Investar Holding Corporation — FY 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. Investar is a Louisiana-based bank holding company operating through Investar Bank, serving individuals and small-to-medium-sized businesses primarily in south Louisiana, with expansion into southeast Texas and west Alabama. The company reported one operating segment.
Financial results and position
- Profit and revenue: Net income was $16.8 million, up 23.8% from $13.6 million in 2018; diluted EPS was $1.66 versus $1.39. Net interest income plus noninterest income was $71.0 million, compared with $61.7 million. The effective tax rate was 19.7%, down from 21.1%.
- Interest income and margins: Net interest income rose 13.0% to $64.8 million. Net interest margin declined 10 basis points to 3.51%. Interest income increased to $89.4 million, while interest expense rose 49.0% to $24.6 million, reflecting higher funding costs and increased interest-bearing liabilities.
- Expenses and efficiency: Noninterest expense increased 15.0% to $48.2 million, including $2.1 million of acquisition expense. The efficiency ratio was 67.81%, essentially unchanged from 67.89%.
- Assets and lending: Total assets grew 20.3% to $2.149 billion. Loans, net of allowance, were $1.681 billion, up 20.8%; gross loans were $1.692 billion. Commercial and industrial loans grew to 19.2% of gross loans, from 15.0% in 2018.
- Deposits and liquidity: Deposits increased 25.4% to $1.708 billion; noninterest-bearing deposits rose 61.8% to $351.9 million. Cash and cash equivalents were $44.7 million, versus $17.1 million a year earlier. Core deposits funded 68% of total assets. The Bank had $594.6 million of additional FHLB borrowing capacity and $60 million of unused unsecured credit lines; it reported no brokered deposits.
- Debt and capital: Total borrowings were $183.3 million, compared with $232.5 million in 2018. The company issued $25 million of 5.125% subordinated notes due 2029; the Bank’s FHLB advances ended the year at $131.6 million. Stockholders’ equity was $242.0 million. The Bank’s leverage, common equity Tier 1, Tier 1 risk-based, and total risk-based capital ratios were 10.77%, 12.43%, 12.43%, and 13.03%, respectively; it met well-capitalized standards.
- Cash flow: Operating activities provided $18.6 million, investing activities used $103.1 million, and financing activities provided $112.1 million. Net cash increased $27.6 million. Investing outflows included $162.0 million of net loan growth; financing included $28.5 million of net common-stock proceeds and $24.6 million of net subordinated-debt proceeds.
- Credit quality: Nonperforming loans were $6.3 million, or 0.37% of loans, versus $5.9 million, or 0.42%, in 2018. The allowance for loan losses was $10.7 million, equal to 0.63% of loans and 171% of nonperforming loans. Net charge-offs were 0.04% of average loans.
Changes versus 2018 and significant events
- Growth reflected organic lending and deposits, the March acquisition of Mainland Bank in Texas and the November acquisition of Bank of York in Alabama. The acquisitions added approximately $230 million of assets at fair value and $192.6 million of deposits at closing.
- On December 20, 2019, Investar agreed to acquire Cheaha Financial Group for approximately $41.1 million in cash; the deal was pending at year-end. Cheaha reported $209.6 million of assets and $179.0 million of deposits.
- Investar completed the acquisition of two PlainsCapital Bank branches in Texas on February 21, 2020, adding approximately $45.9 million of loans and $37.3 million of deposits. This occurred after the reporting period.
- In the fourth quarter, the company raised $28.5 million net through a common-stock offering and issued $25 million of subordinated notes. It repurchased 359,906 shares during 2019 for $8.3 million and paid $2.2 million in dividends.
- Full-year diluted EPS improved, but fourth-quarter net income was $3.3 million versus $3.3 million in Q4 2018; diluted EPS was $0.32 versus $0.34. Q4 2019 provision expense increased to $736,000 from $593,000.
Outlook, commentary and risks
- Management described a strategy of relationship-based organic growth, acquisitions and branch expansion. It expected to open two de novo branches in 2020. The filing gives no specific earnings or revenue guidance.
- The filing warns that the coronavirus outbreak and related economic disruption, identified since January 2020, could weaken borrower repayment, collateral values, customer demand and operations. The Federal Reserve cut rates in March 2020; the filing’s rate simulation estimated net interest income down 3.0% under an immediate 100-basis-point decline, with results dependent on assumptions.
- Key exposures include geographic concentration in south Louisiana (about 86% of deposits), real-estate-secured lending (about 79% of loans), commercial real estate and growing C&I lending, as well as energy-sector and severe-weather risks. Integration of acquisitions, competition for deposits, interest-rate changes, cyber and third-party risks, and regulatory requirements are also highlighted.
- CECL adoption was scheduled for January 1, 2023 for the company; management expected the new expected-loss model could increase the allowance but could not reasonably estimate the impact. Goodwill was $26.1 million, including $8.7 million recognized in 2019; no impairment was recorded.
- There were no material legal proceedings reported. The auditor issued unqualified opinions on the financial statements and internal control over financial reporting; the control assessment excluded Bank of York, acquired in November 2019.
Important facts for investors to verify
- Whether Cheaha’s acquisition closed, on what terms, and how the company funded and integrated it.
- How loan performance, criticized assets and allowance adequacy evolved, particularly in C&I, commercial real estate and acquired portfolios.
- Whether deposit growth remains sustainable and how deposit pricing and funding costs affect net interest margin.
- The realized impact of the 2020 economic disruption and rate changes on borrowers, credit losses, liquidity and earnings.
- Progress on branch expansion, acquisition integration, share repurchases and dividend capacity, including resulting dilution and capital effects.
- CECL implementation assumptions and the eventual effect on reserves and regulatory capital.