INVESTAR HOLDING CORPORATION Cautionary Note Regarding Forward-Looking Statements
When included in this Quarterly Report on Form 10-Q, or in other documents thatInvestar Holding Corporation (the "Company," "we," "our," or "us") files with theSecurities and Exchange Commission ("SEC") or in statements made by or on behalf of the Company, words like "may," "should," "could," "predict," "potential," "believe," "think," "will likely result," "expect," "continue," "will," "anticipate," "seek," "estimate," "intend," "plan," "projection," "would," "outlook" and similar expressions or the negative version of those words are intended to identify forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995. These forward-looking statements involve a variety of risks and uncertainties that could cause actual results to differ materially from those described therein. The Company's forward-looking statements are based on assumptions and estimates that management believes to be reasonable in light of the information available at the time such statements are made. However, many of the matters addressed by these statements are inherently uncertain and could be affected by many factors beyond management's control. A number of important factors could cause actual results to differ materially from those indicated by the forward-looking statements. These factors include, but are not limited to, the following, any one or more of which could materially affect the outcome of future events:
• the significant risks and uncertainties for our business, results of
operations and financial condition, as well as our regulatory capital and
liquidity ratios and other regulatory requirements caused by business and
economic conditions generally and in the financial services industry in
particular, whether nationally, regionally or in the markets in which we
operate, including risks and uncertainties caused by recent disruptions in the
banking industry discussed herein, potential continued higher inflation and
interest rates, supply and labor constraints, the war in
regarding whether the
limit and the ongoing COVID-19 pandemic;
• our ability to achieve organic loan and deposit growth, and the composition of
that growth;
• changes (or the lack of changes) in interest rates, yield curves and interest
rate spread relationships that affect our loan and deposit pricing, including
potential continued increases in interest rates in 2023;
• our ability to identify and enter into agreements to combine with attractive
acquisition candidates, finance acquisitions, complete acquisitions after
definitive agreements are entered into, and successfully integrate and grow
acquired operations;
• our adoption on
Credit Losses: Measurement of Credit Losses on Financial Instruments" Update
No. 2016-13 ("ASU 2016-13"), and inaccuracy of the assumptions and estimates
we make in establishing reserves for credit losses and other estimates;
• changes in the quality or composition of our loan portfolio, including adverse
developments in borrower industries or in the repayment ability of individual
borrowers;
• a reduction in liquidity, including as a result of a reduction in the amount
of deposits we hold or other sources of liquidity, which may continue to be
adversely impacted by the recent disruptions in the banking industry causing
bank depositors to move uninsured deposits to other banks or alternative
investments outside the banking industry;
• changes in the quality and composition of, and changes in unrealized losses
in, our investment portfolio, including whether we may have to sell securities
before their recovery of amortized cost basis and realize losses;
• the extent of continuing client demand for the high level of personalized
service that is a key element of our banking approach as well as our ability
to execute our strategy generally;
• our dependence on our management team, and our ability to attract and retain
qualified personnel;
• the concentration of our business within our geographic areas of operation in
Louisiana ,Texas andAlabama ; • concentration of credit exposure;
• any deterioration in asset quality and higher loan charge-offs, and the time
and effort necessary to resolve problem assets;
• cessation of the one-week and two-month
LIBOR setting after
financial products and contracts, including, but not limited to, hedging
products, debt obligations, investments and loans;
• ongoing disruptions in the oil and gas industry due to the significant
fluctuations in the price of oil and natural gas;
• data processing system failures and errors;
• cyberattacks and other security breaches;
• potential impairment of our goodwill and other intangible assets;
• our potential growth, including our entrance or expansion into new markets,
and the need for sufficient capital to support that growth;
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• 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
2023;
• hurricanes, tropical storms, tropical depressions, floods, winter storms, and
other adverse weather events, all of which have affected the Company's market
areas from time to time; other natural disasters; oil spills and other
man-made disasters; acts of terrorism, an outbreak or intensifying of
hostilities including the war in
calamities, acts of God and other matters beyond our control; and
• other circumstances, many of which are beyond our control.
These factors should not be construed as exhaustive. Additional information on
these and other risk factors can be found in Item 1A. "Risk Factors" and Item 7.
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Special Note Regarding Forward-Looking Statements" in the Company's
Annual Report on Form 10-K for the year ended December 31, 2022 , filed with the
SEC on March 8, 2023 (the "Annual Report") and in Part II Item 1A. "Risk
Factors" of this report.
Because forward-looking statements are inherently subject to risks and
uncertainties, some of which cannot be predicted or quantified, you should not
rely on any forward-looking statement as a prediction of future events. We
expressly disclaim any obligation or undertaking to update our forward-looking
statements, and we do not intend to release publicly any updates or changes in
our expectations concerning the forward-looking statements or any changes in
events, conditions or circumstances upon which any forward-looking statement may
be based, except as required by law.
Company Overview
This section presents management's perspective on the consolidated financial
condition and results of operations of the Company and its wholly-owned
subsidiary, Investar Bank , National Association (the "Bank"). The following
discussion and analysis should be read in conjunction with our unaudited
consolidated financial statements and related notes thereto included herein, and
the audited consolidated financial statements for the year ended December 31,
2022 , including the notes thereto, and the related Management's Discussion and
Analysis of Financial Condition and Results of Operations in the Annual Report.
Through the Bank, we provide full banking services, excluding trust services,
tailored primarily to meet the needs of individuals, professionals, and small to
medium-sized businesses. Our primary areas of operation are south Louisiana ,
including Baton Rouge , New Orleans , Lafayette , Lake Charles , and their
surrounding areas; southeast Texas , primarily Houston and its surrounding area;
and Alabama , including York and Oxford and their surrounding areas. Our Bank
commenced operations in 2006 and we completed our initial public offering in
July 2014 . On July 1, 2019 , the Bank changed from a Louisiana state bank charter
to a national bank charter and its name changed to Investar Bank , National
Association. Our strategy includes organic growth through high quality loans and
growth through acquisitions, including whole-bank acquisitions and strategic
branch acquisitions. At March 31, 2023 , we operated 28 full service branches
comprised of 20 full service branches in Louisiana , two full service branches in
Texas , and six full service branches in Alabama . We have completed seven
whole-bank acquisitions since 2011 and regularly review acquisition
opportunities. In addition to our branches acquired through acquisitions, during
our last three fiscal years and year-to-date March 31, 2023 , we opened two de
novo branch locations. As of March 31, 2023 and December 31, 2022 , estimated
uninsured deposits represented approximately 32% and 34%, respectively, of our
total deposits.
We closed five branches during our last three fiscal years, and one in Louisiana
during the first quarter of 2023, as we continued to evaluate opportunities to
improve our branch network efficiency, leverage our digital initiatives and
further reduce costs. Four of the branches had been acquired, and the closures
involved anticipated synergies that resulted in significant cost savings. In
2022, we sold these five former branch locations and three tracts of land that
were being held for future branch locations. On January 27, 2023 , we completed
our previously announced sale of certain assets, deposits and other liabilities
associated with our Alice, Texas and Victoria, Texas branch locations to First
Community Bank in order to focus more on our core markets. Of the Bank's entire
branch network, these two locations were geographically the most distant from
our Louisiana headquarters.
Our principal business is lending to and accepting deposits from individuals and
small to medium-sized businesses in our areas of operation. We generate our
income principally from interest on loans and, to a lesser extent, our
securities investments, as well as from fees charged in connection with our
various loan and deposit services. Our principal expenses are interest expense
on interest-bearing customer deposits and borrowings, salaries and employee
benefits, occupancy costs, data processing and other operating expenses. We
measure our performance through our net interest margin, return on average
assets, and return on average equity, among other metrics, while seeking to
maintain appropriate regulatory leverage and risk-based capital ratios.
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Certain Events That Affect Period-over-Period Comparability
Rising Inflation and Interest Rates. During the entirety of 2021, the federal funds target rate was 0% to 0.25%, and it remained at that rate untilMarch 2022 . Inflation reached a near 40-year high in late 2021, driven in large part by economic recovery from the ongoing COVID-19 pandemic, and continued to be high during 2022 and 2023. In response, theFederal Reserve raised interest rates seven times during 2022 and twice in the first quarter of 2023. Between the first quarter of 2022 and the first quarter of 2023, theFederal Reserve has made incremental increases to the target rate, raising, on a cumulative basis, the target rate from 0% to 0.25% by 475 basis points to 4.75% to 5.00%.
The
Recent Disruptions in the Banking Industry. BetweenMarch 10, 2023 andMarch 12, 2023 , state banking supervisors closedSilicon Valley Bank ("SVB") and Signature Bank and named theFDIC as receiver. At the time of closure, they were among the 30 largestU.S. banks. While the reasons for their failure are complex and have not been fully investigated, reports indicate that, among other things, both banks had grown in asset size in recent periods at a faster rate than their peers, had large proportions of uninsured deposits (approximately 87.5% and 89.7% of total deposits, respectively) and high unrealized losses on investment securities. SVB's business strategy focused on serving the technology and venture capital sectors, and Signature Bank had significant exposure to deposits from the digital asset industry. Prior to their closure, both banks experienced sudden and rapid deposit withdrawals. These events caused bank deposit customers, particularly those with uninsured deposits, to become concerned regarding the safety of their deposits, and in some cases caused customers to withdraw deposits. In response to the disruptions, among other things, theFederal Reserve announced a new Bank Term Funding Program ("BTFP") to provide eligible banks with loans of up to one-year maturity backed by collateral pledged at par value. OnApril 24, 2023 ,San Francisco -based First Republic Bank, also among the 30 largestU.S. banks, reported a large deposit outflow and substantially reduced net income. First Republic Bank also had a large proportion of uninsured deposits (67% as ofDecember 31, 2022 ). OnMay 1, 2023 , regulators seized First Republic Bank and sold all of its deposits and most of its assets toJPMorgan Chase Bank . In response to the disruptions and related publicity, we formed an internal task force that included members of our Asset/Liability Committee ("ALCO"). The task force met frequently to review our liquidity position and liquidity sources, and oversaw the Bank's process to qualify for the BTFP in case needed. In addition, we took steps to inform our customers about our financial position, liquidity and insured deposit products. As ofMarch 31, 2023 , estimated uninsured deposits represented approximately 32% of our total deposits. For additional information, see "Discussion and Analysis of Financial Condition - Deposits, Liquidity and Capital Resources" and Part II. Item 1A. Risk Factors. Adoption of ASU 2016-13. As discussed throughout this report, we adopted ASU 2016-13 onJanuary 1, 2023 , and recorded a one-time, cumulative effect adjustment that increased the allowance for credit losses by$5.9 million and decreased retained earnings, net of tax, by$4.3 million . Sale of Two Branches toFirst Community Bank . OnJanuary 27, 2023 , we completed the previously announced sale of certain assets, deposits and other liabilities associated with theAlice andVictoria, Texas locations toFirst Community Bank , aTexas state bank located inCorpus Christi, Texas . We sold approximately$13.9 million in loans and$14.5 million in deposits.
Branch Closures. We closed one branch location in
COVID-19 Pandemic. The COVID-19 pandemic and related governmental control measures severely disrupted financial markets and overall economic conditions in 2020 and 2021. While the impact of the pandemic and the associated uncertainties remained in 2022 and 2023, there has been significant progress made with COVID-19 vaccination levels, which has resulted in the easing of restrictive measures inthe United States . At the same time, many industries continue to experience supply chain disruptions and labor shortages. Inflation has also increased significantly, and in response theFederal Reserve has raised the federal funds target rate multiple times in 2022 and 2023, as discussed above. Oil and gas prices have also been volatile due in part to the pandemic and the war inUkraine . OnApril 10, 2023 , the COVID-19 national emergency was ended byCongress , and the national public health emergency is set to end onMay 11, 2023 . For additional information, see our Annual Report, Item 1A. Risk Factors, Risks Related to our Business "The ongoing COVID-19 pandemic, or a similar health crisis, may adversely affect our business, employees, borrowers, depositors, counterparties and third-party service providers." Subordinated Debt Issuance and Redemption. InApril 2022 , we completed a private placement of$20.0 million in aggregate principal amount of our 5.125% Fixed-to-Floating Subordinated Notes due 2032 (the "2032 Notes"). InJune 2022 , we used the majority of the proceeds to redeem$18.6 million of our 2017 issuance of 6.00% Fixed-to-Floating Rate Subordinated Notes due 2027 (the "2027 Notes"). We utilized the remaining proceeds for share repurchases and for general corporate purposes. 36
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Overview of Financial Condition and Results of Operations
For the three months endedMarch 31, 2023 , net income was$3.8 million , or$0.38 per basic and diluted common share, compared to net income of$10.1 million , or$0.98 and$0.97 per basic and diluted common share, for the three months endedMarch 31, 2022 . Net income decreased primarily due to a$4.8 million decrease in noninterest income and a$1.6 million decrease in net interest income. The decrease in noninterest income is mainly attributable to$3.3 million in swap termination fees recorded during three months endedMarch 31, 2022 and a loss on sale or disposition of fixed assets of$0.9 million during the three months endedMarch 31, 2023 , resulting from the sale of theAlice andVictoria, Texas branches, compared to a gain on sale or disposition of fixed assets of$0.4 million for three months endedMarch 31, 2022 . The decrease in net interest income was a result of an$8.8 million increase in interest expense partially offset by a$7.1 million increase in interest income. AtMarch 31, 2023 , the Company and Bank each were in compliance with all regulatory capital requirements, and the Bank was considered "well-capitalized" under theFDIC's prompt corrective action regulations. Other key components of our performance for the three months endedMarch 31, 2023 compared to the three months endedMarch 31, 2022 are summarized below.
? Total loans increased
2023, compared to
loans associated with the
at March 31, 2023 , compared to $2.09 billion at December 31, 2022 .
? Credit quality metrics improved as nonperforming loans were 0.27% of total
loans at March 31, 2023 , compared to 0.54% at December 31, 2022 .
? On
Current Expected Credit Loss ("CECL") standard, ASU 2016-13 requires the
measurement of all expected credit losses for financial assets held at the
reporting date based on historical experience, current conditions, and
reasonable and supportable forecasts. Upon adoption, we recorded a one-time,
cumulative effect adjustment to increase the allowance for credit losses by
$5.9 million and reduce retained earnings, net of tax, by$4.3 million .
? Total deposits increased
2023, compared to
deposits decreased
2023, compared to
brokered time deposits increased, and other deposit categories decreased. As
of
of our total deposits.
? Net interest income for the three months ended March 31, 2023 was $20.2
million, a decrease of
the three months ended
rates paid on interest-bearing liabilities partially offset by increases in
the volume and yield earned on interest-earning assets.
? We experienced pressure on our net interest margin as interest rates rose
rapidly and we raised rates offered on deposits and incurred higher costs on
our borrowings. For the three months ended
margin was 3.13%, compared to 3.75% for the three months ended
? Return on average assets decreased to 0.57% for the three months ended March
31, 2023, compared to 1.60% for the three months ended
on average equity was 7.04% for the three months ended
to 16.64% for the three months ended March 31, 2022 .
? During the three months ended March 31, 2023 , we paid $0.9 million to
repurchase 45,975 shares of common stock, compared to paying
repurchase 77,248 shares of common stock during the three months ended March
31, 2022, and we paid
compared to $0.8 million in the first quarter of 2022.
? We held
maintained
advances, the BTFP, and unsecured lines of credit with correspondent banks.
Although we do not plan to utilize the BTFP, our borrowing capacity under the
BTFP is
securities available to be used as collateral, valued at par value as
permitted under the program. Cash and cash equivalents and available funding
represent 136% of uninsured deposits at March 31, 2023 .
? Accumulated other comprehensive loss improved
million for the quarter ended
the quarter ended
98% of total investment securities at
37
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Discussion and Analysis of Financial Condition
Loans General. Loans constitute our most significant asset, comprising 77% and 76% of our total assets atMarch 31, 2023 andDecember 31, 2022 , respectively. Total loans increased$4.3 million , or 0.2%, to$2.11 billion atMarch 31, 2023 , compared to$2.10 billion atDecember 31, 2022 . The increase in loans was primarily the result of organic growth. Given the rising interest rate environment, we are emphasizing origination of high margin loans that promote long-term profitability.
The table below sets forth the balance of loans outstanding by loan type as of the dates presented, and the percentage of each loan type to total loans (dollars in thousands).
March 31, 2023 December 31, 2022
Percentage of Percentage of
Amount Total Loans Amount Total Loans
Construction and development $ 210,274 10.0 % $ 201,633 9.6 %
1-4 Family 401,329 19.0 401,377 19.1
Multifamily 80,980 3.8 81,812 3.9
Farmland 10,731 0.5 12,877 0.6
Commercial real estate
Owner-occupied 433,585 20.6 445,148 21.1
Nonowner-occupied 533,572 25.3 513,095 24.4
Total mortgage loans on real estate 1,670,471 79.2 1,655,942 78.7
Commercial and industrial 425,093 20.2 435,093 20.7
Consumer 13,480 0.6 13,732 0.6
Total loans $ 2,109,044 100 % $ 2,104,767 100 %
At March 31, 2023 , the Company's business lending portfolio, which consists of
loans secured by owner-occupied commercial real estate properties and commercial
and industrial loans, was $858.7 million , a decrease of $21.6 million , or 2.4%,
compared to $880.2 million at December 31, 2022 . The decrease in the business
lending portfolio is primarily driven by tighter underwriting standards and
lower demand due to economic pressures. We also experienced a $20.5 million
increase in nonowner-occupied loans due to organic growth.
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The following table sets forth loans outstanding atMarch 31, 2023 , which, based on remaining scheduled repayments of principal, are due in the periods indicated. Loans with balloon payments and longer amortizations are often repriced and extended beyond the initial maturity when credit conditions remain satisfactory. Demand loans, loans having no stated schedule of repayments and no stated maturity and overdrafts are reported below as due in one year or less (dollars in thousands). After One After Five After Ten After One Year Year Through Years Through Years Through Fifteen or Less Five Years Ten Years Fifteen Years Years Total Construction and development$ 110,753 $ 41,812 $ 29,783 $ 10,228 $ 17,698 $ 210,274 1-4 Family 49,276 82,103 50,221 24,053 195,676 401,329 Multifamily 4,238 62,754 12,462 446 1,080 80,980 Farmland 4,231 4,649 1,851 - - 10,731 Commercial real estate Owner-occupied 23,765 83,987 206,899 110,116 8,818 433,585 Nonowner-occupied 36,436 270,168 176,254 50,497 217 533,572 Total mortgage loans on real estate 228,699 545,473 477,470 195,340 223,489 1,670,471 Commercial and industrial 163,922 89,557 102,267 61,347 8,000 425,093 Consumer 3,391 8,368 1,182 374 165 13,480 Total loans$ 396,012 $ 643,398 $ 580,919 $ 257,061 $ 231,654 $ 2,109,044 Loan Concentrations. Loan concentrations are considered to exist when there are amounts loaned to multiple borrowers engaged in similar activities that would cause them to be similarly impacted by economic or other conditions. AtMarch 31, 2023 andDecember 31, 2022 , we had no concentrations of loans exceeding 10% of total loans other than loans in the categories listed in the table above. 39
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Table of ContentsInvestment Securities We purchase investment securities primarily to provide a source for meeting liquidity needs, with return on investment a secondary consideration. We also use investment securities as collateral for certain deposits and other types of borrowings. Investment securities represented 15% of our total assets and totaled$414.2 million atMarch 31, 2023 , an increase of$0.7 million , or 0.2%, from$413.5 million atDecember 31, 2022 . The increase in investment securities atMarch 31, 2023 compared toDecember 31, 2022 was driven by a$1.5 million increase in commercial mortgage-backed securities and a$0.5 million increase in corporate bonds partially offset by decreases in all other categories of investments compared toDecember 31, 2022 . The table below shows the carrying value of our investment securities portfolio by investment type and the percentage that such investment type comprises of our entire portfolio as of the dates indicated (dollars in thousands). March 31, 2023 December 31, 2022 Percentage of Percentage of Balance Portfolio Balance Portfolio Obligations of theU.S. Treasury andU.S. government agencies and corporations$ 29,408 7.1 %$ 29,805 7.2 % Obligations of state and political subdivisions 23,251 5.6 23,916 5.8 Corporate bonds 30,480 7.4 29,942 7.2 Residential mortgage-backed securities 254,324 61.4 254,618 61.6 Commercial mortgage-backed securities 76,692 18.5 75,191 18.2 Total$ 414,155 100 %$ 413,472 100 % The investment portfolio consists of available for sale ("AFS") and held to maturity ("HTM") securities. We classify debt securities as HTM if management has the positive intent and ability to hold the securities to maturity. HTM debt securities are stated at amortized cost. Securities not classified as HTM are classified as AFS. As ofMarch 31, 2023 , AFS securities comprised 98% of our total investment securities. We adopted ASU 2016-13 effectiveJanuary 1, 2023 . Due to the nature of the investments, current market prices, and the current interest rate environment, we determined that the declines in the fair values of the AFS and HTM securities portfolio were not attributable to credit losses. Accordingly, there was no adjustment made to the amortized cost basis upon adoption. The carrying values of our AFS securities are adjusted for unrealized gains or losses not attributable to credit losses as valuation allowances, and any gains or losses are reported on an after-tax basis as a component of other comprehensive income (loss). For additional information regarding accounting for our investment securities upon the adoption of ASU 2016-13, see Note 1. Summary of Significant Accounting Policies - Accounting Standards Adopted in 2023 in the Notes to Consolidated Financial Statements contained in Part I Item 1. "Financial Statements" included herein. The table below sets forth the stated maturities and weighted average yields of our investment debt securities based on the amortized cost of our investment portfolio atMarch 31, 2023 (dollars in thousands). After One Year Through Five After Five Years Through One Year or Less Years Ten Years After Ten Years Amount Yield Amount Yield Amount Yield Amount Yield Held to maturity: Obligations of state and political subdivisions$ 915 5.88 %$ 960 5.88 %$ 3,536 3.59 % $ - - % Residential mortgage-backed securities - - - - - - 2,637 3.06 Available for sale: Obligations of theU.S. Treasury andU.S. government agencies and corporations 619 2.88 13,664 4.02 15,073 5.92 430 5.65 Obligations of state and political subdivisions 92 3.42 1,843 2.42 9,117 2.40 8,915 2.78 Corporate bonds 600 4.23 12,581 3.56 16,550 4.45 4,000 2.69 Residential mortgage-backed securities - - - - 6,102 2.75 288,459 2.26 Commercial mortgage-backed securities 678 2.76 6,253 3.84 4,041 2.96 73,315 3.42$ 2,904 $ 35,301 $ 54,419 $ 377,756 The maturity of mortgage-backed securities reflects scheduled repayments based upon the contractual maturities of the securities. Weighted average yields on tax-exempt obligations have been computed on a fully tax equivalent basis assuming a federal tax rate of 21%. As ofMarch 31, 2023 , we had$56.7 million in unrealized losses, primarily attributable to investment debt securities with contractual maturities due after 10 years, and$0.5 million in unrealized gains in our AFS investment securities portfolio. For additional information, see Note 3.Investment Securities in the Notes to Consolidated Financial Statements contained in Part I Item 1. "Financial Statements" herein. 40
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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
March 31, 2023 December 31, 2022
Percentage of Percentage of
Amount Total Deposits Amount Total Deposits
Noninterest-bearing demand deposits $ 508,241 23.7 % $ 580,741 27.9 %
Interest-bearing demand deposits 538,515 25.1 565,598 27.1
Money market deposit accounts 180,402 8.4 208,596 10.0
Savings accounts 137,336 6.4 155,176 7.5
Brokered time deposits 146,270 6.8 9,990 0.5
Time deposits 634,883 29.6 562,264 27.0
Total deposits $ 2,145,647 100 % $ 2,082,365 100 %
Total deposits were $2.15 billion at March 31, 2023 , an increase of $63.3
million , or 3.0%, compared to $2.08 billion at December 31, 2022 . Time deposits
and brokered time deposits increased, and other deposit categories decreased.
The majority of the increase in time deposits at March 31, 2023 compared to
December 31, 2022 is due to existing customer funds migrating from other deposit
categories. Beginning in the fourth quarter of 2022, management utilized
brokered time deposits, entirely in denominations of less than $250,000 , to
secure fixed cost funding and reduce short-term borrowings. We were able to
offset core deposit decreases with time deposits and brokered time deposits. The
weighted average duration of brokered time deposits at March 31, 2023 was
approximately 17 months with a weighted average rate of 4.91%.
Our deposit mix shifted as interest rates rose, as noninterest-bearing deposits
as a percentage of total deposits decreased to 23.7% at March 31, 2023 compared
to 27.9% at December 31, 2022 . Brokered time deposits and time deposits as a
percentage of total deposits increased to 6.8% and 29.6%, respectively, at March
31, 2023 compared to 0.5% and 27.0%, respectively, at December 31, 2022 .
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Table of Contents Borrowings AtMarch 31, 2023 , total borrowings include federal funds purchased through unsecured lines of credit withFirst National Bankers Bank andThe Independent Bankers Bank , advances from theFederal Home Loan Bank ("FHLB"), subordinated debt issued in 2019 and 2022, and junior subordinated debentures assumed through acquisitions. We had no securities sold under agreements to repurchase atMarch 31, 2023 andDecember 31, 2022 . Our advances from the FHLB were$300.1 million atMarch 31, 2023 , a decrease of$86.9 million , or 22.5%, from FHLB advances of$387.0 million atDecember 31, 2022 . FHLB advances are used to fund increased loan and investment activity that is not funded by deposits or other borrowings. We had$0.4 million of federal funds purchased through our unsecured lines of credit atMarch 31, 2023 and no outstanding balances drawn atDecember 31, 2022 . The carrying value of the subordinated debt was$44.2 million at bothMarch 31, 2023 andDecember 31, 2022 . The$8.5 million in junior subordinated debt at bothMarch 31, 2023 andDecember 31, 2022 represents the junior subordinated debentures that we assumed through acquisitions.
The average balances and cost of short-term borrowings for the three months
ended
Average Balances Cost of Short-term Borrowings
March 31,
2023 March 31, 2022 March 31, 2023 March 31, 2022
Federal funds purchased, FHLB advances
and other short-term borrowings $ 301,033 $ 52 4.80 % 0.66 %
Securities sold under agreements to
repurchase - 5,564 - 0.15
Total short-term borrowings $ 301,033 $ 5,616 4.80 % 0.15 %
The main source of our short-term borrowings are advances from the FHLB. The
rate charged for these advances is directly tied to the Federal Reserve Bank's
federal funds target rate. As previously discussed, the Federal Reserve has
raised the federal funds target rate multiple times in 2022 and 2023. As of
March 31, 2023 , the federal funds target rate was 4.75% to 5.00%.
2032 Notes. On April 6, 2022 , we entered into a Subordinated Note Purchase
Agreement with certain institutional accredited investors and qualified
institutional buyers (the "Purchasers") under which we issued $20.0 million in
aggregate principal amount of our 2032 Notes to the Purchasers at a price equal
to 100% of the aggregate principal amount of the 2032 Notes. The 2032 Notes were
issued under an indenture, dated April 6, 2022 (the "Indenture"), by and among
the Company and UMB Bank, National Association , as trustee.
The 2032 Notes have a stated maturity date of April 15, 2032 and will bear
interest at a fixed rate of 5.125% per year from and including April 6, 2022 to
but excluding April 15, 2027 or earlier redemption date. From April 15, 2027 to
but excluding the stated maturity date or earlier redemption date, the 2032
Notes will bear interest at a floating rate equal to the then
current three-month term secured overnight financing rate ("SOFR"),
plus 277 basis points. As provided in the 2032 Notes, the interest rate on the
2032 Notes during the applicable floating rate period may be determined based on
a rate other than three-month term SOFR. The 2032 Notes may be redeemed, in
whole or in part, on or after April 15, 2027 or, in whole but not in part, under
certain other limited circumstances set forth in the Indenture. Any redemption
we made would be at a redemption price equal to 100% of the principal balance
being redeemed, together with any accrued and unpaid interest to the date of
redemption.
Principal and interest on the 2032 Notes are subject to acceleration only in
limited circumstances in the case of certain bankruptcy and insolvency-related
events with respect to us. The 2032 Notes are the unsecured, subordinated
obligations of the Company and rank junior in right of payment to our current
and future senior indebtedness and to our obligations to our general
creditors. The 2032 Notes are intended to qualify as tier 2 capital for
regulatory purposes.
We used the majority of the net proceeds to redeem our 2027 Notes in
For a description of our 2029 Notes, which are outstanding atMarch 31, 2023 , and our 2027 Notes, which have been redeemed as ofMarch 31, 2023 , see our Annual Report, Part II Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations - Discussion and Analysis of Financial Condition - Borrowings - 2029 Notes and 2027 Notes" and Note 11 to the financial statements included in such report. Stockholders' Equity Stockholders' equity was$218.5 million atMarch 31, 2023 , an increase of$2.7 million compared toDecember 31, 2022 . The increase is primarily attributable to a$4.7 million decrease in accumulated other comprehensive loss due to an increase in the fair value of the Bank's AFS securities portfolio and$3.8 million of net income for the quarter, partially offset by the adoption of the CECL standard, reflected as a one-time, cumulative effect adjustment to retained earnings that decreased retained earnings by$4.3 million after tax. Stockholders' equity was also reduced during the quarter by the payment of$0.9 million in dividends and$0.9 million to repurchase shares. 42
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Table of Contents Results of Operations
Net Interest Income and Net Interest Margin
Net interest income, our principal source of earnings, is the difference between the interest income generated by interest-earning assets and the total interest cost of the deposits and borrowings obtained to fund those assets. Factors affecting the level of net interest income include the volume of interest-earning assets and interest-bearing liabilities, yields earned on loans and investments and rates paid on deposits and other borrowings, the level of nonperforming loans, the amount of noninterest-bearing liabilities supporting interest-earning assets, and the interest rate environment. The primary factors affecting net interest margin are changes in interest rates, competition, and the shape of the interest rate yield curve. TheFederal Reserve Board sets various benchmark rates, including the federal funds rate, and thereby influences the general market rates of interest, including the deposit and loan rates offered by financial institutions. TheFederal Reserve increased the federal funds target rate a total of seven times during 2022 and, as ofMarch 31, 2023 , twice during 2023 to 4.75% to 5.00%, as discussed in Certain Events That Affect Period-over-Period Comparability - Rising Inflation and Interest Rates. Three months endedMarch 31, 2023 vs. three months endedMarch 31, 2022 . Net interest income decreased 7.6% to$20.2 million for the three months endedMarch 31, 2023 compared to$21.8 million for the same period in 2022. The decrease is primarily due to an increase in both volume of and rates paid on interest-bearing liabilities partially offset by increases in both the volume of interest-earning assets and the yield earned on those assets. Average short-term borrowings increased$295.4 million , as we utilized advances from the FHLB to fund loan growth and investment activity, and resulted in a$3.6 million increase in interest expense compared to the same period in 2022. Average time deposits increased$181.0 million primarily due to higher rates offered and customer funds migrating from other deposit categories, which resulted in a$3.2 million increase in interest expense compared to the same period in 2022. Average brokered time deposits were$67.1 million during the three months endedMarch 31, 2023 compared to none during the three months endedMarch 31, 2022 . Average loans increased$241.2 million primarily due to organic growth, which in addition to higher loan yields, resulted in a$5.6 million increase in interest income compared to the same period in 2022. Our yield on interest-earning assets increased as did our rate paid on interest-bearing liabilities primarily as a result of the overall increase in prevailing interest rates. Interest income was$31.0 million for the three months endedMarch 31, 2023 , compared to$23.9 million for the same period in 2022. Loan interest income made up substantially all of our interest income for the three months endedMarch 31, 2023 and 2022, although interest on investment securities contributed 10.3% of interest income during the first quarter of 2023 compared to 8.2% during the first quarter of 2022. An increase in interest income of$3.0 million can be attributed to the change in the volume of interest-earning assets, and an increase of$4.1 million can be attributed to an increase in the yield earned on those assets. The overall yield on interest-earning assets was 4.80% and 4.10% for the three months endedMarch 31, 2023 and 2022, respectively. The loan portfolio yielded 5.27% and 4.73% for the three months endedMarch 31, 2023 andMarch 31, 2022 , respectively, while the yield on the investment portfolio was 2.72% for the three months endedMarch 31, 2023 compared to 1.90% for the three months endedMarch 31, 2022 . The increase in the overall yield on interest-earning assets compared to the quarter endedMarch 31, 2022 was primarily driven by a 54 basis point increase in the yield on the loan portfolio and an 87 basis point increase in the yield on the taxable investment securities portfolio. Interest expense was$10.8 million for the three months endedMarch 31, 2023 , an increase of$8.8 million compared to interest expense of$2.0 million for the three months endedMarch 31, 2022 . An increase of$7.9 million resulted from the increase in the cost of interest-bearing liabilities, primarily short-term borrowings and time deposits, and an increase in interest expense of$0.8 million resulted from the change in volume of interest-bearing liabilities. Average interest-bearing liabilities increased approximately$249.1 million for the three months endedMarch 31, 2023 compared to the same period in 2022 as average short- and long-term borrowings increased by$268.1 million while average interest-bearing deposits decreased by$19.0 million . As previously discussed, the federal funds target rate was 4.75% to 5.00% as ofMarch 31, 2023 , which affects the rate we pay for immediately available overnight funds, long-term borrowings, and deposits. We increased rates offered on our interest-bearing products in order to remain competitive in our markets. The cost of deposits increased 137 basis points to 1.62% for the three months endedMarch 31, 2023 compared to 0.25% for the three months endedMarch 31, 2022 as a result of the utilization of brokered time deposits to secure fixed cost funding and reduce short-term borrowings, increases in both the average balance of and rates paid for time deposits, and an increase in rates paid for interest-bearing demand deposits. The cost of interest-bearing liabilities increased 175 basis points to 2.23% for the three months endedMarch 31, 2023 compared to 0.48% for the same period in 2022, due to both a higher average balance of and an increased cost of short-term borrowings, the cost of which is driven by theFederal Reserve's federal funds rate and increase in the cost of deposits. Net interest margin was 3.13% for the three months endedMarch 31, 2023 , a decrease of 62 basis points from 3.75% for the three months endedMarch 31, 2022 . The decrease in net interest margin was primarily driven by a 175 basis point increase in the cost of interest-bearing liabilities partially offset by a 70 basis point increase in the yield on interest-earning assets. We experienced margin pressure beginning late in 2022, which continued into 2023. We raised rates offered on deposits and incurred higher costs on our borrowings compared to the three months endedMarch 31, 2022 . We may experience additional pressure on our net interest margin if our cost of funds increases faster than the yield on our interest-earning assets. 43
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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
Three months ended March 31,
2023 2022
Interest Interest
Average Income/ Average Income/
Balance Expense(1) Yield/ Rate(1) Balance Expense(1) Yield/ Rate(1)
Assets
Interest-earning assets:
Loans $ 2,103,989 $ 27,359 5.27 % $ 1,862,775 $ 21,726 4.73 %
Securities:
Taxable 459,099 3,085 2.73 395,828 1,814 1.86
Tax-exempt 16,496 105 2.58 22,248 141 2.58
Interest-earning balances with
banks 35,513 428 4.89 77,461 186 0.97
Total interest-earning assets 2,615,097 30,977 4.80 2,358,312 23,867 4.10
Cash and due from banks 31,356 44,900
Intangible assets 43,000 43,928
Other assets 76,695 134,491
Allowance for credit losses (30,325 ) (20,800 )
Total assets $ 2,735,823 $ 2,560,831
Liabilities and stockholders'
equity
Interest-bearing liabilities:
Deposits:
Interest-bearing demand
deposits $ 736,083 $ 1,594 0.88 % $ 965,574 $ 339 0.14 %
Brokered demand deposits - - - 3,188 2 0.27
Savings deposits 146,093 16 0.04 180,568 21 0.05
Brokered time deposits 67,088 773 4.68 - - -
Time deposits 608,401 3,838 2.56 427,313 614 0.58
Total interest-bearing
deposits 1,557,665 6,221 1.62 1,576,643 976 0.25
Short-term borrowings(2) 301,033 3,562 4.80 5,616 2 0.15
Long-term debt 102,604 1,021 4.04 129,904 1,068 3.33
Total interest-bearing
liabilities 1,961,302 10,804 2.23 1,712,163 2,046 0.48
Noninterest-bearing deposits 550,503 586,556
Other liabilities 4,328 15,803
Stockholders' equity 219,690 246,309
Total liabilities and
stockholders' equity $ 2,735,823 $ 2,560,831
Net interest income/net
interest margin $ 20,173 3.13 % $ 21,821 3.75 %
(1) Interest income and net interest margin are expressed as a percentage of
average interest-earning assets outstanding for the indicated periods. Interest
expense is expressed as a percentage of average interest-bearing liabilities
for the indicated periods.
(2) For additional information, see Discussion and Analysis of Financial
Condition - Borrowings.
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Three months ended March 31, 2023 vs.
Three months ended March 31, 2022
Volume Rate Net(1)
Interest income:
Loans $ 2,813 $ 2,820 $ 5,633
Securities:
Taxable 290 982 1,272
Tax-exempt (37 ) - (37 )
Interest-earning balances with banks (101 ) 343 242
Total interest-earning assets 2,965 4,145
7,110
Interest expense: Interest-bearing demand deposits (81 ) 1,335 1,254 Brokered demand deposits (2 ) - (2 ) Savings deposits (4 ) (1 ) (5 ) Brokered time deposits 774 - 774 Time deposits 260 2,964 3,224 Short-term borrowings 113 3,447 3,560 Long-term debt (224 ) 177 (47 ) Total interest-bearing liabilities 836 7,922
8,758
Change in net interest income
$ (1,648 )
(1) Changes in interest due to both volume and rate have been allocated entirely to
rate.
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Table of Contents Noninterest Income Noninterest income includes, among other things, service charges on deposit accounts, gains and losses on calls or sales of investment securities, gains and losses on sales or dispositions of fixed assets and other real estate owned, swap termination fee income, servicing fees and fee income on serviced loans, interchange fees, income from bank owned life insurance, and changes in the fair value of equity securities. We expect to continue to develop new products that generate noninterest income, and enhance our existing products, in order to diversify our revenue sources. Three months endedMarch 31, 2023 vs. three months endedMarch 31, 2022 . Total noninterest income decreased$4.8 million , or 81.7%, to$1.1 million for the three months endedMarch 31, 2023 compared to$5.9 million for the three months endedMarch 31, 2022 . The decrease in noninterest income is mainly attributable to$3.3 million in swap termination fees recorded during the three months endedMarch 31, 2022 and a loss on sale or disposition of fixed assets of$0.9 million during the three months endedMarch 31, 2023 , resulting from the sale of theAlice andVictoria, Texas branches, compared to a gain on sale or disposition of fixed assets of$0.4 million for three months endedMarch 31, 2022 . Swap termination fees of$3.3 million were recorded during the three months endedMarch 31, 2022 when the Bank voluntarily terminated a number of its interest rate swap agreements in response to market conditions. We had no remaining current or forward starting interest rate swap agreements atMarch 31, 2023 , other than interest rate swaps related to customer loans described in Note 6. Derivative Financial Instruments in the Notes to Consolidated Financial Statements contained in Part I Item 1. "Financial Statements" included herein. Noninterest Expense Three months endedMarch 31, 2023 vs. three months endedMarch 31, 2022 . Total noninterest expense was$16.2 million for the three months endedMarch 31, 2023 , an increase of$0.7 million , or 4.8%, compared to the same period in 2022. The increase is primarily a result of$0.7 million in expenses as a result of the sale of theAlice andVictoria, Texas branch locations and a$0.2 million increase in salaries and employee benefits, partially offset by a$0.1 million decrease in depreciation and amortization. As a result of the sale of theAlice andVictoria, Texas branches, we recorded$0.4 million of occupancy expense primarily to terminate the remaining contractually obligated lease payments,$0.1 million of salaries and employee benefits for severance,$0.1 million of professional fees for legal and consulting services, and$0.1 million of depreciation and amortization to accelerate the amortization of the remaining core deposit intangible. The increase in salaries and employee benefits compared to the same period in 2022 is primarily due to an increase in health insurance claims. The decrease in depreciation and amortization compared to the same period in 2022 is primarily due to the closure of two branch locations in 2022. Income Tax Expense
Income tax expense for the three months ended
For the three months endedMarch 31, 2023 , the effective tax rate differs from the statutory tax rate of 21% primarily due to tax exempt interest income earned on certain loans, investment securities, and bank owned life insurance. For the three months endedMarch 31, 2022 , the effective tax rate differs from the statutory tax rate of 21% primarily due to tax exempt interest income earned on certain investment securities and bank owned life insurance. Risk Management The primary risks associated with our operations are credit, interest rate and liquidity risk. Higher inflation also presents risk. Credit, inflation and interest rate risk are discussed below, while liquidity risk is discussed in this section under the heading Liquidity and Capital Resources below.
Credit Risk and the Allowance for Credit Losses
General. The risk of loss should a borrower default on a loan is inherent in any lending activity. Our portfolio and related credit risk are monitored and managed on an ongoing basis by our risk management department, the board of directors' loan committee and the full board of directors. We utilize a ten point risk-rating system, which assigns a risk grade to each borrower based on a number of quantitative and qualitative factors associated with a loan transaction. The risk grade categorizes the loan into one of five risk categories, based on information about the ability of borrowers to service the debt. The information includes, among other factors, current financial information about the borrower, historical payment experience, credit documentation, public information and current economic trends. These categories assist management in monitoring our credit quality. The following describes each of the risk categories, which are consistent with the definitions used in guidance promulgated by federal banking regulators.
• Pass (grades 1-6) - Loans not falling into one of the categories below are
considered pass. These loans have high credit characteristics and financial
strength. The borrowers at least generate profits and cash flow that are in
line with peer and industry standards and have debt service coverage ratios
above loan covenants and our policy guidelines. For some of these loans, a
guaranty from a financially capable party mitigates characteristics of the
borrower that might otherwise result in a lower grade.
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• Special Mention (grade 7) - Loans classified as special mention possess some
credit deficiencies that need to be corrected to avoid a greater risk of
default in the future. For example, financial ratios relating to the borrower
may have deteriorated. Often, a special mention categorization is temporary
while certain factors are analyzed or matters addressed before the loan is
re-categorized as either pass or substandard.
• Substandard (grade 8) - Loans rated as substandard are inadequately protected
by the current net worth and paying capacity of the borrower or the
liquidation value of any collateral. If deficiencies are not addressed, it is
likely that this category of loan will result in the Bank incurring a loss.
Where a borrower has been unable to adjust to industry or general economic
conditions, the borrower's loan is often categorized as substandard.
• Doubtful (grade 9) - Doubtful loans are substandard loans with one or more
additional negative factors that makes full collection of amounts outstanding,
either through repayment or liquidation of collateral, highly questionable and
improbable.
• Loss (grade 10) - Loans classified as loss have deteriorated to such a point
that it is not practicable to defer writing off the loan. For these loans, all
efforts to remediate the loan's negative characteristics have failed and the
value of the collateral, if any, has severely deteriorated relative to the
amount outstanding. Although some value may be recovered on such a loan, it is
not significant in relation to the amount borrowed.
At March 31, 2023 and December 31, 2022 , there were no loans classified as loss.
There were no loans classified as doubtful at March 31, 2023 , compared to $0.2
million at December 31, 2022 . At March 31, 2023 and December 31, 2022 , there
were $15.2 million and $15.0 million , respectively, of loans classified as
substandard, and $6.7 million and $12.8 million , respectively, of loans
classified as special mention.
An independent loan review is conducted annually, whether internally
or externally, on at least 40% of commercial loans utilizing a risk-based
approach designed to maximize the effectiveness of the review. Internal loan
review is independent of the loan underwriting and approval process. In
addition, credit analysts periodically review certain commercial loans to
identify negative financial trends related to any one borrower, any related
groups of borrowers, or an industry. All loans not categorized as pass are put
on an internal watch list, with quarterly reports to the board of directors. In
addition, a written status report is maintained by our special assets division
for all commercial loans categorized as substandard or worse. We use this
information in connection with our collection efforts.
If our collection efforts are unsuccessful, collateral securing loans may be
repossessed and sold or, for loans secured by real estate, foreclosure
proceedings initiated. The collateral is generally sold at public auction for
fair market value, with fees associated with the foreclosure being deducted from
the sales price. The purchase price is applied to the outstanding loan balance.
If the loan balance is greater than the sales proceeds, the deficient balance is
charged-off.
Allowance for Credit Losses. Effective January 1, 2023 , we adopted ASU 2016-13,
which uses the CECL accounting methodology for the allowance for credit losses.
Upon adoption, we recorded a one-time, cumulative effect adjustment to
increase the allowance for credit losses by $5.9 million . The allowance for
credit losses was $30.5 million and $24.4 million at March 31, 2023 and December
31, 2022 , respectively. The CECL methodology requires that lifetime expected
credit losses be recorded at the time the financial asset is originated or
acquired.
Under ASU 2016-13, the allowance for credit losses on loans is measured on a
pool basis when similar risk characteristics exist. The Company's CECL
calculation estimates credit losses using a combination of the discounted cash
flow and remaining life methods, as appropriate, depending on the certain
portfolio factors including but not limited to size, complexity, and history.
The discounted cash flow analysis estimates future cash flows for the loan pool
and discounts the cash flows to produce a net present value and ultimately the
allowance requirement for the pool. The remaining life method applies a loss
rate to a given pool of loans over the estimated remaining life of the given
pool. The loss rates computed for each pool and expected pool-level funding
rates are applied to the related unfunded lending commitments to calculate an
allowance for credit losses on unfunded amounts. For each pool of loans,
management also evaluates and applies qualitative adjustments to the calculated
allowance for credit losses based on several factors, including, but not limited
to, changes in current and expected future economic conditions, changes in the
nature and volume of the portfolio, changes in levels of concentrations, changes
in the volume and severity of past due loans, changes in lending policies and
personnel and changes in the competitive and regulatory environment of the
banking industry.
Loans that do not share similar risk characteristics are individually evaluated
and are excluded from the pooled loan analysis. The allowance for credit losses
on loans that are individually evaluated is based on a comparison of the
recorded investment in the loan with either the expected cash flows discounted
using the loan's original effective interest rate, observable market price for
the loan or the fair value of the collateral underlying certain collateral
dependent loans. We evaluate the adequacy of the allowance for credit losses on
a quarterly basis. This evaluation is complex and inherently subjective, as it
requires estimates by management that are inherently uncertain and therefore
susceptible to significant revision as more information becomes available. In
future periods evaluations of the overall loan portfolio, in light of the
factors and forecasts then prevailing, may result in significant changes in the
allowance and provision for credit loss on loans in those future periods.
We maintain a separate allowance for credit losses on unfunded loan commitments,
which is included in "Accrued taxes and other liabilities" in the accompanying
consolidated balance sheets. The allowance for credit losses is increased by the
provision for credit losses and decreased by charge-offs, net of recoveries. For
the three months ended March 31, 2023 and 2022, the provision for credit losses
was $0.4 million and negative $0.4 million , respectively.
Refer to Note 1. Summary of Significant Accounting Policies - Accounting
Standards Adopted in 2023 for information regarding our adoption of ASU
2016-13. Results for reporting periods beginning after December 31, 2022 are
presented in accordance with ASU 2016-13 while prior period amounts continue to
be reported in accordance with previously applicable U.S. GAAP as discussed in
the Annual Report in the section captioned "Management's Discussion and Analysis
of Financial Condition and Results of Operations - Critical Accounting
Estimates."
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The following table presents the allocation of the allowance for credit losses by loan category and the percentage of loans in each loan category to total loans as of the dates indicated (dollars in thousands).
March 31, 2023 December 31, 2022
% of Loans % of Loans
in each in each
Category Category
Allowance for to Total Allowance for to Total
Credit Losses Loans Credit Losses Loans
Mortgage loans on real estate:
Construction and development $ 3,041 10.0 % $ 2,555 9.6 %
1-4 Family 8,650 19.0 3,917 19.1
Multifamily 910 3.8 999 3.9
Farmland 30 0.5 113 0.6
Commercial real estate 11,527 45.9 10,718 45.5
Commercial and industrial 6,125 20.2 5,743 20.7
Consumer 238 0.6 319 0.6
Total $ 30,521 100 % $ 24,364 100 %
The following table presents the amount of the allowance for credit losses allocated to each loan category as a percentage of total loans as of the dates indicated.
March 31, 2023 December 31, 2022
Mortgage loans on real estate:
Construction and development 0.15 % 0.12 %
1-4 Family 0.41 0.18
Multifamily 0.04 0.05
Farmland - 0.01
Commercial real estate 0.55 0.51
Commercial and industrial 0.29 0.27
Consumer 0.01 0.02
Total 1.45 % 1.16 %
As discussed above, the balance in the allowance for credit losses is
principally influenced by the provision for credit losses on loans and net loan
loss experience. Additions to the allowance for credit losses are charged to the
provision for credit losses on loans. Losses are charged to the allowance as
incurred and recoveries on losses previously charged to the allowance are
credited to the allowance at the time the recovery is collected.
The table below reflects the activity in the allowance for credit losses and key ratios for the periods indicated (dollars in thousands).
Three months ended March 31,
2023 2022
Allowance at beginning of period $ 24,364 $ 20,859
ASU 2016-13 adoption impact 5,865 -
Provision for credit losses on loans(1) 556 (449 )
Net (charge-offs) recoveries (264 ) 678
Allowance at end of period $ 30,521 $ 21,088
Total loans - period end 2,109,044 1,877,444
Nonaccrual loans - period end 5,576 25,641
Key ratios:
Allowance for credit losses to total loans - period end 1.45 % 1.12 %
Allowance for credit losses to nonaccrual loans - period end 547.36 % 82.24 %
Nonaccrual loans to total loans - period end 0.26 % 1.37 %
(1) The $0.4 million provision for credit losses on the consolidated statement
of income includes a $0.6 million provision for loan losses and a $0.2 million
negative provision for unfunded loan commitments for the three months ended
March 31, 2023 .
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The allowance for credit losses to total loans increased to 1.45% atMarch 31, 2023 compared to 1.12% atMarch 31, 2022 , and the allowance for credit losses to nonaccrual loans ratio increased to 547% atMarch 31, 2023 compared to 82% atMarch 31, 2022 . The increases in the allowance for credit losses to total loans and allowance for credit losses to nonaccrual loans compared toMarch 31, 2022 , is primarily due to the one-time, cumulative effect adjustment to increase the allowance for credit losses by$5.9 million recorded upon adoption of ASU 2016-13 onJanuary 1, 2023 . Nonaccrual loans were$5.6 million , or 0.26% of total loans, atMarch 31, 2023 , a decrease of$20.1 million compared to$25.6 million , or 1.37% of total loans atMarch 31, 2022 . The decrease in nonaccrual loans is primarily due to large paydowns on one loan relationship impacted by Hurricane Ida in the third quarter of 2021. Many of the loans comprising the total relationship were placed on nonaccrual following the impairment in the third quarter of 2021.
The following table presents the allocation of net (charge-offs) recoveries by loan category for the periods indicated (dollars in thousands).
Three months ended
2023 2022
Ratio of Ratio of
Net Net
Net Charge-offs Net Charge-offs
Recoveries to Average Recoveries to Average
(Charge-offs) Average Balance Loans (Charge-offs) Average Balance Loans
Mortgage loans on real estate:
Construction and development $ 42 $ 198,551 (0.02 )% $ 16 $ 208,768 (0.01 )%
1-4 Family (37 ) 402,405 0.01 70 364,740 (0.02 )
Multifamily - 80,536 - - 57,470 -
Farmland - 11,136 - (54 ) 19,043 0.28
Commercial real estate 103 969,667 (0.01 ) 59 884,271 (0.01 )
Commercial and industrial (311 ) 428,806 0.07 622 311,812 (0.20 )
Consumer (61 ) 12,888 0.47 (35 ) 16,671 0.21
Total $ (264 ) $ 2,103,989 0.01 % $ 678 $ 1,862,775 (0.04 )%
Charge-offs reflect the realization of losses in the portfolio that were
recognized previously through the provision for credit losses on loans. Net
charge-offs include recoveries of amounts previously charged off. For the three
months ended March 31, 2023 , net charge-offs were $0.3 million , or 0.01%, of the
average loan balance for the period. Net recoveries for the three months ended
March 31, 2022 were $0.7 million , or 0.04%, of the average loan balance for
the period.
Management believes the allowance for credit losses at March 31, 2023 is
sufficient to provide adequate protection against losses in our portfolio.
However, there can be no assurance that this allowance will prove to be adequate
over time to cover ultimate losses in connection with our loans. This allowance
may prove to be inadequate due to higher inflation and interest rates than
anticipated, other unanticipated adverse changes in the economy, the scope and
duration of the COVID-19 pandemic and its continued influence on the economy, or
discrete events adversely affecting specific customers or industries. Our
results of operations and financial condition could be materially adversely
affected to the extent that the allowance is insufficient to cover such changes
or events. Effective January 1, 2023 , we adopted ASU 2016-13, which uses
the CECL accounting methodology for the calculating the allowance for credit
losses. The CECL methodology requires that lifetime expected credit losses be
recorded at the time the financial asset is originated or acquired, and be
adjusted each period for changes in expected lifetime credit losses. The CECL
methodology replaces multiple prior impairment models under U.S. GAAP that
generally required that a loss be "incurred" before it was recognized, and
represents a significant change from prior U.S. GAAP. Please refer to Note
1. Summary of Significant Accounting Policies - Accounting Standards Adopted in
2023, in the Notes to Consolidated Financial Statements for information
regarding our adoption of ASU 2016-13, effective January 1, 2023 .
Nonperforming Assets. Nonperforming assets consist of nonperforming loans and
other real estate owned. Nonperforming loans are those on which the accrual of
interest has stopped or loans which are contractually 90 days past due on which
interest continues to accrue. Loans are ordinarily placed on nonaccrual when a
loan is specifically determined to be impaired or when principal and interest is
delinquent for 90 days or more. Additionally, management may elect to continue
the accrual when the estimated net available value of collateral is sufficient
to cover the principal balance and accrued interest. It is our policy to
discontinue the accrual of interest income on any loan for which we have
reasonable doubt as to the payment of interest or principal. A loan may be
returned to accrual status when all the principal and interest amounts
contractually due are brought current and future principal and interest amounts
contractually due are reasonably assured, which is typically evidenced by a
sustained period of repayment performance by the borrower. Nonperforming loans
were $5.7 million , or 0.27% of total loans, at March 31, 2023 , a
decrease of $5.6 million compared to $11.3 million , or 0.54% of total loans,
at December 31, 2022 . The decrease in nonperforming loans compared to December
31, 2022 is mainly attributable to large paydowns on one loan relationship
impacted by Hurricane Ida.
Restructured Loans
Effective January 1, 2023 , we adopted ASU 2022-02, "Financial Instruments -
Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage
Disclosures", which eliminated the accounting guidance for troubled debt
restructurings ("TDRs"). Prior to our adoption of ASU 2022-02, we accounted for
a modification to the contractual terms of a loan that resulted in granting a
concession to a borrower experiencing financial difficulties as a TDR.
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Other Real Estate Owned. Other real estate owned consists of properties acquired through foreclosure or acceptance of a deed in lieu of foreclosure. These properties are initially recorded at fair value at the time of foreclosure, less estimated selling cost. Losses arising at the time of foreclosure of properties are charged to the allowance for credit losses. Other real estate owned with a cost basis of$0.9 million was sold during the three months endedMarch 31, 2023 resulting in a loss of$0.1 million for the period. Other real estate owned with a cost basis of$0.8 million was sold during the three months endedMarch 31, 2022 , resulting in a gain of$41,000 for the period. AtMarch 31, 2023 , approximately$0.7 million of loans secured by 1-4 family residential property were in the process of foreclosure.
The table below provides details of our other real estate owned as of the dates indicated (dollars in thousands).
March 31, 2023 December 31, 2022
1-4 Family $ 139 $ 682
Commercial real estate 523 -
Total other real estate owned $ 662 $ 682
Changes in our other real estate owned are summarized in the table below for the periods indicated (dollars in thousands).
Three months ended March 31,
2023 2022
Balance, beginning of period $ 682 $ 2,653 Additions
916 1,620
Sales of other real estate owned (936 ) (819 )
Balance, end of period $ 662 $ 3,454
Impact of Inflation. Inflation reached a near 40-year high in late 2021
primarily due to effects of the ongoing pandemic and continued rising through
June 2022 . Since June 2022 , the rate of inflation has decelerated; however, it
has remained at historically high levels through April 2023 . When the rate of
inflation accelerates, there is an erosion of consumer and customer purchasing
power. Accordingly, this could impact our business by reducing our tolerance for
extending credit, and our customer's desire to obtain credit, or causing us to
incur additional provisions for credit losses resulting from a possible
increased default rate. Inflation may lead to lower loan re-financings.
Inflation may also increase the costs of goods and services we purchase,
including the costs of salaries and benefits. In response to higher inflation,
the Federal Reserve increased the federal funds target rate during 2022 and
2023 as discussed in Certain Events That Affect
Period-over-Period Comparability - Rising Inflation and Interest Rates. For
additional information, see Interest Rate Risk below, and Item 1A. "Risk Factors
- Risks Related to our Business - Changes in interest rates could have an
adverse effect on our profitability," in our Annual Report.
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Table of Contents Interest Rate Risk Market risk is the risk of loss from adverse changes in market prices and rates. Since the majority of our assets and liabilities are monetary in nature, our market risk arises primarily from interest rate risk inherent in our lending and deposit activities. A sudden and substantial change in interest rates may adversely impact our earnings and profitability because the interest rates borne by assets and liabilities do not change at the same speed, to the same extent, or on the same basis. Accordingly, our ability to proactively structure the volume and mix of our assets and liabilities to address anticipated changes in interest rates, as well as to react quickly to such fluctuations, can significantly impact our financial results. To that end, management actively monitors and manages our interest rate risk exposure. The ALCO has been authorized by the board of directors to implement our asset/liability management policy, which establishes guidelines with respect to our exposure to interest rate fluctuations, liquidity, loan limits as a percentage of funding sources, exposure to correspondent banks and brokers and reliance on non-core deposits. The goal of the policy is to enable us to maximize our interest income and maintain our net interest margin without exposing the Bank to excessive interest rate risk, credit risk and liquidity risk. Within that framework, the ALCO monitors our interest rate sensitivity and makes decisions relating to our asset/liability composition. Net interest income simulation is the Bank's primary tool for benchmarking near term earnings exposure. Given the ALCO's objective to understand the potential risk/volatility embedded within the current mix of assets and liabilities, standard rate scenario simulations assume total assets remain static (i.e. no growth). The Bank may also use a standard gap report in its interest rate risk management process. The primary use for the gap report is to provide supporting detailed information to the ALCO's discussion. The Bank has particular concerns with the utility of the gap report as a risk management tool because of difficulties in relating gap directly to changes in net interest income. Hence, the income simulation is the key indicator for earnings-at-risk since it expressly measures what the gap report attempts to estimate. Short term interest rate risk management tactics are decided by the ALCO where risk exposures exist out into the 1 to 2 year horizon. Tactics are formulated and presented to the ALCO for discussion, modification, and/or approval. Such tactics may include asset and liability acquisitions of appropriate maturities in the cash market, loan and deposit product/pricing strategy modification, and derivatives hedging activities to the extent such activity is authorized by the board of directors.
Since the impact of rate changes due to mismatched balance sheet positions in the short-term can quickly and materially affect the current year's income statement, they require constant monitoring and management.
Within the gap position that management directs, we attempt to structure our assets and liabilities to minimize the risk of either a rising or falling interest rate environment. We manage our gap position for time horizons of one month, two months, three months, 4-6 months, 7-12 months, 13-24 months, 25-36 months, 37-60 months and more than 60 months. The goal of our asset/liability management is for the Bank to maintain a net interest income at risk in an up or down 100 basis point environment at less than (5)%. AtMarch 31, 2023 , the Bank was within the policy guidelines for asset/liability management. 51
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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 March 31, 2023
Estimated Increase/Decrease in Net
Changes in Interest Rates (in basis points) Interest Income(1)
+300 (9.4)%
+200 (6.6)%
+100 (3.1)%
-100 2.1%
(1) The percentage change in this column represents the projected net interest
income for 12 months on a flat balance sheet in a stable interest rate
environment versus the projected net interest income in the various rate
scenarios.
The computation of the prospective effects of hypothetical interest rate changes
requires numerous assumptions regarding characteristics of new business and the
behavior of existing positions. These business assumptions are based upon our
experience, business plans and published industry experience. Key assumptions
include asset prepayment speeds, competitive factors, the relative price
sensitivity of certain assets and liabilities, and the expected life of
non-maturity deposits. However, there are a number of factors that influence the
effect of interest rate fluctuations on us which are difficult to measure and
predict. For example, a rapid drop in interest rates might cause our loans to
repay at a more rapid pace and certain mortgage-related investments to prepay
more quickly than projected. This could mitigate some of the benefits of falling
rates as are expected when we are in a negatively-gapped position. Conversely, a
rapid rise in rates could give us an opportunity to increase our margins and
stifle the rate of repayment on our mortgage-related loans which would increase
our returns; however, we may need to increase the rates we offer to maintain or
increase deposits, which would adversely impact our margins. As a result,
because these assumptions are inherently uncertain, actual results will differ
from simulated results.
Liquidity and Capital Resources
Liquidity. Liquidity is a measure of the ability to fund loan commitments and meet deposit maturities and withdrawals in a timely and cost-effective way. Cash flow requirements can be met by generating net income, attracting new deposits, converting assets to cash or borrowing funds. While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit outflows, loan prepayments, loan sales and borrowings are greatly influenced by general interest rates, economic conditions and the competitive environment in which we operate. To minimize funding risks, we closely monitor our liquidity position through periodic reviews of maturity profiles, yield and rate behaviors, and loan and deposit forecasts. Excess short-term liquidity is usually invested in overnight federal funds sold. Our core deposits, which are deposits excluding time deposits greater than$250,000 and deposits of municipalities and other political entities, are our most stable source of liquidity to meet our cash flow needs due to the nature of the long-term relationships generally established with our customers. Maintaining the ability to acquire these funds as needed in a variety of markets, and within ALCO compliance targets, is essential to ensuring our liquidity. AtMarch 31, 2023 andDecember 31, 2022 , 73% and 70% of our total assets, respectively, were funded by core deposits. Our investment portfolio is another alternative for meeting our cash flow requirements. Investment securities generate cash flow through principal payments and maturities, and they generally have readily available markets that allow for their conversion to cash. AtMarch 31, 2023 , 98% of our investment securities portfolio was classified as AFS and we had gross unrealized losses in our AFS investment securities portfolio of$56.7 million and gross unrealized gains of$0.5 million . The sale of securities in a loss position would cause us to record a loss on sale of investment securities in noninterest income in the period during which the securities were sold. Some securities are pledged to secure certain deposit types or short-term borrowings, such as FHLB advances, which impacts their liquidity. AtMarch 31, 2023 , securities with a carrying value of$198.2 million were pledged to secure certain deposits, borrowings, and other liabilities, compared to$165.7 million in pledged securities atDecember 31, 2022 . Other sources available for meeting liquidity needs include advances from the FHLB, repurchase agreements and other borrowings. FHLB advances are primarily used to match-fund fixed rate loans in order to minimize interest rate risk and also may be used to meet day to day liquidity needs, particularly if the prevailing interest rate on an FHLB advance compares favorably to the rates that we would be required to pay to attract deposits. AtMarch 31, 2023 , the balance of our outstanding advances with the FHLB was$300.1 million , a decrease from$387.0 million atDecember 31, 2022 . The total amount of the remaining credit available to us from the FHLB atMarch 31, 2023 was$654.1 million . AtMarch 31, 2023 , our FHLB borrowings were collateralized by approximately$963.0 million of our loan portfolio and$0.5 million of our investment securities. Beginning inMarch 2023 , we are eligible to borrow from theFederal Reserve's Bank Term Funding Program ("BTFP"), which provides additional contingent liquidity through the pledging of certain qualifying securities and other assets. The BTFP is a one year program endingMarch 11, 2024 , and we can borrow any time during the term and can repay the obligation at any time without penalty. Although we do not plan to utilize the BTFP, our borrowing capacity under the BTFP is$185.6 million as ofMarch 31, 2023 based on the value of unpledged securities available to be used as collateral, valued at par value as permitted under the program. Repurchase agreements are contracts for the sale of securities which we own with a corresponding agreement to repurchase those securities at an agreed upon price and date. Our policies limit the use of repurchase agreements to those collateralized by investment securities. We had no repurchase agreements outstanding atMarch 31, 2023 andDecember 31, 2022 . 52
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We maintain unsecured lines of credit with other commercial banks totaling$60.0 million . These lines of credit are federal funds lines of credit and are used for overnight borrowing only. The lines of credit mature at various times within the next year. The total amount of the remaining credit available to us from federal funds lines of credit atMarch 31, 2023 was$59.6 million . AtMarch 31, 2023 , we held$31.3 million of cash and cash equivalents and maintained$899.3 million of available funding fromFederal Home Loan Bank Advances, the BTFP, and unsecured lines of credit with correspondent banks. Cash and cash equivalents and available funding represent 136% of uninsured deposits of$682.9 million atMarch 31, 2023 . In addition, atMarch 31, 2023 andDecember 31, 2022 , we had$45.0 million in aggregate principal amount of subordinated debt outstanding. InApril 2022 , we completed a private placement of$20.0 million in aggregate principal amount of our 2032 Notes, and used the majority of the proceeds to redeem$18.6 million of our 2027 Notes inJune 2022 . See discussion above under Discussion and Analysis of Financial Condition - Borrowings - 2032 Notes. For additional information on our 2027, 2029, and 2032 Notes, see our Annual Report for the year endedDecember 31, 2022 , Part II Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations - Discussion and Analysis of Financial Condition - Borrowings" and Note 11 to the financial statements included in such report. Our liquidity strategy is focused on using the least costly funds available to us in the context of our balance sheet composition and interest rate risk position. Accordingly, we target growth of noninterest-bearing deposits. Although we cannot directly control the types of deposit instruments our customers choose, we can influence those choices with the interest rates and deposit specials we offer. AtMarch 31, 2023 , we held$146.3 million of brokered time deposits and no brokered demand deposits, as defined for federal regulatory purposes, to secure fixed cost funding and reduce short-term borrowings. AtDecember 31, 2022 , we held$10.0 million of brokered time deposits and no brokered demand deposits, as defined for federal regulatory purposes. The Bank has historically used brokered demand deposits to satisfy the required borrowings under its interest rate swap agreements. We hold QwickRate® deposits, included in our time deposit balances, which we obtain through a qualified network to address liquidity needs when rates on such deposits compare favorably with deposit rates in our markets. AtMarch 31, 2023 , we held$26.4 million of QwickRate® deposits, a decrease compared to$26.5 million atDecember 31, 2022 . The following table presents, by type, our funding sources, which consist of total average deposits and borrowed funds, as a percentage of total funds and the total cost of each funding source for the three months endedMarch 31, 2023 and 2022. Percentage of Total Average Deposits and Borrowed Funds Cost of Funds Three months ended March 31, Three months ended March 31, 2023 2022 2023 2022 Noninterest-bearing demand deposits 22 % 25 % - % - % Interest-bearing demand deposits 29 42 0.88 0.14 Brokered demand deposits - - - 0.27 Savings accounts 6 8 0.04 0.05 Brokered time deposits 3 - 4.68 - Time deposits 24 19 2.56 0.58 Short-term borrowings 12 - 4.80 0.15 Long-term borrowed funds 4 6 4.04 3.33 Total deposits and borrowed funds 100 % 100 % 1.74 % 0.36 % Capital Management. Our primary sources of capital include retained earnings, capital obtained through acquisitions, and proceeds from the sale of our capital stock and subordinated debt. We may issue additional common stock and debt securities from time to time to fund acquisitions and support our organic growth. InApril 2022 , we completed a private placement of$20.0 million in aggregate principal amount of our 2032 Notes, which are structured to quality as Tier 2 capital for regulatory purposes, and used the majority of the proceeds to redeem$18.6 million of our 2027 Notes inJune 2022 . During the three months endedMarch 31, 2023 , we paid$0.9 million in dividends, compared to$0.8 million during the three months endedMarch 31, 2022 . We declared dividends on our common stock of$0.095 per share during the three months endedMarch 31, 2023 compared to dividends of$0.085 per share during the three months endedMarch 31, 2022 . OnApril 21, 2022 andSeptember 21, 2022 , the board of directors approved an additional 400,000 shares and 300,000 shares, respectively, of our common stock for repurchase. The Company had 340,739 shares of its common stock remaining authorized for repurchase under the program atMarch 31, 2023 . During the three months endedMarch 31, 2023 , the Company paid$0.9 million to repurchase 45,975 shares of its common stock, compared to paying$1.5 million to repurchase 77,248 shares of its common stock during the three months endedMarch 31, 2022 . 53
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We are subject to various regulatory capital requirements administered by theFederal Reserve and the OCC which specify capital tiers, including the following classifications for the Bank under the OCC's prompt corrective action regulations. Common Equity Ratio of Tier 1 Tangible Tier 1 Leverage Capital Tier 1 Capital Total Capital to Total Capital Tiers(1) Ratio Ratio Ratio Ratio Assets 6.5% or Well capitalized 5% or above above 8% or above 10% or above 4.5% or Adequately capitalized 4% or above above 6% or above 8% or above Less than Undercapitalized Less than 4% 4.5% Less than 6% Less than 8% Less than
Significantly undercapitalized Less than 3% 3% Less than 4%
Less than 6%
2% or
Critically undercapitalized less
(1) In order to be well capitalized or adequately capitalized, a bank must satisfy
each of the required ratios in the table. In order to be undercapitalized or
significantly undercapitalized, a bank would need to fall below just one of the
relevant ratio thresholds in the table. In order to be well capitalized, the
Bank cannot be subject to any written agreement or order requiring it to
maintain a specific level of capital for any capital measure. Pursuant toregulatory capital rules, the Company has made an election not to include
unrealized gains and losses in the investment securities portfolio for purposes
of calculating "Tier 1" capital and "Tier 2" capital.
The Company and the Bank each were in compliance with all regulatory capital
requirements at
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).
Minimum Capital Requirement for Bank to be
Well Capitalized Under Prompt Corrective
Actual Action Rules
Amount Ratio Amount Ratio
March 31, 2023
Investar Holding Corporation :
Tier 1 leverage capital $ 229,343 8.30 % $ - - %
Common equity tier 1 capital 219,843 9.64 - -
Tier 1 capital 229,343 10.06 - -
Total capital 302,081 13.24 - -
Investar Bank:
Tier 1 leverage capital 268,189 9.72 137,898 5.00
Common equity tier 1 capital 268,189 11.78 148,150 6.50
Tier 1 capital 268,189 11.78 182,339 8.00
Total capital 296,679 13.03 227,923 10.00
December 31, 2022
Investar Holding Corporation :
Tier 1 leverage capital $ 231,048 8.53 % $ - - %
Common equity tier 1 capital 221,548 9.79 - -
Tier 1 capital 231,048 10.21 - -
Total capital 300,009 13.25 - -
Investar Bank:
Tier 1 leverage capital 267,603 9.89 135,344 5.00
Common equity tier 1 capital 267,603 11.83 147,044 6.50
Tier 1 capital 267,603 11.83 180,977 8.00
Total capital 292,339 12.92 226,221 10.00
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Off-Balance Sheet Transactions
Swap Contracts. The Bank historically has entered into interest rate swap contracts, some of which are forward starting, to manage exposure against the variability in the expected future cash flows (future interest payments) attributable to changes in the 1-month LIBOR associated with the forecasted issuances of 1-month fixed rate debt arising from a rollover strategy. An interest rate swap is an agreement whereby one party agrees to pay a fixed rate of interest on a notional principal amount in exchange for receiving a floating rate of interest on the same notional amount for a predetermined period of time, from a second party. AtMarch 31, 2023 andDecember 31, 2022 we had no current or forward starting interest rate swap agreements, other than interest rate swaps related to customer loans, described below. For additional information, see Note 6. Derivative Financial Instruments in the Notes to Consolidated Financial Statements contained in Part I Item 1. "Financial Statements" included herein. During the three months endedMarch 31, 2022 , we voluntarily terminated interest rate swap agreements with a total notional amount of$55.0 million in response to market conditions and as a result of excess liquidity. Unrealized gains of$2.6 million , net of tax expense of$0.7 million , were reclassified from "Accumulated other comprehensive (loss) income" as ofMarch 31, 2022 and recorded as "Swap termination fee income" in noninterest income in the accompanying consolidated statements of income for the three months endedMarch 31, 2022 .
For the three months ended
The Company also enters into interest rate swap contracts that allow commercial loan customers to effectively convert a variable-rate commercial loan agreement to a fixed-rate commercial loan agreement. Under these agreements, the Company enters into a variable-rate loan agreement with a customer in addition to an interest rate swap agreement, which serves to effectively swap the customer's variable-rate loan into a fixed-rate loan. The Company then enters into a corresponding swap agreement with a third party in order to economically hedge its exposure through the customer agreement. The interest rate swaps with both the customers and third parties are not designated as hedges under FASB ASC Topic 815, "Derivatives and Hedging", and are marked to market through earnings. As the interest rate swaps are structured to offset each other, changes to the underlying benchmark interest rates considered in the valuation of these instruments do not result in an impact to earnings; however, there may be fair value adjustments related to credit quality variations between counterparties, which may impact earnings as required by FASB ASC Topic 820, "Fair Value Measurements". The Company did not recognize any gains or losses in other income resulting from fair value adjustments during the three months endedMarch 31, 2023 and 2022. AtMarch 31, 2023 we had notional amounts of$147.2 million in interest rate swap contracts with customers and$147.2 million in offsetting interest rate swap contracts with other financial institutions. The fair value of the swap contracts consisted of gross assets of$17.0 million and gross liabilities of$17.0 million recorded in "Other assets" and "Accrued taxes and other liabilities", respectively, in the accompanying consolidated balance sheet. Unfunded Commitments. The Bank enters into loan commitments and standby letters of credit in the normal course of its business. Loan commitments are made to meet the financing needs of our customers, while standby letters of credit commit the Bank to make payments on behalf of customers when certain specified future events occur. The credit risks associated with loan commitments and standby letters of credit are essentially the same as those involved in making loans to our customers. Accordingly, our normal credit policies apply to these arrangements. Collateral (e.g., securities, receivables, inventory, equipment, etc.) is obtained based on management's credit assessment of the customer. Loan commitments are also evaluated in a manner similar to the allowance for credit losses on loans. The reserve for unfunded loan commitments is included in "Accrued taxes and other liabilities" in the accompanying consolidated balance sheets and was$0.2 million and$0.4 million atMarch 31, 2023 andDecember 31, 2022 , respectively. Loan commitments and standby letters of credit do not necessarily represent future cash requirements, in that while the customer typically has the ability to draw upon these commitments at any time, these commitments often expire without being drawn upon in full or at all. Substantially all of our standby letters of credit expire within one year. Our unfunded loan commitments and standby letters of credit outstanding are summarized below as of the dates indicated (dollars in thousands): March 31, 2023 December 31, 2022 Loan commitments$ 354,941 $ 333,040 Standby letters of credit 15,347 11,379
The Company closely monitors the amount of remaining future commitments to borrowers in light of prevailing economic conditions and adjusts these commitments as necessary. The Company intends to continue this process as new commitments are entered into or existing commitments are renewed.
Additionally, at
For the three months endedMarch 31, 2023 and for the year endedDecember 31, 2022 , except as disclosed herein and in the Company's Annual Report, we engaged in no off-balance sheet transactions that we believe are reasonably likely to have a material effect on our financial condition, results of operations, or cash flows. Lease Obligations. The Company's primary leasing activities relate to certain real estate leases entered into in support of the Company's branch operations. The Company's branch locations operated under lease agreements have all been designated as operating leases. The Company does not lease equipment under operating leases, nor does it have leases designated as finance leases. The following table presents, as ofMarch 31, 2023 , contractually obligated lease payments due under non-cancelable operating leases by payment date (dollars in thousands). Less than one year$ 383 One to three years 665 Three to five years 680 Over five years 927 Total$ 2,655 OnJanuary 27, 2023 , we completed the sale of certain assets, deposits and other liabilities associated with theAlice andVictoria, Texas branch locations toFirst Community Bank . Upon the completion of the sale, we recorded$0.3 million of occupancy expense to terminate the remaining contractually obligated lease payments due under non-cancelable operating leases. 55
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