciana, West Feliciana, and East Baton Rouge Parishes through its main office and four branch locations.

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

Overview

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”)~~the Company and its wholly-owned subsidiary, Investar Bank, National Association (the “Bank”). The following discussion and analysis should be read in conjunction with our unaudited consolidated financial statements and related notes thereto included herein, and the audited consolidated financial statements for the year ended December 31, ~~2016,~~2021, 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~~

Report.

Through our wholly-owned subsidiary, ~~Investar~~the Bank, we provide full banking services, excluding trust services, tailored primarily to meet the needs of individuals, professionals and small to medium-sized businesses in our primary areas of operation in ~~South Louisiana:~~south Louisiana including Baton Rouge, New Orleans, Lafayette, ~~Hammond,~~Lake Charles, and their surrounding metropolitan ~~areas. Our~~areas, in southeast Texas, including Houston and its surrounding metropolitan areas, and Alice and Victoria, Texas, in west Alabama, including York and its surrounding area, and east Alabama, including Oxford and its surrounding area. The Bank commenced operations in 2006, and we completed our initial public offering in July 2014. On July 1, 2019, the Bank changed from a Louisiana state bank charter to a national bank charter and its name changed to Investar Bank, National Association.

Our strategy includes organic growth through high quality loans and growth through acquisitions, including whole-bank acquisitions and strategic branch acquisitions. During the nine months ended September 30, 2017, we opened two de novo branches - one in the Baton Rouge market and one in the New Orleans market. We also completed the acquisition of Citizens Bancshares, Inc. (“Citizens”), and its wholly-owned subsidiary, Citizens Bank, located in Evangeline Parish, on July 1, 2017, further expanding our footprint in Louisiana. In August 2017, we announced that the Company has entered into a definitive agreement to acquire BOJ Bancshares, Inc. (“BOJ”) and its wholly-owned subsidiary, The Highlands Bank, in Jackson, Louisiana. The acquisition of BOJ, with its five branch locations in East Feliciana, West Feliciana and East Baton Rouge Parishes, would expand the Company’s branch footprint in its Baton Rouge market, further bolstering our core deposit base. We expect the acquisition to close in the fourth quarter of 2017. For additional information, see Note 13 to the unaudited consolidated financial statements.

We currently operate 1523 full service ~~branches. We continue to focus on growing our deposit base~~branches in ~~our markets.~~Louisiana, four full service branches in Texas, and six full service branches in Alabama. We have completed ~~three~~seven whole-bank acquisitions since 2011 and regularly ~~evaluate~~review acquisition opportunities.

We continue to enhance our online banking platform and plan to continue to introduce new technologies, with the goal of delivering products and services more efficiently with fewer branches and people. We closed two branches in 2021 and will close an additional two branches in the second quarter of 2022. In the first quarter of 2022, we sold one of the branches that closed in 2021 as well as two tracts of land that we held for future branch locations.

Our principal business is lending to and accepting deposits from individuals, professionals 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.~~expenses and, depending on our level of acquisition activity in a period, may also include acquisition expense. 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.

Table of Contents

~~During~~

Certain Events That Affect Quarter-over-Quarter Comparability

Acquisitions. On April 1, 2021, the ~~first quarter~~Company completed the acquisition of ~~2017, we completed both a common stock offering~~Cheaha Financial Group, Inc. (“Cheaha”), headquartered in Oxford, Alabama, and ~~a subordinated debt issuance. The common stock offering generated net proceeds~~its wholly-owned subsidiary, Cheaha Bank. All of ~~$32.5 million through~~ the issuance of 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 used~~outstanding shares of Cheaha were converted into aggregate cash merger consideration of $41.1 million. On the ~~net proceeds from the debt issuance to fund a portion~~date of the acquisition, ~~of Citizens.~~

~~Pending Acquisition~~

~~During the third quarter of 2017, the Company announced that it has entered into~~Cheaha had total assets with a definitive agreement (the “Agreement”) to acquire BOJ. The transaction, which has been unanimously approved by each company’s board of directors, is expected to close in the fourth quarter of 2017 and is subject to customary closing conditions, including obtaining approval by BOJ’s shareholders. The BOJ special meeting of shareholders to vote upon the Agreement has been called for November 15, 2017. The Company has received regulatory approvals from the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, and the Louisiana Office of Financial Institutions.

Under the terms of the Agreement, consideration will be paid to the shareholders of BOJ in the form of cash and shares of the Company’s common stock. Shareholders of BOJ will be entitled to receive an aggregate amount of cash consideration equal to $3.95 million, subject to certain adjustments. BOJ will also be entitled to receive an aggregate of 799,559 shares of the Company’s common stock, subject to adjustment. Assuming no adjustments to the merger consideration under the terms of the Agreement, the transaction is valued at approximately $22.78 million based upon the closing price of the Company’s common stock of $23.55 on October 17, 2017. It is expected that shareholders of BOJ will own approximately 8% of the combined company following the acquisition.

With respect to potential adjustments to the merger consideration, the merger agreement includes two collar mechanisms that could result in a modification to the number of shares of the Company’s common stock to be issued. Fewer shares would be issued if the average closing price of the Company’s common stock for the ten consecutive trading days prior to the closing date is greater than $26.11, and more shares would be issued if such average closing price is less than $20.43. As a result of these collar mechanisms, the implied value of the aggregate merger consideration will not fluctuate above $24.8 million or below $20.3 million due to changes in the market price of the Company’s common stock. The parties are not obligated to close the transaction if such average closing price is not greater than $19.50. In addition, the aggregate merger consideration is subject to a dollar-for-dollar downward adjustment to the extent that BOJ’s adjusted tangible shareholders’ equity, as defined in the Agreement, is less than $16.5 million as of a date to be determined by BOJ that is within ten days prior to the closing of the merger. If this downward adjustment is triggered, both the aggregate cash consideration and aggregate stock consideration would be reduced pro rata. Any BOJ shareholders not voting in favor of the merger agreement have statutory appraisal rights which, if properly perfected, would entitle them to receive, instead of the merger consideration, the fair value of ~~their shares in cash; provided, that the Company is not obligated to complete the merger if such rights are exercised for more than 10% of the outstanding BOJ common stock.~~

~~At September 30, 2017, BOJ had, on a consolidated basis, approximately $154~~$240.8 million, including $120.4 million in ~~assets, $108 million in net~~ loans, ~~$126~~and $207.0 million in deposits, and ~~$17 million in stockholders’ equity. The Highlands Bank offers a full range of banking products and services to~~served the residents of ~~East Feliciana, West Feliciana, and East Baton Rouge Parishes~~Calhoun County, Alabama through ~~its main office and~~ four branch locations.

~~Discussion~~ The Company recorded a core deposit intangible and ~~Analysis~~goodwill of ~~Financial Condition~~

The financial results for the three and nine months ended September 30, 2017 reflect the acquisition of Citizens beginning July 1, 2017. The acquisition of Citizens added three branch locations in Evangeline Parish with total assets of $250 million, total loans of $130 million, and total deposits of $212 million. During the three and nine months ended September 30, 2017, the Company recognized $0.8 million and ~~$1.0~~$11.9 million, respectively, ~~in expenses~~ related to the acquisition of ~~Citizens.~~Cheaha.

Branches. We closed one branch location in Prairieville, Louisiana in April 2021 and one location in Dickinson, Texas in October 2021. Two additional branch locations, one in our Baton Rouge market and one in our Lake Charles market, will close in the second quarter of 2022. We do not expect to open de novo branches during the remainder of 2022.

COVID-19 Pandemic. The COVID-19 pandemic and related governmental control measures severely disrupted financial markets and overall economic conditions in 2020 and 2021. While the impact of the pandemic and the associated uncertainties remain in 2022, there has been significant progress made with COVID-19 vaccination levels, which has resulted in the easing of restrictive measures in the United States. At the same time, many industries have been experiencing supply chain disruptions and labor shortages. Inflation has also increased significantly, including oil and gas prices which have also risen significantly due to the war in Ukraine. We cannot predict the extent to which individuals may decide to restrict their activities as a result of evolving pandemic developments, the extent to which governments may reinstitute certain restrictions, nor what future impact evolving pandemic developments may have on the economy or our business.

Federal Funds Target Rate. On March 16, 2022, the Federal Reserve raised the federal funds target rate by 25 basis points to 0.25% to 0.50%. During first-quarter 2021, the federal funds target rate was 0% to 0.25%

Table of Contents

Overview of Financial Condition and Results of Operations

For the ~~nine~~three months ended ~~September 30, 2017,~~March 31, 2022, net income was ~~$5.9~~$10.1 million, or ~~$0.72~~$0.98 and $0.97 per basic and diluted common share, ~~and $0.71 per diluted share,~~respectively, compared to net income of ~~$6.0~~$5.4 million, or ~~$0.85~~$0.51 per basic ~~share~~ and ~~$0.84 per~~ diluted common share for the ~~nine~~three months ended ~~September 30, 2016. For~~March 31, 2021. Net income increased primarily due to an increase in noninterest income, which was driven by $3.3 million in swap termination fee income, and a decrease in interest expense, which was driven by a 38 basis point decrease in our cost of deposits. We also recorded a negative provision for loan losses of $0.4 million in the ~~nine~~three months ended ~~September 30, 2017, our~~March 31, 2022 as a result of net ~~interest margin was 3.32%, return on average assets was 0.62%, and return on average equity was 5.65%. From December~~recoveries of $0.7 million, compared to a $0.4 million provision for loan losses in the three months ended March 31, ~~2016 to September 30, 2017, total loans increased $217.1 million, or 24.3%, and total deposits increased $193.6 million, or 21.3%~~2021. ~~As of September 30, 2017,~~ At March 31, 2022, the Company and Bank each were in compliance with all regulatory capital requirements, and the Bank was considered “well-capitalized” under the FDIC’s prompt corrective action regulations. Other key components of our performance for the quarter ended March 31, 2022 compared to the quarter ended March 31, 2021 are summarized below.

●

For the three months ended March 31, 2022, our net interest margin was 3.75% compared to 3.64% for the three months ended March 31, 2021.

●

Return on average assets increased to 1.60% for the three months ended March 31, 2022 compared to 0.92% for the three months ended March 31, 2021. Return on average equity was 16.64% for the three months ended March 31, 2022 compared to 8.79% for the three months ended March 31, 2021.

●

Total loans increased $5.4 million, or 0.3%, to $1.88 billion at March 31, 2022 compared to $1.87 billion at December 31, 2021. Excluding PPP loans with a total balance of $13.2 million and $23.3 million at March 31, 2022 and December 31, 2021, respectively, loans increased $15.6 million, or 0.8%, at March 31, 2022 compared to December 31, 2021.

●

Total deposits increased $65.7 million, or 3.1%, to $2.19 billion at March 31, 2022, compared to $2.12 billion at December 31, 2021. Noninterest-bearing deposits increased $29.0 million, or 4.9%, to $614.4 million at March 31, 2022, compared to $585.5 million at December 31, 2021.

●

Deposit mix improved during the first quarter of 2022. Noninterest-bearing deposits as a percentage of total deposits increased to 28.1% at March 31, 2022 compared to 27.6% at December 31, 2021. Time deposits as a percentage of total deposits decreased to 18.4% at March 31, 2022, compared to 21.1% at December 31, 2021.

●

During the three months ended March 31, 2022, the Company paid $1.5 million to repurchase 77,248 shares of its common stock, compared to paying $6.7 million to repurchase 225,950 shares of its common stock during the three months ended March 31, 2021. On April 21, 2022, the board of directors approved an additional 400,000 shares of the Company’s common stock for repurchase.

Subsequent to the end of the first quarter of 2022, we announced the completion of a private placement of $20.0 million in aggregate principal amount of our 5.125% Fixed-to-Floating Subordinated Notes due 2032 (the “2032 Notes”). We expect to utilize the net proceeds from the sale of the 2032 Notes to refinance our 2017 issuance of subordinated debt securities, for possible share repurchases and for general corporate purposes.

Table of Contents

Discussion and Analysis of Financial Condition

Loans

General. Loans, excluding loans held for sale, constitute our most significant asset, comprising ~~75.2%~~73% and ~~77.1%~~74% of our total assets at ~~September 30, 2017~~March 31, 2022 and December 31, ~~2016,~~2021, respectively. Total loans increased ~~$217.1~~$5.4 million, or ~~24.3%~~0.3%, to ~~$1.1~~$1.88 billion at ~~September 30, 2017~~March 31, 2022 compared to ~~$893.4~~$1.87 billion at December 31, 2021. The increase in loans was primarily the result of organic growth.

Beginning in the second quarter of 2020, the Bank has participated as a lender in the Paycheck Protection Program (“PPP”) as established by the CARES Act. At March 31, 2022, the balance, net of repayments, of the Bank’s PPP loans originated was $13.2 million, compared to $23.3 million at December 31, ~~2016 as a result of both~~2021, and is included in the ~~Citizens acquisition~~commercial and ~~organic growth in our business. Excluding acquired loans of $124.4 million, or 11.2%~~industrial loan portfolio. Eighty-seven percent of the total ~~loan portfolio,~~number of PPP loans we have originated have principal balances of $150,000 or less. At March 31, 2022, approximately 92% of the total balance of PPP loans originated have been forgiven by the SBA or paid off by the customer. Excluding PPP loans with a total balance of $13.2 million and $23.3 million at ~~September 30, 2017~~March 31, 2022 and December 31, 2021, respectively, loans increased ~~$92.7~~$15.6 million, or ~~10.4%~~0.8%,at March 31, 2022 compared to ~~$893.4 million at~~ December 31, ~~2016.~~

2021.

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

September 30, 2017 December 31, 2016
Amount Percentage of
Total Loans Amount Percentage of
Total Loans
Construction and development $ 122,501
11.0 % $ 90,737
10.2 %
1-4 Family 252,003
22.7
177,205
19.8
Multifamily 50,770
4.6
42,759
4.8
Farmland 14,130
1.3
8,207
0.9
Commercial real estate

Owner-occupied 217,369
19.6
180,458
20.2
Nonowner-occupied 245,053
22.0
200,258
22.4
Total mortgage loans on real estate 901,826
81.2
699,624
78.3
Commercial and industrial 125,230
11.3
85,377
9.6
Consumer 83,465
7.5
108,425
12.1
Total loans $ 1,110,521
100.0 % $ 893,426
100.0 %

~~One to four family loans were $252.0 million at September 30, 2017, an increase of $74.8 million, or 42.2%, compared to $177.2 million at December~~

	March 31, 2022					December 31, 2021
			Percentage of					Percentage of
	Amount		Total Loans			Amount		Total Loans
Construction and development	$	201,222		10.7	%	$	203,204		10.9	%
1-4 Family		367,520		19.6			364,307		19.4
Multifamily		52,500		2.8			59,570		3.2
Farmland		18,296		1.0			20,128		1.1
Commercial real estate
Owner-occupied		436,763		23.3			460,205		24.6
Nonowner-occupied		471,447		25.1			436,172		23.3
Total mortgage loans on real estate		1,547,748		82.5			1,543,586		82.5
Commercial and industrial		314,093		16.7			310,831		16.6
Consumer		15,603		0.8			17,595		0.9
Total loans		1,877,444		100	%		1,872,012		100	%
Loans held for sale		—					620
Total gross loans	$	1,877,444				$	1,872,632

At March 31, ~~2016. The increase in the 1-4 family portfolio is primarily a result of the $61.5 million 1-4 family loans acquired from Citizens.~~

~~At September 30, 2017,~~2022, the Company’s business lending portfolio, which consists of loans secured by owner-occupied commercial real estate properties and commercial and industrial loans, was ~~$342.6~~$750.9 million, ~~an increase~~a decrease of ~~$76.8~~$20.2 million, or ~~28.9%~~2.6%, compared to ~~$265.8~~$771.0 million at December 31, ~~2016. Included~~2021. The decrease in the business lending portfolio ~~at September 30, 2017 is $34.0 million, or 9.9%~~was driven by the forgiveness of PPP loans and a large prepayment from one of our owner-occupied commercial real estate loan relationships.

Our focus on a relationship-driven banking strategy and hiring of experienced commercial lenders are the ~~total portfolio,~~primary reasons we experienced our largest organic loan growth in the commercial real estate portfolio. We have increased our emphasis on commercial real estate loans and commercial and industrial loans.

Table of ~~loans acquired from Citizens.~~Contents

Consumer loans totaled $83.5 million at September 30, 2017, a decrease of $24.9 million, or 23.0%, compared to $108.4 million at December 31, 2016. Excluding the consumer loans totaling $8.5 million acquired from Citizens, consumer loans at September 30, 2017 decreased $33.4 million, or 30.8%, compared to December 31, 2016. The decrease in consumer loans is attributable to the scheduled paydowns of the consumer loans, most of which relate to our former indirect auto loan business.

The following table sets forth loans outstanding at ~~September 30, 2017,~~March 31, 2022, excluding loans held for sale, 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 $ 101,011
$ 10,432
$ 9,156
$ 1,412
$ 490
$ 122,501
1-4 Family 40,801
93,559
43,950
27,091
46,602
252,003
Multifamily 5,177
26,932
16,220
893
1,548
50,770
Farmland 5,507
3,397
3,372
1,854
—
14,130
Commercial real estate

Owner-occupied 14,532
75,565
79,044
38,597
9,631
217,369
Nonowner-occupied 33,686
91,637
102,891
16,839
—
245,053
Total mortgage loans on real estate 200,714
301,522
254,633
86,686
58,271
901,826
Commercial and industrial 66,380
42,750
14,927
—
1,173
125,230
Consumer 4,039
69,795
9,147
361
123
83,465
Total loans $ 271,133
$ 414,067
$ 278,707
$ 87,047
$ 59,567
$ 1,110,521

~~Loans Held for Sale~~less (dollars in thousands). There were no loans held for sale at September 30, 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 nine months ended September 30, 2017, compared to $0.3 million for the nine months ended September 30, 2016.

	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	$	137,917	$	30,573	$	20,881	$	8,673	$	3,178	$	201,222
1-4 Family		53,340		77,916		48,630		28,464		159,170		367,520
Multifamily		16,182		31,471		3,337		393		1,117		52,500
Farmland		5,654		7,433		5,004		205		—		18,296
Commercial real estate
Owner-occupied		38,099		108,835		177,537		103,552		8,740		436,763
Nonowner-occupied		64,509		220,695		148,220		37,799		224		471,447
Total mortgage loans on real estate		315,701		476,923		403,609		179,086		172,429		1,547,748
Commercial and industrial		140,824		83,774		54,720		28,010		6,765		314,093
Consumer		3,737		9,934		1,550		378		4		15,603
Total loans	$	460,262	$	570,631	$	459,879	$	207,474	$	179,198	$	1,877,444

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 ~~September 30, 2017~~March 31, 2022 and December 31, ~~2016,~~2021, 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~~

Our loan portfolio, excluding loans held for ~~exposure~~sale, includes loans to ~~potential negative impacts of low~~businesses in certain industries that may be more significantly affected by the pandemic than others. These loans, including loans related to oil and gas, ~~prices. We consider~~food services, hospitality, and entertainment, represented approximately 5.5% of our ~~direct exposure to the energy sector not to be significant, at approximately one percent of the~~ total loan portfolio, or 5.4% excluding PPP loans, at ~~September 30, 2017. Despite~~March 31, 2022, compared to 5.6% of our total portfolio, or 5.4% excluding PPP loans, at December 31, 2021, as shown in the ~~prolonged suppressed prices~~table below.

Industry	Percentage of Loan Portfolio March 31, 2022			Percentage of Loan Portfolio March 31, 2022 (excluding PPP loans)			Percentage of Loan Portfolio December 31, 2021			Percentage of Loan Portfolio December 31, 2021 (excluding PPP loans)
Oil and gas		2.0	%		2.0	%		2.2	%		2.1	%
Food services		2.4			2.3			2.3			2.2
Hospitality		0.5			0.5			0.5			0.5
Entertainment		0.6			0.6			0.6			0.6
Total		5.5	%		5.4	%		5.6	%		5.4	%

Table of oil and gas, we have not experienced increased losses in our portfolio as a result. However, management continues to monitor the general economic conditions in our South Louisiana markets to consider how they may negatively affect our borrowers and their ability to service their debt. Management continually evaluates the allowance for loan losses based on several factors, including economic conditions, and currently believes that any potential negatively affected future cash flows related to these loans would be covered by the current allowance for loan losses.Contents

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 ~~16.7%~~16% of our total assets and totaled ~~$246.9~~$423.7 million at ~~September 30, 2017,~~March 31, 2022, an increase of ~~$63.8~~$57.9 million, or ~~34.8%~~15.8%, from ~~$183.1~~$365.8 million at December 31, ~~2016.~~2021. The increase in investment securities at ~~September 30, 2017~~March 31, 2022 compared to December 31, ~~2016 primarily resulted~~2021 resulted from ~~purchases of~~increases in investments in residential mortgage-backed securities, slightly offset by a decrease in investments in obligations of ~~other U.S. government agencies~~political and ~~corporations and residential mortgage-backed securities.~~

state subdivisions.

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).

September 30, 2017 December 31, 2016
Balance Percentage of
Portfolio Balance Percentage of
Portfolio
Obligations of other U.S. government agencies and corporations $ 55,496
22.5 % $ 29,490
16.1 %
Obligations of state and political subdivisions 48,186
19.5
40,831
22.3
Corporate bonds 16,558
6.7
14,968
8.2
Residential mortgage-backed securities 122,440
49.6
94,703
51.7
Commercial mortgage-backed securities 3,177
1.3
2,444
1.3
Equity securities 1,011
0.4
706
0.4
Total $ 246,868
100.0 % $ 183,142
100.0 %

	March 31, 2022					December 31, 2021
	Balance		Percentage of Portfolio			Balance		Percentage of Portfolio
Obligations of U.S. government agencies and corporations	$	20,660		4.9	%	$	21,268		5.8	%
Obligations of state and political subdivisions		33,686		8.0			39,495		10.8
Corporate bonds		25,157		5.9			27,667		7.6
Residential mortgage-backed securities		268,435		63.3			203,249		55.6
Commercial mortgage-backed securities		75,765		17.9			74,085		20.2
Total	$	423,703		100	%	$	365,764		100	%

The investment portfolio consists of available for sale (“AFS”) and held to maturity (“HTM”) securities. We classify debt securities as ~~held to maturity~~HTM if management has the positive intent and ability to hold the securities to maturity. ~~Held to maturity~~HTM debt securities are stated at amortized cost. Securities not classified as ~~held to maturity or trading~~HTM are classified as ~~available for sale.~~AFS. The carrying values of the Company’s ~~available for sale~~AFS 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 September 30, 2017~~at March 31, 2022 (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 % $ 6,130
4.38 %
Residential mortgage-backed securities —
—
—
—
—
—
6,651
2.75
Available for sale:

Obligations of other U.S. government agencies and corporations —
—
1,078
2.63
7,528
2.30
47,183
2.46
Obligations of states and political subdivisions 728
1.89
8,529
2.29
6,320
2.83
20,307
4.10
Corporate bonds 1,257
2.10
4,395
2.60
9,605
3.58
1,564
2.53
Residential mortgage-backed securities —
—
734
2.02
1,977
2.24
113,535
2.19
Commercial mortgage-backed securities —
—
1,012
1.84
2,206
2.50
—
—
$ 2,670

$ 18,843

$ 30,381

$ 195,370

	One Year or Less					After One Year Through Five Years					After Five Years Through Ten Years					After Ten Years
	Amount		Yield			Amount		Yield			Amount		Yield			Amount		Yield
Held to maturity:
Obligations of state and political subdivisions	$	870		5.88	%	$	1,875		5.88	%	$	4,041		3.59	%	$	—		—	%
Residential mortgage-backed securities		—		—			—		—			—		—			3,140		3.00
Available for sale:
Obligations of U.S. government agencies and corporations		—		—			2,756		2.71			17,931		2.30			—		—
Obligations of state and political subdivisions		280		3.00			1,006		2.80			9,764		2.43			16,821		3.49
Corporate bonds		—		—			7,449		1.99			15,026		3.73			4,000		2.69
Residential mortgage-backed securities		—		—			—		—			2,047		2.11			280,679		2.04
Commercial mortgage-backed securities		—		—			2,251		2.59			3,241		1.73			73,508		1.86
	$	1,150				$	15,337				$	52,050				$	378,148

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%~~21%.

Table of Contents

Deposits

The following table sets forth the composition of our deposits and the percentage of each deposit type to total deposits at ~~September 30, 2017~~March 31, 2022 and December 31, ~~2016~~2021 (dollars in thousands).

September 30, 2017 December 31, 2016
Amount Percentage of
Total
Deposits Amount Percentage of
Total
Deposits
Noninterest-bearing demand deposits $ 175,130
15.9 % $ 108,404
11.9 %
NOW accounts 192,503
17.5
171,556
18.9
Money market deposit accounts 147,096
13.3
123,079
13.6
Savings accounts 103,017
9.4
52,860
5.8
Time deposits 483,616
43.9
451,888
49.8
Total deposits $ 1,101,362
100.0 % $ 907,787
100.0 %

	March 31, 2022					December 31, 2021
	Amount		Percentage of Total Deposits			Amount		Percentage of Total Deposits
Noninterest-bearing demand deposits	$	614,416		28.1	%	$	585,465		27.6	%
Interest-bearing demand deposits		710,914		32.5			650,868		30.7
Money market deposit accounts		276,112		12.6			255,501		12.1
Savings accounts		182,532		8.4			180,837		8.5
Time deposits		402,030		18.4			447,595		21.1
Total deposits	$	2,186,004		100	%	$	2,120,266		100	%

Total deposits were ~~$1.1~~$2.19 billion at ~~September 30, 2017,~~March 31, 2022, an increase of ~~$193.6~~$65.7 million, or ~~21.3%~~3.1%, compared to $2.12 billion at December 31, ~~2016. Excluding deposits acquired from Citizens, or approximately $212.2 million, deposits at September 30, 2017 decreased $18.6 million, or 2.0%, compared~~2021. The increase is due to ~~December 31, 2016. The decrease in total deposits exclusive of acquired deposits was driven~~organic growth, partially offset by a decrease in time ~~deposits~~deposits.

The COVID-19 pandemic has created a significant amount of ~~$62.3 million, or 13.8%, which was partially offset by~~excess liquidity in the market, and, as a result, we experienced large increases ~~of $23.3 million, or 21.5%,~~in both noninterest and ~~$21.0 million, or 17.1%, in noninterest-bearing~~interest-bearing demand deposits, and in money market deposit accounts ~~respectively. In an effort~~compared to ~~begin reducing its cost~~December 31, 2021. These increases were primarily driven by reduced spending by consumer and business customers as well as organic growth.

Our deposit mix has improved and reflects our consistent focus on relationship banking and growing our commercial relationships, as well as the effects of ~~funds~~the pandemic on consumer and ~~its dependency on non-retail certificates~~business spending. From December 31, 2021 to March 31, 2022, noninterest-bearing deposits as a percentage of ~~deposit, during the third quarter of 2016, the Company began lowering its rates on~~total deposits has increased while time deposits ~~particularly Qwikrate~~^®as a percentage of total deposits ~~which are primarily deposits~~has decreased.

Table of ~~other financial institutions. As a result of this strategy, as the Qwikrate~~^® ~~deposits have matured, many have not renewed with the Bank, which is the primary driver for the decrease in time deposits.~~Contents

~~The following table shows the contractual maturities of certificates of deposit and other time deposits greater than $100,000 at September 30, 2017 and December~~

Borrowings

At March 31, ~~2016 (dollars in thousands).~~

September 30, 2017 December 31, 2016
Certificates of Deposit Other Time
Deposits Certificates of Deposit Other Time
Deposits
Time remaining until maturity:
Three months or less $ 36,929
$ 719
$ 59,639
$ 100
Over three months through six months 55,825
1,967
25,695
358
Over six months through twelve months 59,472
1,688
20,327
660
Over one year through three years 46,718
1,962
65,865
1,388
Over three years 8,008
2,173
8,684
297
$ 206,952
$ 8,509
$ 180,210
$ 2,803

~~Borrowings~~

~~Total~~2022, total borrowings include securities sold under agreements to repurchase, federal funds purchased, advances from the Federal Home Loan Bank (“FHLB”), unsecured lines of credit with First National Bankers Bank ~~(“FNBB”)~~ and The Independent Bankers Bank ~~(“TIB”),~~totaling $60.0 million, subordinated debt issued in 2017 and 2019, and 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 (“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 Company used the net proceeds of the Notes sale to fund a portion of its acquisition of Citizens, which closed on July 1, 2017.

assumed through acquisitions.

Securities sold under agreements to repurchase decreased ~~$14.2~~$4.5 million to ~~$24.9~~$1.3 million at ~~September 30, 2017~~March 31, 2022 from ~~$39.1~~$5.8 million at December 31, ~~2016.~~2021. Our advances from the FHLB were ~~$162.7~~$78.5 million at ~~September 30, 2017, an increase of $79.9 million, or 96.5%, from FHLB advances of $82.8 million at~~March 31, 2022 and December 31, ~~2016. The increase in FHLB advances was used primarily to fund organic loan growth.~~

2021.

We had no outstanding balances drawn on unsecured lines of credit at ~~September 30, 2017~~March 31, 2022 or December 31, ~~2016. There~~2021. The carrying value of the subordinated debt was ~~no outstanding balance on the secured revolving line of credit with TIB at September 30, 2017 compared to $1.0~~$43.0 million at March 31, 2022 and December 31, ~~2016.~~2021. The ~~$3.6~~$8.4 million in junior subordinated debt at ~~September 30, 2017~~March 31, 2022 and December 31, ~~2016 represents~~2021 represent the junior subordinated debentures that we assumed through ~~acquisition. The carrying value of the Notes was $18.2 million at September 30, 2017.~~

acquisitions.

The average balances and cost of funds of short-term borrowings for the ~~nine~~three months ended ~~September 30, 2017~~March 31, 2022 and ~~2016~~2021 are summarized in the table below (dollars in thousands).

Average Balances Cost of Funds
September 30, 2017 September 30, 2016 September 30, 2017 September 30, 2016
Federal funds purchased and other short-term borrowings $ 91,914
$ 82,912
1.34 % 1.07 %
Securities sold under agreements to repurchase 35,167
28,506
0.30
0.20
Total short-term borrowings $ 127,081
$ 111,418
1.05 % 0.85 %

	Average Balances				Cost of Funds
	March 31, 2022		March 31, 2021		March 31, 2022			March 31, 2021
Federal funds purchased and other short-term borrowings	$	52	$	6,599		0.66	%		0.17	%
Securities sold under agreements to repurchase		5,564		4,808		0.15			0.20
Total short-term borrowings	$	5,616	$	11,407		0.15	%		0.18	%

The main source of our short-term borrowings are advances from the FHLB. The rate charged for these advances is directly tied to the Federal Reserve Bank’s federal funds target rate. On March 3, 2020, the Federal Reserve lowered the federal funds target rate to 1.00 to 1.25%, which the Federal Reserve stated was in response to the evolving risks to economic activity posed by the coronavirus. As the coronavirus spread and was declared a pandemic, the Federal Reserve further reduced the federal funds target rate to 0 to 0.25% on March 15, 2020. On March 16, 2022, the Federal Reserve raised the federal funds target rate by 25 basis points to 0.25% to 0.50%.

For a description of our subordinated notes outstanding at March 31, 2022, see our Annual Report, Part II Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations

~~The results~~ - Discussion and Analysis of ~~operations for the three~~Financial Condition - Borrowings - 2029 Notes and ~~nine months ended September 30, 2017 reflect the acquisition of Citizens beginning July 1, 2017.~~

~~Performance Summary~~

~~Three months ended September 30, 2017 vs. three months ended September 30, 2016. For the three months ended September 30, 2017, net income was $2.1 million, or $0.24 per basic~~2027 Notes” and diluted share, compared to net income of $2.0 million, or $0.29 per basic and diluted share for the three months ended September 30, 2016. The decrease in basic and diluted earnings per share is mainly attributableNote 11 to the ~~increase~~financial statements included in such report.

On April 6, 2022, we entered into a Subordinated Note Purchase Agreement with certain institutional accredited investors and qualified institutional buyers (the “Purchasers”) under which we issued an aggregate of $20.0 million in aggregate principal amount of our 2032 Notes to the ~~weighted average number of common shares outstanding, which is primarily~~Purchasers at a ~~result~~price equal to 100% of the ~~1.6 million shares issued in a public offering at the end~~aggregate principal amount of the ~~first quarter of 2017. Return on average assets decreased~~2032 Notes. We intend to ~~0.59% for~~use the three months ended September 30, 2017 compared to 0.71% for the three months ended September 30, 2016, primarily due to a $303.3 million increase in average assets for the quarter ended September 30, 2017, as well as $0.8 million in acquisition related expenses recognized during the three months ended September 30, 2017. Return on average equity was 5.55% for the three months ended September 30, 2017 compared to 7.15% for the three months ended September 30, 2016, primarily due to a $39.1 million increase in average equity, which mainly resulted from a public offering of common stock in the first quarter of 2017, generating net proceeds to refinance our 2017 issuance of ~~$32.5 million.~~

~~Nine months ended September 30, 2017 vs. Nine months ended September 30, 2016~~.subordinated debt securities, for possible share repurchases, and for general corporate purposes. For the nine months ended September 30, 2017, net income was $5.9 million, or $0.72 per basic share and $0.71 per diluted share, compared to net income of $6.0 million, or $0.85 per basic share and $0.84 diluted share for the nine months ended September 30, 2016. The decrease in basic and diluted earnings per share is mainly attributableadditional information, see Note 12 to the ~~increase~~financial statements included in ~~the weighted average number~~this report.

Table of common shares outstanding, discussed above. Return on average assets decreased to 0.62% for the nine months ended September 30, 2017 compared to 0.74% for the nine months ended September 30, 2016, primarily due to a $176.9 million increase in average assets for the nine months ended September 30, 2017, as well as $1.0 million in acquisition related expenses recognized during the same period. Return on average equity was 5.65% for the nine months ended September 30, 2017 compared to 7.17% for the nine months ended September 30, 2016, primarily due to a $27.9 million increase in average equity, which mainly resulted from the public offeringContents

Results of ~~common stock discussed above.~~

Operations

Net Interest Income

and Net Interest Margin

Net interest income, which is the largest component of our earnings, is the difference between interest earned on assets, 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 ~~September 30, 2017~~March 31, 2022 vs. three months ended ~~September 30, 2016~~March 31, 2021. Net interest income increased ~~31.8%~~11.1% to ~~$11.5~~$21.8 million for the three months ended ~~September 30, 2017~~March 31, 2022 compared to ~~$8.8~~$19.6 million for the same period in ~~2016.~~2021. This increase is primarily due ~~primarily~~ to the ~~$199.5 million and $71.3 million increases~~decrease in ~~average loans and average investment securities, respectively, when~~the cost of deposits compared to the same period in ~~2016, resulting in a $3.4~~2021, and prepayment penalty fees of $0.6 million ~~increase in interest income, discussed in more detail below.~~as one of our large commercial loan relationships prepaid. Average interest-bearing deposits increased approximately ~~$142.4 million and average short- and long-term borrowings increased $53.2~~$92.1 million for the three months ended ~~September 30, 2017 when~~March 31, 2022 compared to the same period in ~~2016, resulting~~2021, but we experienced a $1.3 million decrease in interest expense, discussed in more detail below. The increase in average interest-bearing deposits resulted from organic growth and growth through the acquisition of Cheaha. The organic growth experienced was partially driven by reduced consumer and business spending related to the pandemic as well as increases in PPP borrowers’ deposit accounts. There was also a ~~$0.7~~$5.5 million increase in average loans, primarily due to the acquisition of Cheaha, compared to the same period in 2021, which drove a $0.9 million increase in interest ~~expense,~~income, also discussed in more detail below. ~~The increases in both average interest-earning assets and interest-bearing liabilities are results of both organic growth of the Company and the acquisition of Citizens.~~

Interest income was ~~$14.4~~$23.9 million, including $0.4 million of interest and fees for PPP loans and $0.6 million of prepayment penalty fees, for the three months ended ~~September 30, 2017~~March 31, 2022, compared to ~~$11.0~~$23.0 million, including $1.4 million of interest and fees for PPP loans, for the same period in ~~2016.~~2021. Loan interest income made up substantially all of our interest income for the three months ended ~~September 30, 2017~~March 31, 2022 and ~~2016.~~2021. An increase in interest income of ~~$2.6~~$0.7 million can be attributed to ~~an increase~~the change in the volume of interest-earning assets, and an increase of ~~$0.8~~$0.2 million can be attributed to an increase in the yield earned on those assets. Prepayment penalty fees of $0.6 million recognized as loan fees during the quarter ended March 31, 2022 added 12 basis points to the yield on the loan portfolio. The overall yield on interest-earning assets was ~~4.26%~~4.10% and ~~4.06%~~4.26% for the three months ended ~~September 30, 2017~~March 31, 2022 and ~~2016,~~2021, respectively. The loan portfolio yielded ~~4.76%~~4.73% and 4.72% for the three months ended ~~September 30, 2017 compared to 4.54% for the three months ended September 30, 2016,~~March 31, 2022 and March 31, 2021, respectively, while the yield on the investment portfolio was ~~2.33%~~1.90% for the three months ended ~~September 30, 2017~~March 31, 2022 compared to ~~2.19%~~1.65% for the three months ended ~~September 30, 2016.~~

March 31, 2021. The decrease in the overall yield on interest-earning assets compared to the quarter ended March 31, 2021 was driven by excess liquidity and a reduction in the yield earned on the excess funds.

Interest expense was ~~$2.9~~$2.0 million for the three months ended ~~September 30, 2017, an increase~~March 31, 2022, a decrease of ~~$0.7~~$1.3 million compared to interest expense of ~~$2.2~~$3.3 million for the three months ended ~~September 30, 2016, as~~March 31, 2021. A decrease in interest expense of $0.2 million resulted from the change in volume of interest-bearing liabilities and a ~~result~~decrease of ~~an increase of $0.4~~$1.1 million ~~attributed to volume and $0.3 million attributed to~~resulted from the ~~increase~~ decrease in the ~~rate~~cost of interest-bearing ~~liabilities.~~liabilities, primarily time deposits. Average interest-bearing liabilities increased approximately ~~$195.6~~$88.9 million for the three months ended ~~September 30, 2017~~March 31, 2022 compared to the same period in ~~2016~~2021 mainly as a result of a ~~$53.2~~$92.1 million increase in interest-bearing deposits, while average short- and long-term ~~borrowings. The increase in short-term borrowings is attributable to our liquidity needs, while the increase in long-term borrowings is a result of the Company’s sale of its Notes, discussed in~~ ~~Borrowings~~ ~~above.~~debt decreased by $3.3 million. The cost of deposits decreased ~~seven~~38 basis points to ~~0.91%~~0.25% for the ~~quarter~~three months ended ~~September 30, 2017~~March 31, 2022 compared to ~~0.98%~~0.63% for the ~~quarter~~three months ended ~~September 30, 2016~~March 31, 2021 as a result of the decrease in the ~~cost~~rates offered for our all of ~~savings deposits and time deposits.~~our interest-bearing deposit products, which are driven by the federal funds target rate. The cost of interest-bearing liabilities ~~increased seven~~decreased 35 basis points to ~~1.05%~~0.48% for the three months ended ~~September 30, 2017~~March 31, 2022 compared to ~~0.98%~~0.83% for the same period in ~~2016, primarily as a result of an increase~~2021, due to the decrease in the cost of ~~short-~~both deposits and ~~long-term~~short-term borrowings.

Net interest margin was ~~3.40%~~3.75% for the three months ended ~~September 30, 2017,~~March 31, 2022, an increase of 1711 basis points from ~~3.23%~~3.64% for the three months ended ~~September 30, 2016.~~March 31, 2021. The increase in net interest margin ~~is mainly attributable tothe 20~~was primarily driven by a 38 basis point ~~increase~~decrease in the cost of deposits partially offset by a 16 basis point decrease in the yield on interest-earning assets.

Table of Contents

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 ~~September 30, 2017~~March 31, 2022 and ~~2016.~~2021. Averages presented in the table below are daily averages (dollars in thousands).

Three months ended September 30,
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 $ 1,073,800
$ 12,893
4.76 % $ 874,272
$ 10,011
4.54 %
Securities:

Taxable 203,407
1,193
2.33
136,047
728
2.12
Tax-exempt 34,659
206
2.36
30,733
192
2.48
Interest-earning balances with banks 34,589
150
1.72
34,093
62
0.72
Total interest-earning assets 1,346,455
14,442
4.26
1,075,145
10,993
4.06
Cash and due from banks 22,626

7,138

Intangible assets 13,283

3,248

Other assets 63,007

56,273

Allowance for loan losses (7,442 )

(7,213 )

Total assets $ 1,437,929

$ 1,134,591

Liabilities and stockholders’ equity

Interest-bearing liabilities:

Deposits:

Interest-bearing demand $ 337,846
$ 604
0.71 % $ 262,841
$ 433
0.65 %
Savings deposits 102,331
139
0.54
51,924
88
0.67
Time deposits 486,837
1,394
1.14
469,826
1,413
1.19
Total interest-bearing deposits 927,014
2,137
0.91
784,591
1,934
0.98
Short-term borrowings 122,456
367
1.19
98,286
237
0.96
Long-term debt 51,642
400
3.07
22,644
69
1.21
Total interest-bearing liabilities 1,101,112
2,904
1.05
905,521
2,240
0.98
Noninterest-bearing deposits 173,212

102,736

Other liabilities 11,419

13,278

Stockholders’ equity 152,186

113,056

Total liabilities and stockholders’ equity $ 1,437,929

$ 1,134,591

Net interest income/net interest margin $ 11,538
3.40 %
$ 8,753
3.23 %

	Three months ended March 31,
	2022								2021
				Interest								Interest
	Average			Income/					Average			Income/
	Balance			Expense⁽¹⁾		Yield/ Rate⁽¹⁾			Balance			Expense⁽¹⁾		Yield/ Rate⁽¹⁾
Assets
Interest-earning assets:
Loans	$	1,862,775		$	21,726		4.73	%	$	1,857,272		$	21,627		4.72	%
Securities:
Taxable		395,828			1,814		1.86			270,040			1,039		1.56
Tax-exempt		22,248			141		2.58			20,228			140		2.81
Interest-earning balances with banks		77,461			186		0.97			38,313			163		1.72
Total interest-earning assets		2,358,312			23,867		4.10			2,185,853			22,969		4.26
Cash and due from banks		44,900								30,335
Intangible assets		43,928								32,112
Other assets		134,491								126,750
Allowance for loan losses		(20,800	)							(20,546	)
Total assets	$	2,560,831							$	2,354,504
Liabilities and stockholders’ equity
Interest-bearing liabilities:
Deposits:
Interest-bearing demand deposits	$	965,574		$	339		0.14	%	$	736,502		$	685		0.38	%
Brokered deposits		3,188			2		0.27			83,832			209		1.01
Savings deposits		180,568			21		0.05			146,078			66		0.19
Time deposits		427,313			614		0.58			518,103			1,342		1.05
Total interest-bearing deposits		1,576,643			976		0.25			1,484,515			2,302		0.63
Short-term borrowings		5,616			2		0.15			11,407			6		0.18
Long-term debt		129,904			1,068		3.33			127,364			1,027		3.27
Total interest-bearing liabilities		1,712,163			2,046		0.48			1,623,286			3,335		0.83
Noninterest-bearing deposits		586,556								466,531
Other liabilities		15,803								17,451
Stockholders’ equity		246,309								247,236
Total liabilities and stockholders’ equity	$	2,560,831							$	2,354,504
Net interest income/net interest margin				$	21,821		3.75	%				$	19,634		3.64	%


⁽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~~

Table of ~~the changes in interest earned and interest paid resulting from changes in volume and rates for the three months ended September 30, 2017 compared to the same period in 2016 (dollars in thousands).~~

Contents

Three months ended September 30, 2017 vs.
three months ended September 30, 2016
Volume Rate
Net⁽¹⁾
Interest income:
Loans $ 2,285
$ 597
$ 2,882
Securities:

Taxable 360
105
465
Tax-exempt 25
(11 ) 14
Interest-earning balances with banks 1
87
88
Total interest-earning assets 2,671
778
3,449
Interest expense:

Interest-bearing demand deposits 124
47
171
Savings deposits 86
(35 ) 51
Time deposits 51
(70 ) (19 )
Short-term borrowings 58
72
130
Long-term debt 88
243
331
Total interest-bearing liabilities 407
257
664
Change in net interest income $ 2,264
$ 521
$ 2,785

	Three months ended March 31, 2022 vs.
	Three months ended March 31, 2021
	Volume			Rate			Net⁽¹⁾
Interest income:
Loans	$	65		$	34		$	99
Securities:
Taxable		483			291			774
Tax-exempt		14			(12	)		2
Interest-earning balances with banks		166			(143	)		23
Total interest-earning assets		728			170			898
Interest expense:
Interest-bearing demand deposits		213			(559	)		(346	)
Brokered deposits		(201	)		(6	)		(207	)
Savings deposits		16			(62	)		(46	)
Time deposits		(235	)		(492	)		(727	)
Short-term borrowings		(3	)		—			(3	)
Long-term debt		20			20			40
Total interest-bearing liabilities		(190	)		(1,099	)		(1,289	)
Change in net interest income	$	918		$	1,269		$	2,187


⁽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.

~~Nine months ended September 30, 2017 vs. nine months ended September 30, 2016~~. Net interest income increased 14.4% to $29.7 million for the nine months ended September 30, 2017 from $26.0 million for the same period in 2016. This increase is primarily due to the $107.8 million and $52.9 million increases in average loans and average investment securities, respectively, when compared to the same period in 2016, resulting in a $5.3 million increase in interest income, discussed in more detail below. Average interest-bearing deposits and average short- and long-term borrowings increased approximately $83.6 million and $28.9 million, respectively, for the nine months ended September 30, 2017 when compared to the same period in 2016, resulting in a $1.5 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

Table of ~~both organic growth of the Company and the acquisition of Citizens.~~

Interest income was $37.4 million for the nine months ended September 30, 2017, an increase of $5.3 million, or 16.5%, compared to $32.1 million for the same period in 2016. Loan interest income made up substantially all of our interest income for the nine months ended September 30, 2017 and 2016. The increase in interest income was a result of continued growth of the Company’s loan and investment portfolios organically and through acquisition, with an increase in interest income of $4.6 million due to an increase in the volume of interest-earning assets and an increase of $0.7 million attributed to the increase in the yield earned on those assets. The overall yield on interest-earning assets increased three basis points to 4.18% for the nine months ended September 30, 2017 compared to 4.15% for the same period in 2016. The loan portfolio yielded 4.66% and 4.57% for the nine months ended September 30, 2017 and 2016, respectively.~~The yield on the investment portfolio was 2.37% for the nine months ended September 30, 2017 compared to 2.34% for the nine months ended September 30, 2016.~~

Interest expense was $7.7 million for the nine months ended September 30, 2017, an increase of $1.6 million compared to interest expense of $6.1 million for the nine months ended September 30, 2016, as a result of increases in both the volume and cost of interest-bearing liabilities. Average interest-bearing liabilities increased approximately $112.5 million for the nine months ended September 30, 2017 compared to the same period in 2016, resulting from acquired deposits, an increase in short-term borrowings to fund liquidity needs, and an increase in long-term borrowings from the issuance and sale of the Company’s Notes, discussed in ~~Borrowings~~ above. The cost of interest-bearing liabilities increased 11 basis points to 1.05% for the nine months ended September 30, 2017 compared to 0.94% for the same period in 2016, primarily as a result of the cost of short- and long-term borrowings.

Net interest margin was 3.32% for the nine months ended September 30, 2017, down four basis points from 3.36% for the nine months ended September 30, 2016. The decrease in net interest margin is attributable to the increase in the cost of interest-bearing liabilities discussed above.

~~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 nine months ended September 30, 2017 and 2016. Averages presented in the table below are daily averages (dollars in thousands).

Contents

Nine months ended September 30,
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 $ 960,868
$ 33,456
4.66 % $ 853,116
$ 29,277
4.57 %
Securities:

Taxable 173,273
3,044
2.35
125,982
2,172
2.30
Tax-exempt 31,540
583
2.47
25,920
495
2.54
Interest-earning balances with banks 29,238
296
1.35
25,608
146
0.76
Total interest-earning assets 1,194,919
37,379
4.18
1,030,626
32,090
4.15
Cash and due from banks 13,180

7,335

Intangible assets 6,612

3,228

Other assets 58,401

54,478

Allowance for loan losses (7,265 )

(6,770 )

Total assets $ 1,265,847

$ 1,088,897

Liabilities and stockholders’ equity

Interest-bearing liabilities:

Deposits:

Interest-bearing demand $ 307,369
$ 1,616
0.70 % $ 249,960
$ 1,205
0.64 %
Savings deposits 69,194
308
0.60
52,596
265
0.67
Time deposits 440,956
3,893
1.18
431,328
3,742
1.16
Total interest-bearing deposits 817,519
5,817
0.95
733,884
5,212
0.95
Short-term borrowings 127,081
1,000
1.05
111,418
710
0.85
Long-term debt 37,479
862
3.08
24,243
210
1.15
Total interest-bearing liabilities 982,079
7,679
1.05
869,545
6,132
0.94
Noninterest-bearing deposits 133,675

95,225

Other liabilities 10,166

12,135

Stockholders’ equity 139,927

111,992

Total liabilities and stockholders’ equity $ 1,265,847

$ 1,088,897

Net interest income/net interest margin $ 29,700
3.32 %
$ 25,958
3.36 %


⁽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 nine months ended September 30, 2017 compared to the same period in 2016 (dollars in thousands).

Nine months ended September 30, 2017 vs.
Nine months ended September 30, 2016
Volume Rate
Net⁽¹⁾
Interest income:
Loans $ 3,698
$ 481
$ 4,179
Securities:

Taxable 815
57
872
Tax-exempt 107
(19 ) 88
Interest-earning balances with banks 21
129
150
Total interest-earning assets 4,641
648
5,289
Interest expense:

Interest-bearing demand deposits 277
134
411
Savings deposits 83
(40 ) 43
Time deposits 84
67
151
Short-term borrowings 100
190
290
Long-term debt 115
537
652
Total interest-bearing liabilities 659
888
1,547
Change in net interest income $ 3,982
$ (240 ) $ 3,742


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

Three months ended ~~September 30, 2017~~March 31, 2022 vs. three months ended ~~September 30, 2016~~March 31, 2021. Total noninterest income increased ~~$0.2~~$3.5 million, or ~~13.4%~~148.0%, to ~~$1.2~~$5.9 million for the three months ended ~~September 30, 2017~~March 31, 2022 compared to ~~$1.0~~$2.4 million for the three months ended ~~September 30, 2016.~~March 31, 2021. The increase in noninterest income is mainly attributable to ~~the $0.2~~increases of $3.3 million ~~increase~~ in ~~both service charges on deposit accounts~~swap termination fee income and $0.4 million in gain on sale or disposition of fixed assets, partially offset by ~~decreases~~a $0.6 million decrease in the gain on call or sale of investment securities ~~and servicing fees and fee income on serviced loans. The increase in the service charges on deposit accounts is attributable~~compared to the ~~increase~~three months ended March 31, 2021. The gain on sale or disposition of fixed assets resulted from our sale of two tracts of land that we held for future branch locations.

Swap termination fees were recorded when we voluntarily terminated a number of interest rate swap agreements during the first quarter of 2022 in ~~deposits~~response to market conditions and as a result of excess liquidity. In the ~~Citizens acquisition. During~~past few years, we have entered into multiple forward starting pay-fixed interest rate swap agreements to manage exposure against the variability in expected future cash flows, in anticipation of rising rates. However, the borrowings required by the swap agreements provide excess liquidity and put downward pressure on the yield on our interest-earning assets and net interest margin. We elected to terminate a number of swap contracts that became effective in the first quarter of 2022 or would be effective in the second quarter of 2022 to avoid additional excess liquidity and net interest margin compression. We had forward starting interest rate swap contracts with a total notional amount of $60 million as of March 31, 2022.

Noninterest Expense

Three months ended March 31, 2022 vs. three months ended ~~September 30, 2017, the Company recognized a $0.2 million gain on sale of fixed assets for the sale of the land and building of one of the Bank’s former branch locations.~~

~~Servicing fees and fee income on serviced loans, which are fees collected for servicing loans which have been sold and are held in our servicing portfolio, decreased $0.1 million, or 31.0%, to $0.4~~March 31, 2021. Total noninterest expense was $15.4 million for the three months ended September 30, 2017 compared to $0.5 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.

~~Nine months ended September 30, 2017 vs. nine months ended September 30, 2016~~. Total noninterest income decreased $1.7 million, or 37.6%, to $2.9 million for the nine months ended September 30, 2017 compared to $4.6 million for the nine months ended September 30, 2016. The decrease in noninterest income is mainly attributable to the $1.0 million decrease in gain on sale of fixed assets when compared to the nine months ended September 30, 2016. There was also a $0.5 million decrease in servicing fees and fee income on serviced loans and a $0.3 million decrease in gain on sale of loans when compared to the nine months ended September 30, 2017. The gain on sale of fixed assets recognized during the nine months ended September 30, 2016 resulted from the sale of the land and building of one of the Bank’s branch locations to a healthcare company.

Other operating income primarily consists of interchange fees, credit card fees, ATM surcharge income, and the net change in the value of bank owned life insurance, among other items. Other operating income was $0.8 million for the nine months ended September 30, 2017 compared to $0.7 million for the same period in 2016.

~~Noninterest Expense~~

~~Three months ended September 30, 2017 vs. three months ended September 30, 2016. Total noninterest expense was $9.1 million for the three months ended September 30, 2017,~~March 31, 2022, an increase of ~~$2.6~~$0.6 million, or ~~39.3%~~4.2%, compared to the same period in ~~2016.~~2021. The increase is ~~mainly~~primarily attributable to a ~~$1.2~~$0.4 million increase in other operating expenses and $0.3 million increase in salaries and employee ~~benefits and a $0.8 million~~benefits. The increase in ~~acquisition expenses.~~other operating expenses was driven by an increase in collection and repossession expenses, the majority of which is related to one impaired loan relationship. The increase in salaries and employee benefits is ~~mainly~~primarily attributable to the ~~additional employees acquired through the Citizens~~ acquisition ~~as well as additional lenders and treasury management employees hired during the quarter ended September 30, 2017. In addition, the Company opened two de novo~~of Cheaha on April 1, 2021, which added four branch locations ~~in June 2017 which required the hiring of additional employees. The increase in acquisition expenses when compared to the quarter ended September 30, 2016 is directly~~and related ~~to the Citizens acquisition that was completed on July 1, 2017.~~

~~Nine months ended September 30, 2017 vs. nine months ended September 30, 2016~~. Total noninterest expense was $22.7 million for the nine months ended September 30, 2017, an increase of $2.7 million, or 13.5%, compared to the same period in 2016. The increase is mainly attributable to a $1.5 million increase in salaries and employee benefits and a $1.0 million increase in acquisition expenses for the reasons discussed above. There were also increases in depreciation and amortization and other operating expenses, mainly as a result of the Citizens acquisition, offset by decreases in customer reimbursements and professional fees.

staff.

Income Tax Expense

Income tax expense for the three months ended ~~September 30, 2017~~March 31, 2022 and 2021 was ~~$1.0~~$2.6 million ~~an increase of $0.3~~and $1.4 million, ~~compared to the three months ended September 30, 2016.~~respectively. The effective tax rate for the three months ended ~~September 30, 2017~~March 31, 2022 and ~~2016~~2021 was ~~32.6%~~20.5% and ~~26.8%~~21.1%, respectively. ~~The Company recorded a $0.1 million tax benefit during~~

For the ~~quarter ended September 30, 2016 related to the filing of its 2015 tax return, which contributed to the lower effective tax rate.~~

~~Income tax expense for both the nine~~three months ended ~~September 30, 2017 and 2016 was $2.8 million. The~~March 31, 2022, the effective tax rate ~~for~~differs from the ~~nine~~statutory tax rate of 21% primarily due to tax exempt interest income earned on certain investment securities and bank owned life insurance. For the three months ended ~~September 30, 2017~~March 31, 2021, the effective tax rate differs from the statutory tax rate of 21% primarily due an increase in state taxes and ~~2016 was 31.8% and 31.4%, respectively.~~

the impact of share-based compensation.

Risk Management

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

Credit Risk and the Allowance for 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.

~~Pass (grades 1-6)~~ ~~– Loans not falling into one~~

Table 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.Contents

~~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.

•

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 ~~September 30, 2017~~March 31, 2022 and December 31, ~~2016,~~2021, there were no loans classified as loss. There was $0.5 million of loans classified as doubtful ~~or loss, while~~at March 31, 2022, compared to $0.7 million at December 31, 2021. At March 31, 2022 and December 31, 2021, there were ~~$6.6~~$36.6 million and ~~$3.7~~$46.8 million, respectively, of loans classified as ~~substandard. At September 30, 2017~~substandard, and ~~December 31, 2016, $0.5~~$5.7 million and ~~$0.6~~$7.3 million, respectively, of loans ~~were~~ classified as special mention. The increase in substandard loans primarily relates to loans acquired in the Citizens acquisition. These loans were recorded at their acquisition date fair values, based on expected cash flows and credit related losses. As a result, the increase in substandard loans during the period had minimal impact on our provision for loan losses and related allowance.

An ~~external~~independent loan review ~~consultant~~ is ~~engaged~~conducted annually, ~~to review approximately 60%~~whether internally or externally, on at least 40% of commercial loans utilizing a risk-based approach designed to maximize the effectiveness of the review. Internal loan review is independent of the loan underwriting and approval process. In addition, credit analysts periodically review ~~smaller dollar~~certain commercial loans to identify negative financial trends related to any one borrower, any related groups of borrowers, or an industry. All loans not categorized as pass are put on an internal watch list, with quarterly reports to the board of directors. In addition, a written status report is maintained by our special assets division for all commercial loans categorized as substandard or worse. We use this information in connection with our collection efforts.

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

Allowance for 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 type. 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 ~~$7.6~~$21.1 million and $20.9 million at ~~September 30, 2017, up from $7.1 million at~~March 31, 2022 and December 31, ~~2016, as we increased our loan loss provisioning to reflect our nonperforming loans and organic loan growth.~~2021, respectively.

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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 ~~nonaccrual loans.~~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 ~~September 30, 2017~~March 31, 2022, which include TDRs and nonaccrual loans individually evaluated for impairment for purposes of determining the allowance for loan losses, were ~~$3.5~~$27.2 million compared to ~~$4.4~~$32.8 million at December 31, ~~2016.~~2021. At ~~September 30, 2017~~March 31, 2022 and December 31, ~~2016, $0.3~~2021, $0.5 million and ~~$0.4~~$0.6 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 ~~September 30, 2017~~March 31, 2022 and ~~2016,~~2021, the provision for loan losses was negative $0.4 million and ~~$0.5~~$0.4 million, respectively.

The negative provision for loan losses for the three months ended March 31, 2022 was driven by net recoveries of $0.7 million in the loan portfolio during the quarter.

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.There was no provision for loan losses charged to operating expense attributable to loans accounted for under ASC 310-30 for the three months ended March 31, 2022 and 2021.

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

September 30, 2017 December 31, 2016
Construction and development $ 848
$ 579
1-4 Family 1,259
1,377
Multifamily 340
355
Farmland 60
60
Commercial real estate 3,263
2,499
Total mortgage loans on real estate 5,770
4,870
Commercial and industrial 741
759
Consumer 1,094
1,422
Total $ 7,605
$ 7,051

	March 31, 2022					December 31, 2021
	Allowance for Loan Losses		% of Loans in each Category to Total Loans			Allowance for Loan Losses		% of Loans in each Category to Total Loans
Mortgage loans on real estate:
Construction and development	$	2,408		10.7	%	$	2,347		10.9	%
1-4 Family		3,404		19.6			3,337		19.4
Multifamily		590		2.8			673		3.2
Farmland		342		1.0			383		1.1
Commercial real estate		9,669		48.4			9,354		47.9
Commercial and industrial		4,356		16.7			4,411		16.6
Consumer		319		0.8			354		0.9
Total	$	21,088		100	%	$	20,859		100	%

The following table presents the amount of the allowance for loan losses allocated to each loan category as a percentage of total loans as of the dates indicated (dollars in thousands).

	March 31, 2022			December 31, 2021
Mortgage loans on real estate:
Construction and development		0.13	%		0.12	%
1-4 Family		0.18			0.18
Multifamily		0.03			0.04
Farmland		0.02			0.02
Commercial real estate		0.51			0.50
Commercial and industrial		0.23			0.23
Consumer		0.02			0.02
Total		1.12	%		1.11	%

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 and key ratios for the periods indicated (dollars in thousands).

	Three months ended March 31,
	2022			2021
Allowance at beginning of period	$	20,859		$	20,363
Provision for loan losses		(449	)		400
Net recoveries (charge-offs)		678			(340	)
Allowance at end of period	$	21,088		$	20,423
Total loans - period end		1,877,444			1,845,970
Nonaccrual loans - period end		25,641			13,166

Key ratios:
Allowance for loan losses to total loans - period end		1.12	%		1.11	%
Allowance for loan losses to nonaccrual loans - period end		82.24	%		155.12	%
Nonaccrual loans to total loans - period end		1.37	%		0.71	%

Three months ended September 30, Nine months ended September 30,
2017 2016 2017 2016
Allowance at beginning of period $ 7,320
$ 7,091
$ 7,051
$ 6,128
Provision for loan losses 420
450
1,145
1,704
Charge-offs:
Mortgage loans on real estate:
Construction and development —
—
—
(14 )
1-4 Family —
—
—
(7 )
Commercial and industrial (77 ) —
(270 ) —
Consumer (78 ) (173 ) (365 ) (488 )
Total charge-offs (155 ) (173 ) (635 ) (509 )
Recoveries
Mortgage loans on real estate:
Construction and development 14
4
28
10
1-4 Family 2
3
4
11
Commercial real estate —
—
—
1
Commercial and industrial —
—
—
20
Consumer 4
8
12
18
Total recoveries 20
15
44
60
Net charge-offs (135 ) (158 ) (591 ) (449 )
Balance at end of period $ 7,605
$ 7,383
$ 7,605
$ 7,383
Net charge-offs to:
Loans - average 0.01 % 0.02 % 0.06 % 0.06 %
Allowance for loan losses 1.78 % 2.14 % 7.77 % 6.08 %
Allowance for loan losses to:
Total loans 0.68 % 0.87 % 0.68 % 0.87 %
Total loans, excluding acquired loans⁽¹⁾
0.77 % 0.87 % 0.77 % 0.87 %
Nonperforming loans 349.64 % 82.44 % 349.64 % 82.44 %
Nonperforming loans, excluding acquired loans⁽²⁾
541.62 % 82.44 % 541.62 % 82.44 %

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The allowance for loan losses to total loans ~~ratio decreased~~increased to ~~0.68%~~1.12% at ~~September 30, 2017~~March 31, 2022 compared to ~~0.87%~~1.11% at ~~September 30, 2016. The~~March 31, 2021, while the allowance for loan losses to ~~nonperforming~~nonaccrual loans ratio ~~increased~~decreased to ~~349.64%~~82% at ~~September 30, 2017~~March 31, 2022 compared to ~~82.44%~~155% at ~~September 30, 2016.~~March 31, 2021. The increase in the allowance for loan losses to ~~nonperforming~~total loans ~~ratio~~ at ~~September 30, 2017~~March 31, 2022 is primarily due to ~~a $6.8 million decrease~~the increase in nonperforming loans compared to September 30, 2016. The decrease in nonperforming loans compared to September 30, 2016 is mainly attributable to one $4.7 million owner-occupied commercial real estate loan relationship and one $2.7 million commercial and industrial loan relationship that were not performing at September 30, 2016.

~~At September 30, 2017,~~ the allowance for loan losses ~~did not include a balance related~~compared to ~~acquired loans, which were recorded at fair value on~~March 31, 2021. The decrease in the ~~date of acquisition. The~~ allowance for loan losses to nonaccrual loans is due to the increase in nonaccrual loans primarily due to one loan relationship impacted by Hurricane Ida.Nonaccrual loans were $25.6 million, or 1.37% of total loans, ~~excluding acquired loans ratio decreased to 0.77%~~ at ~~September 30, 2017~~March 31, 2022, an increase of $12.5 million compared to 0.87% at September 30, 2016. The allowance for loan losses to nonperforming loans, excluding acquired loans ratio increased to 541.62% at September 30, 2017 compared to 82.44% at September 30, 2016. Nonperforming loans, excluding acquired loans$13.2 million, or 0.71% of ~~$0.8 million, were $1.4 million at September 30, 2017, compared to $2.0 million at December 31, 2016, and $9.0 million at September 30, 2016. The decrease in nonperforming~~total loans at ~~September 30, 2017 compared to September 30, 2016 is discussed above.~~

March 31, 2021.

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

	Three months ended March 31,
	2022							2021
		Net Recoveries (Charge-offs)		Average Balance		Ratio of Net Charge-offs to Average Loans			Net Recoveries (Charge-offs)		Average Balance		Ratio of Net Charge-offs to Average Loans
Mortgage loans on real estate:
Construction and development	$	16		$	208,768	(0.01	)%	$	10		$	194,531	(0.01	)%
1-4 Family		70			364,740	(0.02	)		(128	)		340,319	0.04
Multifamily		—			57,470	—			—			62,167	—
Farmland		(54	)		19,043	0.28			—			25,873	—
Commercial real estate		59			884,271	(0.01	)		2			832,435	(0.00	)
Commercial and industrial		622			311,812	(0.20	)		(210	)		382,400	0.05
Consumer		(35	)		16,671	0.21			(14	)		19,547	0.07
Total	$	678		$	1,862,775	(0.04	)	$	(340	)	$	1,857,272	0.02

Charge-offs reflect the realization of losses in the portfolio that were recognized previously through the provision for loan losses. Net charge-offs include recoveries of amounts previously charged off. Net recoveries of $0.7 million and net charge-offs of $0.3 million for the three ~~and nine~~ months ended ~~September 30, 2017 were $0.1 million~~March 31, 2022 and ~~$0.6 million,~~2021, respectively, equal ~~to 0.01%~~0.04% and ~~0.06%~~0.02%, respectively, of ~~our~~the average loan balance for ~~the respective~~each period. Net charge-offs for the three and nine months ended September 30, 2016 were $0.2 million and $0.4 million, respectively, equal to 0.02% and 0.06%, respectively, of our average loan balance as of that date.

Management believes the allowance for loan losses at ~~September 30, 2017~~March 31, 2022 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 the scope and duration of the COVID-19 pandemic and its continued influence on the economy, other 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.


⁽¹⁾	~~Non-GAAP measure; see reconciliation below.~~

September 30, 2017
2017 2016
Total loans (a) $ 1,110,521
$ 846,828
Acquired loans (b) 124,394
—
Allowance for loan losses (c) 7,605
7,383
Allowance for loan losses to total loans, excluding acquired loans (c)/(a-b) 0.77 % 0.87 %


⁽²⁾	~~Non-GAAP measure; see reconciliation below.~~

September 30, 2017
2017 2016
Total nonperforming loans (a) $ 2,175
$ 8,956
Nonperforming loans acquired (b) 771
—
Allowance for loan losses (c) 7,605
7,383
Allowance for loan losses to nonperforming loans, excluding acquired loans (c)/(a-b) 541.62 % 82.44 %

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 specificallydetermined to be impaired or when principal and interest is delinquent for 90 days or more. However, under the CARES Act and guidance from regulatory agencies, certain loans modified due to pandemic-related hardships are not accounted for as past due or nonaccrual. Additionally, management may elect to continue the accrual when the estimated net available value of collateral is sufficient to cover the principal balance and accruedinterest. 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~~A loan may be returned to accrual status when all the ~~financial position~~principal and interest amounts contractually due are brought current and future principal and interest amounts contractually due are reasonably assured, which is typically evidenced by a sustained period of repayment performance by the ~~borrowerindicates there is no longer any reasonable doubt as to the payment of principal or interest.~~

borrower.

Another category of assets which contributes to our credit risk is troubled debt restructurings (“~~TDR”~~TDRs”), 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~~24 credits classified as TDRs at ~~September 30, 2017 that totaled approximately $1.6~~March 31, 2022 with a total aggregate balance of $7.4 million, compared to ~~eighteen loans totaling $2.4~~29 credits with a total aggregate balance of $10.5 million at December 31, ~~2016. Eight~~2021. At March 31, 2022, eleven of the restructured loans were considered TDRs due to a modification of terms through adjustments to maturity, ~~nine~~seven 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~~four restructured ~~loan was~~loans were considered ~~a TDR~~TDRs due to ~~modification of terms through~~ principal payment forbearance, paying interest only for a specified period of ~~time. As~~time, and two of ~~September 30, 2017 and December 31, 2016, all~~the restructured loans were ~~performing under~~considered TDRs due to principal and interest forbearance.

As of March 31, 2022 and December 31, 2021, none of the TDRs were in default of their modified ~~terms.~~terms and included in nonaccrual loans. The Company individually evaluates each TDR for allowance purposes, primarily based on collateral value, and excludes these loans from the loan population that is collectively evaluated for impairment.

~~The following table shows the principal amounts~~Table 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).

Contents

September 30, 2017
December 31, 2016
Nonaccrual loans $ 1,833

$ 1,978
Accruing loans past due 90 days or more 342

1
Total nonperforming loans 2,175

1,979
Restructured loans 1,644

2,399
Total nonperforming and restructured loans $ 3,819

$ 4,378
Interest income recognized on nonperforming and restructured loans $ 114

$ 169
Interest income foregone on nonperforming and restructured loans $ 73

$ 159

Nonperforming loans are comprised of accruing loans past due 90 days or more and nonaccrual loans. Nonperforming loans outstanding represented 0.20% and 0.22% of total loans at September 30, 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 ~~$0.4~~$0.8 million ~~and $0.5 million~~ was sold during the three ~~and nine~~ months ended ~~September 30, 2017, respectively,~~March 31, 2022, resulting in a ~~net~~ gain of ~~$37,000 and $32,000~~$41,000 for the ~~respective periods. For the nine months ended September 30, 2016,~~period. No other real estate owned ~~with a cost basis of $0.5 million~~ was sold ~~resulting in a net gain of $11,000. There were no sales of other real estate owned~~ during the three months ended ~~September 30, 2016.~~

March 31, 2021. At March 31, 2022, approximately $0.1 million of loans secured by real estate were in the process of foreclosure.

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

September 30, 2017 December 31, 2016
Construction and development $ 218
$ 270
Commercial real estate 3,612
3,795
Total other real estate owned $ 3,830
$ 4,065

	March 31, 2022		December 31, 2021
1-4 Family	$	629	$	168
Farmland		990		—
Commercial real estate		1,835		2,485
Total other real estate owned	$	3,454	$	2,653

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

Nine months ended September 30,
2017 2016
Balance, beginning of period $ 4,065
$ 725
Transfers from loans —
30
Acquired other real estate owned 429
—
Sales of other real estate owned (481 ) (469 )
Write-downs (183 ) (7 )
Balance, end of period $ 3,830
$ 279

	Three months ended March 31,
	2022			2021
Balance, beginning of period	$	2,653		$	663
Additions		1,620			501
Transfers from acquired loans		—			354
Sales of other real estate owned		(819	)		—
Balance, end of period	$	3,454		$	1,518

Impact of Inflation. Inflation reached a near 40-year high in late 2021 primarily due to effects of the ongoing pandemic, and continues to be high in 2022. When the rate of inflation accelerates, there is an erosion of consumer and customer purchasing power. Accordingly, this could impact our business by reducing our tolerance for extending credit, and our customer’s desire to obtain credit, or causing us to incur additional provisions for loan losses resulting from a possible increased default rate. Inflation may lead to lower loan re-financings. Inflation may also increase the costs of goods and services we purchase, including the costs of salaries and benefits. In response to higher inflation, the Federal Reserve may increase interest rates multiple times in 2022. For additional information, see Interest Rate Risk below, and Item 1A. Risk Factors – Risks Related to our Business – Changes in interest rates could have an adverse effect on our profitability, in our Annual Report.

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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~~ 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~~

Net interest income simulation is the Bank’s primary tool for benchmarking near term earnings exposure. Given the ALCO’s objective to understand the potential risk/volatility embedded within the current mix of assets and liabilities, standard rate scenario simulations assume total assets remain static (i.e. no growth).

The Bank may also use a standard gap report in its interest rate risk management process. The primary use for the gap report is to provide supporting detailed information to the ALCO’s discussion. The Bank has particular concerns with the utility of the gap report as a risk management tool because of difficulties in relating gap directly to changes in net interest income. Hence, the income simulation is the key indicator for earnings-at-risk since it expressly measures what the gap report attempts to estimate.

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

Since the impact of rate changes due to mismatched balance sheet positions in ~~interest rates on our net interest~~the short-term can quickly and materially affect the current year’s income ~~using gap analysis. The gap represents the net position of our assets~~statement, they require constant monitoring 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.

management.

Within the gap position that management directs, we attempt to structure our assets and liabilities to minimize the risk of either a rising or falling interest rate environment. We manage our gap position for time horizons of one month, two months, three months, 4-6 months, 7-12 months, 13-24 months, 25-36 months, 37-60 months and more than 60 months. The goal of our asset/liability management is for the Bank to maintain a net interest income at risk in an up or down 100 basis point environment at less than (5)%. At ~~September 30, 2017,~~March 31, 2022, the Bank was within the policy guidelines for asset/liability management.

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

As of September 30, 2017
Changes in Interest Rates
(in basis points)
Estimated
Increase/Decrease in
Net Interest Income ⁽¹⁾
+300 (3.3)%
+200 (2.0)%
+100 (0.9)%
-100 3.8%
-200 1.3%
-300 1.1%

As of March 31, 2022
Changes in Interest Rates (in basis points)		Estimated Increase/Decrease in Net Interest Income⁽¹⁾
+300		(0.8)%
+200		(0.9)%
+100		(0.8)%
-100		(4.6)%


⁽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 ~~September 30, 2017~~March 31, 2022 and December 31, ~~2016, 73.2%~~2021, 83% and ~~75.9%~~81% 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 ~~September 30, 2017,~~March 31, 2022, securities with a carrying value of ~~$84.0~~$158.9 million were pledged to secure certain deposits, borrowings, and other liabilities, compared to ~~$77.5~~$118.2 million in pledged securities at December 31, ~~2016.~~

2021.

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 ~~September 30, 2017,~~March 31, 2022 and December 31, 2021, the balance of our outstanding advances with the FHLB was ~~$162.7 million, an increase from $82.8 million at December 31, 2016.~~$78.5 million. The total amount of the remaining credit available to us from the FHLB at ~~September 30, 2017~~March 31, 2022 was ~~$327.0 million.~~ $791.3 million. At March 31, 2022, our FHLB borrowings were collateralized by approximately $878.5 million of our loan portfolio and $1.2 million of our investment securities.

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~~investment securities. We had ~~$24.9~~$1.3 million of repurchase agreements outstanding ~~as of September 30, 2017,~~at March 31, 2022 compared to ~~$39.1~~$5.8 million of repurchase agreements outstanding ~~as of~~at December 31, ~~2016.~~ 2021.

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We maintain unsecured lines of credit with other commercial banks totaling ~~$55.0~~$60.0 million. These lines of credit are federal funds lines of credit and are used for overnight borrowing only. The lines of credit mature at various times within the next year. We had no outstanding balances on our unsecured lines of credit at ~~September 30, 2017~~March 31, 2022 and December 31, ~~2016. We also have~~2021.

In addition, at both March 31, 2022 and December 31, 2021, we had $43.6 million in aggregate principal amount of subordinated debt outstanding. For additional information, see our Annual Report on Form 10-K for the year ended December 31, 2021, Part II Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Discussion and Analysis of Financial Condition - Borrowings - 2029 Notes and 2027 Notes” and Note 11 to the financial statements included in such report. Subsequent to the end of the first quarter of 2022, we announced the completion of a ~~secured~~private placement of $20.0 million ~~revolving line~~in aggregate principal amount of ~~credit with TIB maturing~~our 2032 Notes. We expect to utilize the net proceeds from the sale of the 2032 Notes to refinance our 2017 issuance of subordinated debt securities, for possible share repurchases and for general corporate purposes. For additional information, see Note 12 to the financial statements included in ~~June 2018. There was no outstanding balance on the revolving line of credit at September 30, 2017 compared to a $1.0 million outstanding balance at December 31, 2016.~~

this report.

Our liquidity strategy is focused on using the least costly funds available to us in the context of our balance sheet composition and interest rate risk position. Accordingly, we target growth of noninterest-bearing deposits. Although we cannot directly control the types of deposit instruments our customers choose, we can influence those choices with the interest rates and deposit specials we offer. ~~We do not hold any~~At March 31, 2022 and December 31, 2021, we held no brokered deposits, as defined for federal regulatory ~~purposes, although we do~~purposes; however the Bank may periodically use brokered deposits to satisfy the required borrowings under its interest rate swap agreements, due to more favorable pricing. We hold ~~QwikRate~~®QwickRate® deposits, included in our time deposit balances, which we obtain through a qualified network to address liquidity needs when rates on such deposits compare favorably with deposit rates in our markets. At ~~September 30, 2017,~~March 31, 2022, we held ~~$75.1~~$53.7 million of ~~QwikRate~~®QwickRate® deposits, ~~down from $123.2~~a decrease compared to $63.8 million at December 31, ~~2016.~~

2021.

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 ~~September 30, 2017~~March 31, 2022 and ~~2016.~~

Percentage of Total Cost of Funds Percentage of Total Cost of Funds
Three months ended September 30, Three months ended September 30, Nine months ended September 30, Nine months ended September 30,
2017 2016 2017 2016 2017 2016 2017 2016
Noninterest-bearing demand deposits 14 % 10 % — % — % 12 % 10 % — % — %
Interest-bearing demand deposits 26
26
0.71
0.65
28
26
0.70
0.64
Savings accounts 8
5
0.54
0.67
6
5
0.60
0.67
Time deposits 38
47
1.14
1.19
40
45
1.18
1.16
Short-term borrowings 10
10
1.19
0.96
11
12
1.05
0.85
Long-term borrowed funds 4
2
3.07
1.21
3
2
3.08
1.15
Total deposits and borrowed funds 100 % 100 % 0.90 % 0.88 % 100 % 100 % 0.92 % 0.85 %

2021.

	Percentage of Total Average Deposits and Borrowed Funds						Cost of Funds
	Three months ended March 31,						Three months ended March 31,
	2022			2021			2022			2021
Noninterest-bearing demand deposits		25	%		22	%		—	%		—	%
Interest-bearing demand deposits		42			35			0.14			0.38
Brokered deposits		—			4			0.27			1.01
Savings accounts		8			7			0.05			0.19
Time deposits		19			25			0.58			1.05
Short-term borrowings		—			1			0.15			0.18
Long-term borrowed funds		6			6			3.33			3.27
Total deposits and borrowed funds		100	%		100	%		0.36	%		0.65	%

Capital Management. Our primary sources of capital include retained earnings, capital obtained through acquisitions, and proceeds from the sale of our capital stock and subordinated debt. We may issue additional common stock and debt securities from time to time to fund acquisitions and support our organic growth.

During the three months ended March 31, 2022, the Company paid $0.8 million in dividends, compared to $0.7 million during the three months ended March 31, 2021. The Company declared dividends on its common stock of $0.085 per share during the three months ended March 31, 2022 compared to dividends of $0.07 per share during the three months ended March 31, 2021. Our board of directors has authorized a share repurchase program and, at March 31, 2022, the Company had 128,444 shares of its common stock remaining authorized for repurchase under the program. On April 21, 2022, the board of directors approved an additional 400,000 shares of the Company’s common stock for repurchase. During the three months ended March 31, 2022, the Company paid $1.5 million to repurchase 77,248 shares of its common stock, compared to paying $6.7 million to repurchase 225,950 shares of its common stock during the three months ended March 31, 2021.

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We are subject to various regulatory capital requirements administered by the Federal Reserve and the ~~FDIC~~OCC which specify capital tiers, including the following ~~classifications.~~

classifications for the Bank under the OCC’s prompt corrective action regulations.



~~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~~
Capital Tiers⁽¹⁾	Tier1Leverage Ratio		Common Equity Tier 1 Capital Ratio		Tier1Capital Ratio		TotalCapital Ratio		Ratio of Tangible to Total Assets
Well capitalized	5% or above		6.5% or above		8% or above		10% or above
Adequately capitalized	4% or above		4.5% or above		6% or above		8% or above
Undercapitalized	Less than 4%		Less than 4.5%		Less than 6%		Less than 8%
Significantly undercapitalized	Less than 3%		Less than 3%		Less than 4%		Less than 6%
Critically undercapitalized									2% or less

⁽¹⁾

In order to be well capitalized or adequately capitalized, a bank must satisfy each of the required ratios in the table. In order to be undercapitalized or significantly undercapitalized, a bank would need to fall below just one of the relevant ratio thresholds in the table. In order to be well capitalized, the Bank cannot be subject to any written agreement or order requiring it to maintain a specific level of capital for any capital measure.

The Company and the Bank each were in compliance with all regulatory capital requirements ~~as of September 30, 2017~~at March 31, 2022 and December 31, ~~2016.~~2021. The Bank also was considered “well-capitalized” under the ~~FDIC’s~~OCC’s prompt corrective action regulations as of these dates.

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

	Actual					Minimum Capital Requirement for Bank to be Well Capitalized Under Prompt Corrective Action Rules
	Amount		Ratio			Amount		Ratio
March 31, 2022
Investar Holding Corporation:
Tier 1 leverage capital	$	214,925		8.53	%	$	—		—	%
Common equity tier 1 capital		205,425		9.76			—		—
Tier 1 capital		214,925		10.21			—		—
Total capital		279,683		13.29			—		—
Investar Bank:
Tier 1 leverage capital		252,570		10.03			125,875		5.00
Common equity tier 1 capital		252,570		12.01			135,666		6.50
Tier 1 capital		252,570		12.01			166,973		8.00
Total capital		274,316		13.04			208,716		10.00

December 31, 2021
Investar Holding Corporation:
Tier 1 leverage capital	$	206,899		8.12	%	$	—		—	%
Common equity tier 1 capital		197,399		9.45			—		—
Tier 1 capital		206,899		9.90			—		—
Total capital		271,416		12.99			—		—
Investar Bank:
Tier 1 leverage capital		244,541		9.60			127,313		5.00
Common equity tier 1 capital		244,541		11.72			135,651		6.50
Tier 1 capital		244,541		11.72			166,956		8.00
Total capital		266,069		12.75			208,694		10.00

Actual Minimum Capital
Requirement to be
Well Capitalized
Amount Ratio Amount Ratio
September 30, 2017
Investar Holding Corporation:
Tier 1 leverage capital $ 144,276
10.13 % $ —
— %
Common equity tier 1 capital 140,776
11.86
—
—
Tier 1 capital 144,276
12.15
—
—
Total capital 170,038
14.32
—
—
Investar Bank:
Tier 1 leverage capital 159,514
11.21
71,171
5.00
Common equity tier 1 capital 159,514
13.46
77,042
6.50
Tier 1 capital 159,514
13.46
94,821
8.00
Total capital 167,119
14.10
118,527
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

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We augmented our capital in the quarter ended March 31, 2017 through both a common stock offering and a subordinated debt issuance. See Note 7. Subordinated Debt Securities and Note 8. Stockholders’ Equity for further information.

Off-Balance Sheet Transactions

Swap Contracts.The Bank ~~entered~~enters into interest rate swap contracts, some of which are forward starting, to manage exposure against the variability in the expected future cash flows (future interest payments) attributable to changes in the 1-month LIBOR associated with the forecasted issuances of 1-month fixed rate debt arising from a rollover strategy. An interest rate swap is an agreement whereby one party agrees to pay a fixed rate of interest on a notional principal amount in exchange for receiving a floating rate of interest on the same notional amount for a predetermined period of time, from a second party. 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 ~~2.9~~7.4 years. ~~The~~At both March 31, 2022 and December 31, 2021 the Company had no current interest rate swap agreements, and forward starting interest rate swap agreements with a total notional amount of $60.0 million at March 31, 2022 compared to $115.0 million at December 31, 2021, all of which were designated as cash flow hedges. For additional information, see Note 7 to the ~~derivative~~financial statements included herein.

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

For the three months ended March 31, 2022, a gain of $3.2 million, net of a $0.8 million tax expense, has been recognized in “Other comprehensive (loss) income” in the accompanying consolidated statements of comprehensive (loss) income for the change in fair value of the interest rate swaps compared to a gain of $6.1 million, net of a $1.6 million tax expense, recognized for the three months ended March 31, 2021.

The Company also enters into interest rate swap contracts ~~is $50.0 million.~~

that allow commercial loan customers to effectively convert a variable-rate commercial loan agreement to a fixed-rate commercial loan agreement. Under these agreements, the Company enters into a variable-rate loan agreement with a customer in addition to an interest rate swap agreement, which serves to effectively swap the customer’s variable-rate loan into a fixed-rate loan. The Company then enters into a corresponding swap agreement with a third party in order to economically hedge its exposure through the customer agreement. The interest rate swaps with both the customers and third parties are not designated as hedges under FASB ASC Topic 815, Derivatives and Hedging, and are marked to market through earnings. As the interest rate swaps are structured to offset each other, changes to the underlying benchmark interest rates considered in the valuation of these instruments do not result in an impact to earnings; however, there may be fair value adjustments related to credit quality variations between counterparties, which may impact earnings as required by FASB ASC Topic 820, Fair Value Measurements. The Company did not recognize any gains or losses in other income resulting from fair value adjustments during the three months ended March 31, 2022 and 2021.

Unfunded Commitments. The Bank enters into loan commitments and standby letters of credit in the normal course of its business. Loan commitments are made to meet the financing needs of our customers, while standby letters of credit commit the Bank to make payments on behalf of customers when certain specified future events occur. The credit risks associated with loan commitments and standby letters of credit are essentially the same as those involved in making loans to our customers. Accordingly, our normal credit policies apply to these arrangements. Collateral (e.g., securities, receivables, inventory, equipment, etc.) is obtained based on management’s credit assessment of the customer.

Loan commitments are also evaluated in a manner similar to the allowance for loan losses. The reserve for unfunded loan commitments is included in other liabilities in the consolidated balance sheets and was $0.7 million at both March 31, 2022 and December 31, 2021, respectively.

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

September 30, 2017 December 31, 2016
Commitments to extend credit:
Loan commitments $ 176,517
$ 142,891
Standby letters of credit 703
1,008

	March 31, 2022		December 31, 2021
Loan commitments	$	368,056	$	349,701
Standby letters of credit		15,965		18,259

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 ~~September 30, 2017,~~March 31, 2022, the Company had unfunded commitments of ~~$0.3~~$1.9 million for its investment in Small Business Investment Company qualified funds.

For the three months ended ~~September 30, 2017~~March 31, 2022 and for the year ended December 31, ~~2016,~~2021, 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~~

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

The following table presents, as of ~~September 30, 2017, contractual obligations to third parties~~March 31, 2022, contractually obligated lease payments due under non-cancelable operating leases by payment date (dollars in thousands).

Less than one year	$	448
One to three years		1,110
Three to five years		815
Over five years		1,354
Total	$	3,727

Payments Due In:

Less than One Year One to Three Years Three to Five Years Over Five Years Total
Deposits without a stated maturity⁽¹⁾
$ 617,746
$ —
$ —
$ —
$ 617,746
Time Deposits 330,516
137,228
15,872
—
483,616
Securities sold under agreements to repurchase 24,892
—
—
—
24,892
Federal Home Loan Bank advances 119,600
13,100
—
30,000
162,700
Junior subordinated debt —
—
—
3,609
3,609
Subordinated debt —
—
—
18,600
18,600
Total contractual obligations⁽²⁾
$ 1,092,754
$ 150,328
$ 15,872
$ 52,209
$ 1,311,163

Table of Contents


⁽¹⁾	~~Excludes interest~~


⁽²⁾	~~On August 7, 2017, the Company announced that it has entered into a definitive agreement to acquire BOJ and its wholly-owned subsidiary, The Highlands Bank, as summarized in Note 2~~ ~~to the unaudited condensed consolidated financial statements~~.

Item3. Quantitative and Qualitative Disclosures about Market Risk

Quantitative and qualitative disclosures about market risk as of December 31, ~~2016~~2021 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~~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 ~~nine~~three months ended ~~September 30, 2017.~~

March 31, 2022; except as discussed therein, there have been no material changes in the Company’s market risk since December 31, 2021.

Item4. 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.

Table of Contents

PART II. OTHER INFORMATION

Item1A. Risk Factors

For information regarding risk factors that could affect Investar Holding ~~Corporation’s~~Corporation's (the “Company”) results of operations, financial condition and liquidity, see the risk factors disclosed in the Annual ~~Report on Form 10-K for the year ended December 31, 2016 filed by the Company with the SEC on March 9, 2017.~~

~~The~~Report. There have been no significant changes in our risk factors below relate to the recently completed acquisition of Citizens Bancshares, Inc. (“Citizens”) and its wholly-owned subsidiary, Citizens Bank, and the recently announced acquisition of BOJ Bancshares, Inc. (“BOJ”) and its wholly-owned subsidiary, The Highlands Bank.

The integration of Citizens and, if the acquisition is completed, BOJ, with the Company may be more difficult, costly or time-consuming than expected, and the anticipated benefits and cost savings of these and future acquisitions by the Company may not be realized.

The acquisition component of the Company’s growth strategy depends on the successful integration of these acquisitions. The Company and each of Citizens and BOJ have previously operated and, with respect to BOJ, will continue to operate until the completion of the acquisition, independently from each other. The success of each acquisition or proposed acquisition, including anticipated benefits and cost savings, will depend,as described in part, on the Company’s ability to successfully combine and integrate the businesses within the Company’s projected timeframe in a manner that permits growth opportunities and does not materially disrupt existing customer relationships or result in decreased revenues due to loss of customers.

~~A number of factors could affect the Company’s ability to successfully combine its business with Citizens and, if the acquisition is completed, with BOJ, including the following:~~

~~the potential for unexpected costs, delays and challenges that may arise in integrating acquisitions into the Company’s existing business;~~

~~unexpected obstacles to the Company’s ability to realize the expected cost savings and synergies from the acquisitions;~~

~~the Company’s ability to retain key employees and maintain relationships with significant customers and depositors of the acquired businesses;~~

~~diversion of management’s attention and resources during integration efforts;~~

~~challenges related to operating at new locations and in new geographic areas, including difficulties in identifying and gaining access to customers in new markets; and~~

~~discovery following an acquisition of previously unknown liabilities associated with the acquired business.~~

If the Company encounters significant difficulties in the integration process, the anticipated benefits of the acquisition or proposed acquisition may not be realized fully, or at all, or may take longer to realize than expected. Failure to achieve the anticipated benefits of the acquisition or proposed acquisition in the timeframes projected by the Company could result in increased costs and decreased revenues. This could have a dilutive effect on the combined company’s earnings per share. If the Company is unable to successfully integrate the businesses it acquires, the Company’s business, financial condition and results of operations may be materially adversely affected.

~~The acquisition of BOJ may not be consummated unless important conditions are satisfied.~~

The Company and BOJ expect the BOJ acquisition to close during the fourth quarter of 2017, but the acquisition is subject to a number of closing conditions. Satisfaction of many of these conditions is beyond the Company’s control. If these conditions are not satisfied or waived, the acquisition will not be completed or may be delayed and each of the Company and BOJ may lose some or all of the intended benefits of the merger. Certain of the conditions that remain to be satisfied include, but are not limited to:

~~the continued accuracy of the representations and warranties made by the parties in the merger agreement;~~

~~the performance by each party of its respective obligations under the merger agreement;~~

~~the absence of any injunction, order or decree restraining, enjoining or otherwise prohibiting the merger;~~

~~the absence of any material adverse change in the financial condition, business or results of operations of BOJ, Highlands Bank, the Company or Investar Bank;~~

~~receipt by the Company and BOJ from Fenimore, Kay, Harrison & Ford, LLP of a federal tax opinion that the merger qualifies as a “reorganization” within the meaning of Section 368(a) of the Code;~~

~~the adjusted tangible shareholders’ equity of BOJ, determined in accordance with the requirements of the merger agreement, being at least $16.0 million;~~

~~the average closing price for the Company’s common stock, calculated in accordance with the terms of the merger agreement, being an amount greater than $19.50; and~~

~~the approval by BOJ’s shareholders of the merger agreement and the merger.~~

~~As a result, the BOJ acquisition may not close as scheduled, or at all. In addition, either the Company or BOJ may terminate the merger agreement under certain circumstances.~~

If the acquisition of BOJ by the Company is not completed, including through the termination of the merger agreement by one or both of the parties, the Company will have incurred significant transaction expenses without realizing the expected benefits of the acquisition and could face negative impacts to its prospects and stock price.

The Company expects to incur significant costs associated with completing the proposed acquisition of BOJ, which are charged to earnings as incurred. If the proposed acquisition is not completed, these expenses will still be charged to earnings even though the Company would not have realized the expected benefits of the acquisition.

If the merger agreement with BOJ is terminated, there may be various adverse consequences to the Company. For example, the Company may have failed to pursue other beneficial opportunities due to the focus of management on the acquisition of BOJ, and there can be no assurance that the Company would be successful in competing with other financial institutions for other potential acquisition candidates. Additionally, the market price of the Company’s common stock could decline to the extent that the current market prices reflect a market assumption that the acquisition will be completed.

such Annual Report.

Item2. Unregistered Sales of Equity Securities and Use of Proceeds

Unregistered Sales of Equity Securities ~~and Use~~

None.

Table of ~~Proceeds~~Contents

~~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 ~~September 30, 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⁾
July 1, 2017 to July 31, 2017 2,227
$ 22.90
—
241,243
August 1, 2017 to August 31, 2017 12,114
21.90
12,056
229,187
September 1, 2017 to September 30, 2017 143
22.30
—
229,187
14,484
$ 22.06
12,056
229,187

March 31, 2022.

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, 2022 - January 31, 2022		62	$	18.41		—		205,692
February 1, 2022 - February 28, 2022		77,545		19.95		77,248		128,444
March 1, 2022 - March 31, 2022		13,173		20.07		—		128,444
		90,780	$	19.96		77,248		128,444


⁽¹⁾	Includes ~~2,428~~13,532 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,April 21, 2022, the Company announced that its board of directors authorized the repurchase of an additional ~~250,000~~400,000 shares of the Company’s common stock under its stock repurchase plan. As of May 2, 2022, the Company had 502,954 shares remaining as authorized for repurchase.

Since we are a holding company with no material business activities, our ability to pay dividends is substantially dependent upon the ability of the Bank to transfer funds to us in the form of dividends, loans and advances. The ~~Company’s~~Bank’s ability to pay dividends and make other distributions and payments to us depends upon the Bank’s earnings, financial condition, general economic conditions, compliance with regulatory requirements and other factors. In addition, the Bank’s ability to pay dividends to us is itself subject to various legal, regulatory and other restrictions under federal banking laws that are described in Part I Item 1 “Business”, of our Annual Report on Form 10-K for the year ended December 31, 2021.

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

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.

Item6. Exhibits



Exhibit No.		Description of Exhibit

2.1			Agreement and Plan of Reorganization, dated ~~August 4, 2017,~~January 21, 2021 by and among Investar Holding Corporation, ~~BOJ Bancshares,~~Cheaha Financial Group, Inc. and ~~Investar Interim Corporation~~High Point Acquisition, Inc.⁽¹⁾

~~2.2~~ 3.1			~~Agreement and Plan~~ Restated Articles of ~~Reorganization, dated March 8, 2017, by and among~~Incorporation of Investar Holding Corporation ~~Citizens Bancshares, Inc. and Investar Acquisition Company~~⁽²⁾

~~3.1~~ 3.2			Amended and Restated ~~Articles of Incorporation~~By-laws of Investar Holding Corporation⁽³⁾

~~3.2~~ 4.1			~~Amended and Restated By-laws of Investar Holding Corporation~~ Specimen Common Stock Certificate⁽⁴⁾

~~4.1~~ 4.2			~~Specimen Common Stock Certificate~~⁽⁵⁾

~~4.2~~	Indenture, dated March 24, 2017, by and between Investar Holding Corporation and Wilmington Trust, National Association, as Trustee⁽⁶⁾⁽⁵⁾

4.3			Supplemental Indenture, dated March 24, 2017, by and between Investar Holding Corporation and Wilmington Trust, National Association, as Trustee⁽⁷⁾⁽⁶⁾

~~10.1~~ 4.4			~~Investar Holding Corporation 2017 Long-Term Incentive Compensation Plan~~ Form of 5.125% Fixed to Fluctuation Rate Subordinated Note due 2029⁽⁸⁾⁽⁷⁾

~~10.2~~ 4.5			Form of ~~Voting~~Registration Rights Agreement, dated ~~August 4, 2017, among~~December 20, 2019, by and between Investar Holding Corporation ~~BOJ Bancshares, Inc.~~ and the ~~shareholders party thereto~~purchasers set forth therein⁽⁹⁾⁽⁸⁾

~~10.3~~ 4.6			~~Form of Non-Competition~~Indenture, dated April 6, 2022, by and ~~Confidentiality Agreements, dated August 4, 2017, between~~among Investar Holding Corporation and ~~all of the directors of BOJ Bancshares, Inc.~~UMB Bank, National Association, as trustee^(10)(9)

~~31.1~~ 4.7			Form of 5.125% Fixed-to-Floating Rate Subordinated Note due 2032⁽¹⁰⁾

4.8			Form of Subordinated Note Purchase Agreement, dated April 6, 2022, by and among Investar Holding Corporation and the several purchasers identified on the signature pages thereto⁽¹¹⁾

4.9			Form of Registration Rights Agreement, dated April 6, 2022, by and among Investar Holding Corporation and the several purchasers identified on the signature pages thereto⁽¹²⁾

10.1*			Resignation agreement with Travis Lavergne, dated July 9, 2021

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

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

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

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

101.INS			Inline XBRL Instance Document

101.SCH			Inline XBRL Taxonomy Extension Schema Document

101.CAL			Inline XBRL Taxonomy Extension Calculation Linkbase Document

101.LAB			Inline XBRL Taxonomy Extension Label Linkbase Document

101.PRE			Inline XBRL Taxonomy Extension Presentation Linkbase Document

101.DEF			Inline XBRL Taxonomy Extension Definition Linkbase Document


⁽¹⁾			~~Filed as Annex A to the Registration Statement on Form S-4 of the Company filed with the SEC on October 10, 2017 and incorporated herein by reference.~~


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

⁽¹⁾

Filed as exhibit 2.1 to the Current Report on Form 8-K of the Company filed with the SEC on ~~March 8, 2017~~January 25, 2021 and incorporated herein by reference.


⁽³⁾⁽²⁾	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.


⁽⁴⁾⁽³⁾	Filed as exhibit 3.2 to the Registration Statement on Form S-4 of the Company filed with the SEC on October 10, 2017 and incorporated herein by reference.


⁽⁵⁾⁽⁴⁾	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.


⁽⁶⁾⁽⁵⁾	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.


⁽⁷⁾⁽⁶⁾	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.

⁽⁷⁾

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

	⁽⁸⁾	Filed as exhibit 4.1 to the Current Report on Form 8-K filed with the SEC on December 24, 2019 and incorporated herein by reference.
	⁽⁸⁾⁽⁹⁾	Filed as exhibit 4.1 to the Current Report on Form 8-K filed with the SEC on April 7, 2022 and incorporated herein by reference.
	⁽¹⁰⁾	Filed as exhibit 4.2 to the Current Report on Form 8-K filed with the SEC on April 7, 2022 and incorporated herein by reference.
	⁽¹¹⁾	Filed as exhibit 10.1 to the Current Report on Form 8-K filed with the SEC on ~~May 25, 2017~~April 7, 2022 and incorporated herein by reference.


^(9)(12)	Filed as ~~Exhibit B to Annex A~~exhibit 10.2 to the ~~Registration Statement~~Current Report on Form ~~S-4 of the Company~~8-K filed with the SEC on ~~October 10, 2017~~April 7, 2022 and incorporated herein by reference.


⁽¹⁰⁾	~~Filed as Exhibit C to Annex A to the Registration Statement on Form S-4 of the Company filed with the SEC on October 10, 2017 and incorporated herein by reference.~~

* Management contract or compensatory plan or arrangement.

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,~~SEC, upon its request, a copy of all long-term debt instruments.

Table of Contents

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: ~~November 9, 2017~~May 4, 2022						/s/ John J. D’Angelo
						John J. D’Angelo
						President and Chief Executive Officer
						(Principal Executive Officer)

Date: ~~November 9, 2017~~May 4, 2022						/s/ Christopher L. Hufft
						Christopher L. Hufft
						Chief Financial Officer
						(Principal Financial Officer)

Louisiana		27-1560715

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

Title of each class			Trading Symbol(s)			Name of each exchange on which registered
Common stock, $1.00 par value per share			ISTR			The Nasdaq Global Market



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



~~Special Note Regarding Forward-Looking Statements~~	3

Part I. Financial Information

Item 1.		Financial Statements (Unaudited)	43
		Consolidated Balance Sheets as of ~~September 30, 2017~~March 31, 2022 and December 31, ~~2016~~2021	43
		Consolidated Statements of Income for the three ~~and nine~~ months ended ~~September 30, 2017~~March 31, 2022 and ~~2016~~2021	54
		Consolidated Statements of Comprehensive (Loss) Income for the three ~~and nine~~ months ended ~~September 30, 2017~~March 31, 2022 and ~~2016~~2021	65
		Consolidated Statements of Changes in Stockholders’ Equity for the three months ended March 31, 2022 and 2021	76
		Consolidated Statements of Cash Flows for the ~~nine~~three months ended ~~September 30, 2017~~March 31, 2022 and ~~2016~~2021	87
		Notes to the Consolidated Financial Statements	9
~~Item 2.~~	Note 1. Summary of Significant Accounting Policies	9
	Note 2. Business Combinations	14
	Note 3. Earnings Per Share	15
	Note 4. Investment Securities	15
	Note 5. Loans and Allowance for Loan Losses	18
	Note 6. Stockholders’ Equity	28
	Note 7. Derivative Financial Instruments	29
	Note 8. Fair Values of Financial Instruments	30
	Note 9. Income Taxes	35
	Note 10. Commitments and Contingencies	35
	Note 11. Leases	36
	Note 12. Subsequent Events	36
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	3837
Item 3.		Quantitative and Qualitative Disclosures about Market Risk	6160
Item 4.		Controls and Procedures	6160

Part II. Other Information		6261

Item 1A.		Risk Factors	6261
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds	6361
Item 6.	Exhibits	63
Signatures		72

	*March 31, 2022*			*December 31, 2021*
	(Unaudited)
ASSETS
Cash and due from banks	$	45,700		$	38,601
Interest-bearing balances due from other banks		45,775			57,940
Federal funds sold		130			500
Cash and cash equivalents		91,605			97,041

Available for sale securities at fair value (amortized cost of $436,759 and $356,639, respectively)		413,777			355,509
Held to maturity securities at amortized cost (estimated fair value of $9,900 and $10,727, respectively)		9,926			10,255
Loans held for sale		0			620
Loans, net of allowance for loan losses of $21,088 and $20,859, respectively		1,856,356			1,851,153
Equity securities		17,904			16,803
Bank premises and equipment, net of accumulated depreciation of $20,016 and $19,149, respectively		55,204			58,080
Other real estate owned, net		3,454			2,653
Accrued interest receivable		11,168			11,355
Deferred tax asset		6,600			2,239
Goodwill and other intangible assets, net		43,804			44,036
Bank owned life insurance		51,366			51,074
Other assets		11,544			12,385
Total assets	$	2,572,708		$	2,513,203

LIABILITIES
Deposits:
Noninterest-bearing	$	614,416		$	585,465
Interest-bearing		1,571,588			1,534,801
Total deposits		2,186,004			2,120,266
Advances from Federal Home Loan Bank		78,500			78,500
Repurchase agreements		1,305			5,783
Subordinated debt, net of unamortized issuance costs		43,012			42,989
Junior subordinated debt		8,420			8,384
Accrued taxes and other liabilities		21,810			14,683
Total liabilities		2,339,051			2,270,605

STOCKHOLDERS’ EQUITY
Preferred stock, no par value per share; 5,000,000 shares authorized		0			0
Common stock, $1.00 par value per share; 40,000,000 shares authorized; 10,310,212 and 10,343,494 shares issued and outstanding, respectively		10,310			10,343
Surplus		153,531			154,932
Retained earnings		85,387			76,160
Accumulated other comprehensive (loss) income		(15,571	)		1,163
Total stockholders’ equity		233,657			242,598
Total liabilities and stockholders’ equity	$	2,572,708		$	2,513,203


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


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

	*Three months ended March 31,*
	*2022*			*2021*
INTEREST INCOME
Interest and fees on loans	$	21,726		$	21,627
Interest on investment securities		1,955			1,179
Other interest income		186			163
Total interest income		23,867			22,969

INTEREST EXPENSE
Interest on deposits		976			2,302
Interest on borrowings		1,070			1,033
Total interest expense		2,046			3,335
Net interest income		21,821			19,634

Provision for loan losses		(449	)		400
Net interest income after provision for loan losses		22,270			19,234

NONINTEREST INCOME
Service charges on deposit accounts		667			491
Gain on call or sale of investment securities, net		6			600
Gain (loss) on sale or disposition of fixed assets, net		373			(2	)
Gain on sale of other real estate owned, net		41			0
Swap termination fee income		3,344			0
Gain on sale of loans		33			0
Servicing fees and fee income on serviced loans		21			64
Interchange fees		498			388
Income from bank owned life insurance		292			223
Change in the fair value of equity securities		11			65
Other operating income		580			536
Total noninterest income		5,866			2,365
Income before noninterest expense		28,136			21,599

NONINTEREST EXPENSE
Depreciation and amortization		1,155			1,206
Salaries and employee benefits		9,021			8,695
Occupancy		641			637
Data processing		1,006			746
Marketing		21			41
Professional fees		379			358
Acquisition expense		0			361
Other operating expenses		3,210			2,765
Total noninterest expense		15,433			14,809
Income before income tax expense		12,703			6,790
Income tax expense		2,600			1,430
Net income	$	10,103		$	5,360

EARNINGS PER SHARE
Basic earnings per share	$	0.98		$	0.51
Diluted earnings per share		0.97			0.51
Cash dividends declared per common share		0.085			0.07

										*Accumulated*
										*Other*			*Total*
	*Common*						*Retained*			*Comprehensive*			*Stockholders’*
	*Stock*			*Surplus*			*Earnings*			*Income (Loss)*			*Equity*
Three months ended:
March 31, 2021
Balance at beginning of period	$	10,609		$	159,485		$	71,385		$	1,805		$	243,284
Surrendered shares		(19	)		(337	)		0			0			(356	)
Options exercised		8			107			0			0			115
Dividends declared, $0.07 per share		0			0			(747	)		0			(747	)
Stock-based compensation		64			336			0			0			400
Shares repurchased		(226	)		(3,769	)		0			0			(3,995	)
Net income		0			0			5,360			0			5,360
Other comprehensive income, net		0			0			0			4,190			4,190
Balance at end of period	$	10,436		$	155,822		$	75,998		$	5,995		$	248,251

March 31, 2022
Balance at beginning of period	$	10,343		$	154,932		$	76,160		$	1,163		$	242,598
Surrendered shares		(14	)		(258	)		0			0			(272	)
Dividends declared, $0.085 per share		0			0			(876	)		0			(876	)
Stock-based compensation		58			324			0			0			382
Shares repurchased		(77	)		(1,467	)		0			0			(1,544	)
Net income		0			0			10,103			0			10,103
Other comprehensive loss, net		0			0			0			(16,734	)		(16,734	)
Balance at end of period	$	10,310		$	153,531		$	85,387		$	(15,571	)	$	233,657

Cash flows from financing activities:
Net increase in customer deposits		65,630			122,074
Net decrease in repurchase agreements		(4,478	)		(1,379	)
Net decrease in short-term FHLB advances		0			(38,000	)
Cash dividends paid on common stock		(829	)		(693	)
Proceeds from stock options exercised		0			115
Payments to repurchase common stock		(1,544	)		(3,995	)
Net cash provided by financing activities		58,779			78,122
Net change in cash and cash equivalents		(5,436	)		64,099
Cash and cash equivalents, beginning of period		97,041			35,368
Cash and cash equivalents, end of period	$	91,605		$	99,467

Purchase price:
Cash paid	$	41,067

Fair value of assets acquired:
Cash and cash equivalents		49,179
Investment securities		60,938
Loans		120,395
Bank premises and equipment		5,407
Core deposit intangible asset		848
Bank owned life insurance		3,023
Other assets		1,012
Total assets acquired		240,802

Fair value of liabilities acquired:
Deposits		206,986
Notes payable		2,327
Other liabilities		2,366
Total liabilities assumed		211,679

Fair value of net assets acquired		29,123
Goodwill	$	11,944

			*Gross*		*Gross*
			*Unrealized*		*Unrealized*			*Fair*
	*Amortized Cost*		*Gains*		*Losses*			*Value*
March 31, 2022
Obligations of U.S. government agencies and corporations	$	20,687	$	102	$	(129	)	$	20,660
Obligations of state and political subdivisions		27,871		30		(1,001	)		26,900
Corporate bonds		26,475		61		(1,379	)		25,157
Residential mortgage-backed securities		282,726		132		(17,563	)		265,295
Commercial mortgage-backed securities		79,000		179		(3,414	)		75,765
Total	$	436,759	$	504	$	(23,486	)	$	413,777

			*Less than 12 Months*					*12 Months or More*					*Total*
					*Unrealized*					*Unrealized*					*Unrealized*
	*Count*		*Fair Value*		*Losses*			*Fair Value*		*Losses*			*Fair Value*		*Losses*
March 31, 2022
Obligations of U.S. government agencies and corporations		15	$	3,948	$	(112	)	$	1,445	$	(17	)	$	5,393	$	(129	)
Obligations of state and political subdivisions		26		10,140		(949	)		683		(52	)		10,823		(1,001	)
Corporate bonds		45		18,377		(1,112	)		2,233		(267	)		20,610		(1,379	)
Residential mortgage-backed securities		409		237,279		(16,491	)		10,984		(1,072	)		248,263		(17,563	)
Commercial mortgage-backed securities		89		46,836		(3,012	)		11,797		(402	)		58,633		(3,414	)
Total		584	$	316,580	$	(21,676	)	$	27,142	$	(1,810	)	$	343,722	$	(23,486	)

			Less than 12 Months					12 Months or More				Total
					Unrealized					Unrealized				Unrealized
	Count		Fair Value		Losses			Fair Value		Losses		Fair Value		Losses
March 31, 2022
Residential mortgage-backed securities		8	$	3,043	$	(41	)	$	0	$	0	$	3,043	$	(41	)
Total		8	$	3,043	$	(41	)	$	0	$	0	$	3,043	$	(41	)

	*Securities Available For Sale*				*Securities Held To Maturity*
	*Amortized*		*Fair*		*Amortized*		*Fair*
	*Cost*		*Value*		*Cost*		*Value*
March 31, 2022
Due within one year	$	280	$	282	$	870	$	872
Due after one year through five years		13,462		13,293		1,875		1,881
Due after five years through ten years		48,009		46,880		4,041		4,048
Due after ten years		375,008		353,322		3,140		3,099
Total debt securities	$	436,759	$	413,777	$	9,926	$	9,900

	*March 31, 2022*
	*Accruing*
	*Current*		*30-59 Days Past Due*		*60-89 Days Past Due*		*90 Days or More Past Due*		*Nonaccrual*		*Total Past Due & Nonaccrual*		*Acquired Impaired Loans*		*Total Loans*
Construction and development	$	200,950	$	0	$	0	$	0	$	272	$	272	$	0	$	201,222
1-4 Family		361,695		4,867		83		0		548		5,498		327		367,520
Multifamily		52,500		0		0		0		0		0		0		52,500
Farmland		17,545		20		0		0		74		94		657		18,296
Commercial real estate		894,782		82		170		0		12,540		12,792		636		908,210
Total mortgage loans on real estate		1,527,472		4,969		253		0		13,434		18,656		1,620		1,547,748
Commercial and industrial		302,895		239		114		47		10,798		11,198		0		314,093
Consumer		15,170		132		54		0		186		372		61		15,603
Total loans	$	1,845,537	$	5,340	$	421	$	47	$	24,418	$	30,226	$	1,681	$	1,877,444

	*December 31, 2021*
	*Accruing*
	*Current*		*30-59 Days Past Due*		*60-89 Days Past Due*		*90 Days or More Past Due*		*Nonaccrual*		*Total Past Due & Nonaccrual*		*Acquired Impaired Loans*		*Total Loans*
Construction and development	$	202,850	$	55	$	11	$	0	$	288	$	354	$	0	$	203,204
1-4 Family		360,434		1,933		182		0		1,410		3,525		348		364,307
Multifamily		59,570		0		0		0		0		0		0		59,570
Farmland		18,348		0		0		0		79		79		1,701		20,128
Commercial real estate		881,575		170		86		0		13,910		14,166		636		896,377
Total mortgage loans on real estate		1,522,777		2,158		279		0		15,687		18,124		2,685		1,543,586
Commercial and industrial		295,323		4,044		57		53		11,354		15,508		0		310,831
Consumer		17,238		89		18		0		186		293		64		17,595
Total loans	$	1,835,338	$	6,291	$	354	$	53	$	27,227	$	33,925	$	2,749	$	1,872,012

	*March 31, 2022*
			*Special*
	*Pass*		*Mention*		*Substandard*		*Doubtful*		*Total*
Construction and development	$	198,808	$	812	$	1,602	$	0	$	201,222
1-4 Family		362,187		0		5,333		0		367,520
Multifamily		52,040		0		460		0		52,500
Farmland		17,564		0		732		0		18,296
Commercial real estate		888,686		3,838		15,686		0		908,210
Total mortgage loans on real estate		1,519,285		4,650		23,813		0		1,547,748
Commercial and industrial		299,985		1,079		12,542		487		314,093
Consumer		15,312		18		273		0		15,603
Total loans	$	1,834,582	$	5,747	$	36,628	$	487	$	1,877,444

	*Three months ended March 31, 2022*
	*Construction &*											*Commercial*		*Commercial &*
	*Development*		*1-4 Family*			*Multifamily*			*Farmland*			*Real Estate*		*Industrial*			*Consumer*			*Total*
Allowance for loan losses:
Beginning balance	$	2,347	$	3,337		$	673		$	383		$	9,354	$	4,411		$	354		$	20,859
Provision		45		(3	)		(83	)		13			256		(677	)		0			(449	)
Charge-offs		0		0			0			(54	)		58		(286	)		(47	)		(329	)
Recoveries		16		70			0			0			1		908			12			1,007
Ending balance	$	2,408	$	3,404		$	590		$	342		$	9,669	$	4,356		$	319		$	21,088
Ending allowance balance for loans individually evaluated for impairment		0		0			0			0			0		468			74			542
Ending allowance balance for loans acquired with deteriorated credit quality		0		0			0			156			0		0			0			156
Ending allowance balance for loans collectively evaluated for impairment		2,408		3,404			590			186			9,669		3,888			245			20,390
Loans receivable:
Balance of loans individually evaluated for impairment		508		996			0			74			12,940		12,518			186			27,222
Balance of loans acquired with deteriorated credit quality		0		327			0			657			636		0			61			1,681
Balance of loans collectively evaluated for impairment		200,714		366,197			52,500			17,565			894,634		301,575			15,356			1,848,541
Total period-end balance	$	201,222	$	367,520		$	52,500		$	18,296		$	908,210	$	314,093		$	15,603		$	1,877,444

	*Three months ended March 31, 2021*
	*Construction &*											*Commercial*		*Commercial &*
	*Development*			*1-4 Family*			*Multifamily*		*Farmland*			*Real Estate*		*Industrial*			*Consumer*			*Total*
Allowance for loan losses:
Beginning balance	$	2,375		$	3,370		$	589	$	435		$	8,496	$	4,558		$	540		$	20,363
Provision		(140	)		127			107		(40	)		547		(122	)		(79	)		400
Charge-offs		0			(134	)		0		0			0		(215	)		(56	)		(405	)
Recoveries		10			6			0		0			2		5			42			65
Ending balance	$	2,245		$	3,369		$	696	$	395		$	9,045	$	4,226		$	447		$	20,423
Ending allowance balance for loans individually evaluated for impairment		0			0			0		0			175		81			103			359
Ending allowance balance for loans acquired with deteriorated credit quality		0			0			0		210			0		0			0			210
Ending allowance balance for loans collectively evaluated for impairment		2,245			3,369			696		185			8,870		4,145			344			19,854
Loans receivable:
Balance of loans individually evaluated for impairment		774			1,532			0		302			6,654		8,159			298			17,719
Balance of loans acquired with deteriorated credit quality		0			375			0		1,701			534		0			37			2,647
Balance of loans collectively evaluated for impairment		190,042			339,359			60,844		22,142			822,692		372,375			18,150			1,825,604
Total period-end balance	$	190,816		$	341,266		$	60,844	$	24,145		$	829,880	$	380,534		$	18,485		$	1,845,970

	*March 31, 2022*
	*Recorded Investment*		*Unpaid Principal Balance*		*Related Allowance*
With no related allowance recorded:
Construction and development	$	508	$	791	$	—
1-4 Family		996		1,087		—
Farmland		74		79		—
Commercial real estate		12,940		23,355		—
Total mortgage loans on real estate		14,518		25,312		—
Commercial and industrial		8,593		9,274		—
Consumer		81		94		—
Total		23,192		34,680		—

With related allowance recorded:
Commercial and industrial		3,925		9,618		468
Consumer		105		137		74
Total		4,030		9,755		542

Total loans:
Construction and development		508		791		0
1-4 Family		996		1,087		0
Farmland		74		79		0
Commercial real estate		12,940		23,355		0
Total mortgage loans on real estate		14,518		25,312		0
Commercial and industrial		12,518		18,892		468
Consumer		186		231		74
Total	$	27,222	$	44,435	$	542

			*Quoted Prices in*		*Significant Other*		*Significant*
			*Active Markets for*		*Observable*		*Unobservable*
	*Estimated*		*Identical Assets*		*Inputs*		*Inputs*
	*Fair Value*		*(Level 1)*		*(Level 2)*		*(Level 3)*
March 31, 2022
Assets:
Obligations of U.S. government agencies and corporations	$	20,660	$	0	$	20,660	$	0
Obligations of state and political subdivisions		26,900		0		10,888		16,012
Corporate bonds		25,157		0		24,652		505
Residential mortgage-backed securities		265,295		0		265,295		0
Commercial mortgage-backed securities		75,765		0		75,765		0
Equity securities		1,609		1,609		0		0
Derivative financial instruments		3,270		0		3,270		0
Total assets	$	418,656	$	1,609	$	400,530	$	16,517

December 31, 2021
Assets:
Obligations of U.S. government agencies and corporations	$	21,268	$	0	$	21,268	$	0
Obligations of state and political subdivisions		32,585		0		10,471		22,114
Corporate bonds		27,667		0		27,179		488
Residential mortgage-backed securities		199,904		0		199,904		0
Commercial mortgage-backed securities		74,085		0		74,085		0
Equity securities		1,810		1,810		0		0
Derivative financial instruments		2,599		0		2,599		0
Total assets	$	359,918	$	1,810	$	335,506	$	22,602

	*Obligations of State and*
	*Political Subdivisions*			*Corporate Bonds*
Balance at December 31, 2021	$	22,114		$	488
Realized gains (losses) included in earnings		0			0
Unrealized (losses) gains included in other comprehensive (loss) income		(1,077	)		17
Purchases		0			0
Sales		0			0
Maturities, prepayments, and calls		(25	)		0
Transfers into level 3		0			0
Transfers out of level 3		(5,000	)		0
Balance at March 31, 2022	$	16,012		$	505

	*Obligations of State and*
	*Political Subdivisions*
Balance at December 31, 2020	$	18,516
Realized gains (losses) included in earnings		0
Unrealized losses included in other comprehensive income (loss)		(567	)
Purchases		0
Sales		0
Maturities, prepayments, and calls		0
Transfers into level 3		0
Transfers out of level 3		0
Balance at March 31, 2021	$	17,949

	*Estimated*
	*Fair Value*		*Valuation Technique*	*Unobservable Inputs*	*Range of Discounts*
March 31, 2022
Obligations of state and political subdivisions	$	16,012	Option-adjusted discounted cash flow model; present value of expected future cash flow model	Bond appraisal adjustment⁽¹⁾	0% - 5%
Corporate bonds		505	Option-adjusted discounted cash flow model; present value of expected future cash flow model	Bond appraisal adjustment⁽¹⁾	0%

December 31, 2021
Obligations of state and political subdivisions	$	22,114	Option-adjusted discounted cash flow model; present value of expected future cash flow model	Bond appraisal adjustment⁽¹⁾	0% - 2%
Corporate bonds		488	Option-adjusted discounted cash flow model; present value of expected future cash flow model	Bond appraisal adjustment⁽¹⁾	2%

	*March 31, 2022*
	*Carrying*		*Estimated*
	*Amount*		*Fair Value*		*Level 1*		*Level 2*		*Level 3*
Financial assets:
Cash and due from banks	$	91,475	$	91,475	$	91,475	$	0	$	0
Federal funds sold		130		130		130		0		0
Investment securities		423,703		423,677		0		400,359		23,318
Equity securities		17,904		17,904		1,609		16,295		0
Loans, net of allowance		1,856,356		1,860,269		0		0		1,860,269
Derivative financial instruments		3,270		3,270		0		3,270		0

Financial liabilities:
Deposits, noninterest-bearing	$	614,416	$	614,416	$	0	$	614,416	$	0
Deposits, interest-bearing		1,571,588		1,467,995		0		0		1,467,995
Repurchase agreements		1,305		1,305		0		1,305		0
FHLB long-term advances		78,500		71,524		0		0		71,524
Junior subordinated debt		8,420		8,420		0		0		8,420
Subordinated debt		43,600		39,195		0		39,195		0

	*March 31,*
	*2022*			*2021*
Total operating lease cost	$	152		$	152
Weighted-average remaining lease term (in years)		7.6			8.4
Weighted-average discount rate		2.9	%		2.8	%

2022	$	448
2023		595
2024		515
2025		476
2026		339
Thereafter		1,354
Total	$	3,727



	September 30, 2017			December 31, 2016
	(Unaudited)
ASSETS
Cash and due from banks	$	17,942		$	9,773
Interest-bearing balances due from other banks	30,566			19,569
Federal funds sold	—			106
Cash and cash equivalents	48,508			29,448

Available for sale securities at fair value (amortized cost of $228,980 and $166,258, respectively)	227,562			163,051
Held to maturity securities at amortized cost (estimated fair value of $19,311 and $19,612, respectively)	19,306			20,091
Loans, net of allowance for loan losses of $7,605 and $7,051, respectively	1,102,916			886,375
Other equity securities	7,744			5,362
Bank premises and equipment, net of accumulated depreciation of $7,362 and $6,751, respectively	33,705			31,722
Other real estate owned, net	3,830			4,065
Accrued interest receivable	4,147			3,218
Deferred tax asset	2,604			2,868
Goodwill and other intangible assets, net	13,271			3,234
Bank owned life insurance	8,140			7,201
Other assets	4,690			2,325
Total assets	$	1,476,423		$	1,158,960

LIABILITIES
Deposits:
Noninterest-bearing	$	175,130		$	108,404
Interest-bearing	926,232			799,383
Total deposits	1,101,362			907,787
Advances from Federal Home Loan Bank	162,700			82,803
Repurchase agreements	24,892			39,087
Subordinated debt, net of unamortized issuance costs	18,157			—
Junior subordinated debt	3,609			3,609
Other borrowings	—			1,000
Accrued taxes and other liabilities	12,827			11,917
Total liabilities	1,323,547			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; 8,704,562 and 7,101,851 shares issued and outstanding, respectively	8,705			7,102
Surplus	113,458			81,499
Retained earnings	31,508			26,227
Accumulated other comprehensive loss	(795		)	(2,071		)
Total stockholders’ equity	152,876			112,757
Total liabilities and stockholders’ equity	$	1,476,423		$	1,158,960



	Three months ended September 30,					Nine months ended September 30,
	2017		2016			2017		2016
INTEREST INCOME
Interest and fees on loans	$	12,893	$	10,011		$	33,456	$	29,277
Interest on investment securities	1,399		920			3,627		2,667
Other interest income	150		62			296		146
Total interest income	14,442		10,993			37,379		32,090

INTEREST EXPENSE
Interest on deposits	2,137		1,934			5,817		5,212
Interest on borrowings	767		306			1,862		920
Total interest expense	2,904		2,240		��	7,679		6,132
Net interest income	11,538		8,753			29,700		25,958

Provision for loan losses	420		450			1,145		1,704
Net interest income after provision for loan losses	11,118		8,303			28,555		24,254

NONINTEREST INCOME
Service charges on deposit accounts	281		79			474		264
Gain on sale of investment securities, net	27		204			242		428
Gain on sale of fixed assets, net	160		—			184		1,252
Gain on sale of other real estate owned, net	37		—			32		11
Gain on sale of loans, net	—		—			—		313
Servicing fees and fee income on serviced loans	352		510			1,153		1,638
Other operating income	310		236			768		666
Total noninterest income	1,167		1,029			2,853		4,572
Income before noninterest expense	12,285		9,332			31,408		28,826

NONINTEREST EXPENSE
Depreciation and amortization	542		371			1,309		1,110
Salaries and employee benefits	5,136		3,945			13,195		11,708
Occupancy	317		265			826		743
Data processing	446		374			1,169		1,115
Marketing	124		102			271		316
Professional fees	263		312			726		966
Customer reimbursements	—		—			—		584
Acquisition expense	824		—			1,049		—
Other operating expenses	1,470		1,179			4,189		3,494
Total noninterest expense	9,122		6,548			22,734		20,036
Income before income tax expense	3,163		2,784			8,674		8,790
Income tax expense	1,032		747			2,756		2,758
Net income	$	2,131	$	2,037		$	5,918	$	6,032

EARNINGS PER SHARE
Basic earnings per share	$	0.24	$	0.29		$	0.72	$	0.85
Diluted earnings per share	0.24		0.29			0.71		0.84
Cash dividends declared per common share	0.03		0.01			0.07		0.03



	Three months ended September 30,						Nine months ended September 30,
	2017			2016			2017			2016
Net income	$	2,131		$	2,037		$	5,918		$	6,032
Other comprehensive income (loss):
Unrealized gain (loss) on investment securities:
Unrealized gain (loss), available for sale, net of tax expense (benefit) of $51, ($98), $711 and $790, respectively	95			(182		)	1,320			1,466
Reclassification of realized gain, net of tax expense of $10, $71, $85 and $150, respectively	(18		)	(133		)	(157		)	(278		)
Unrealized loss, transfer from available for sale to held to maturity, net of tax benefit of $0, $0, $0, and $1, respectively	—			—			(1		)	(2		)
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 $20, $151, $62 and ($199), respectively	37			281			114			(370		)
Total other comprehensive income (loss)	114			(34		)	1,276			816
Total comprehensive income	$	2,245		$	2,003		$	7,194		$	6,848



	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 $1,991	1,624			30,885			—			—			32,509
Surrendered shares	(8		)	(158		)	—			—			(166		)
Shares repurchased	(12		)	(252		)	—			—			(264		)
Options and warrants exercised	67			822			—			—			889
Dividends declared, $0.07 per share	—			—			(637		)	—			(637		)
Stock-based compensation and other activity	(68		)	655			—			—			587
Net tax effect of stock-based compensation	—			7			—			—			7
Net income	—			—			5,918			—			5,918
Other comprehensive income, net	—			—			—			1,276			1,276
Balance, September 30, 2017 (Unaudited)	$	8,705		$	113,458		$	31,508		$	(795	)	$	152,876



Purchase price:
Cash paid	$	45,800

Fair value of assets acquired:
Cash and cash equivalents	44,565
Investment securities	69,897
Loans	129,189
Bank premises and equipment	3,337
Other intangible assets	1,462
Other assets	2,558
Total assets acquired	251,008

Fair value of liabilities acquired:
Deposits	212,228
Other liabilities	1,652
Total liabilities assumed	213,880

Fair value of net assets acquired	37,128
Goodwill	$	8,672



	Purchase Credit Impaired
Contractually required principal	$	9,809
Non-accretable difference	(1,546		)
Cash flows expected to be collected	8,263
Accretable yield	—
Fair value of acquired loans	$	8,263



	Non-Credit Impaired
Contractually required principal	$	122,755
Cash flows expected to be collected	122,060
Accretable yield	(1,134		)
Fair value of acquired loans	$	120,926



	Unaudited Pro Forma for the
	Three months ended September 30,				Nine months ended September 30,
(dollars in thousands)	2017		2016		2017		2016
Interest income	$	14,442	$	13,171	$	41,635	$	38,491
Noninterest income	1,167		1,254		3,350		5,241
Net income	2,686		2,582		7,510		7,710



	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
September 30, 2017	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Obligations of other U.S. government agencies and corporations	$	55,789	$	77	$	(370	)	$	55,496
Obligations of state and political subdivisions	35,884		35		(388		)	35,531
Corporate bonds	16,821		68		(331		)	16,558
Residential mortgage-backed securities	116,246		197		(654		)	115,789
Commercial mortgage-backed securities	3,218		5		(46		)	3,177
Equity securities	1,022		23		(34		)	1,011
Total	$	228,980	$	405	$	(1,823	)	$	227,562