Investar Holding Corporation — 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016. The filing was signed March 9, 2017. Amounts are in U.S. dollars; financial results are consolidated unless noted.
Business context
Investar is a Louisiana bank holding company operating primarily through Investar Bank, a community bank serving individuals and small and medium-sized businesses in southern Louisiana. At year-end, the company reported $1.159 billion in assets, $893.4 million in loans before allowance, $907.8 million in deposits, and $112.8 million in shareholders’ equity. Its strategy emphasizes relationship banking, organic growth, and selective acquisitions.
Financial performance and condition
- Revenue and earnings: Net interest income rose 10% to $34.7 million. Net income increased 11% to $7.88 million; diluted EPS was $1.10 versus $0.97 in 2015. Total interest income was $43.2 million and noninterest income was $5.5 million.
- Margins and returns: Net interest margin narrowed 29 basis points to 3.32%. Return on average assets declined to 0.71% from 0.77%; return on average equity increased to 6.99% from 6.60%. The efficiency ratio improved to 66.25% from 68.72%.
- Drivers and expenses: Loan and deposit growth supported earnings, but lower asset yields and higher funding costs compressed margin. Interest expense increased to $8.4 million from $5.9 million. Noninterest expense declined 2.6% to $26.6 million, partly reflecting the exit from indirect auto lending.
- Cash flow: Operating cash flow was $37.3 million, investing cash flow was negative $152.0 million, and financing cash flow was positive $123.1 million. Cash and cash equivalents ended the year at $29.4 million, up from $21.0 million.
- Loans and credit: Net loans were $886.4 million, up from $739.3 million. The allowance for loan losses was $7.1 million, or 0.79% of loans; provision expense was $2.1 million. Net charge-offs increased to $1.2 million from $0.4 million. Nonperforming loans were $2.0 million, or 0.22% of loans, versus $2.4 million, or 0.32%, a year earlier.
- Other real estate: Other real estate owned rose to $4.1 million from $0.7 million, including a $3.8 million transfer from loans, largely commercial real estate.
- Liquidity and funding: Deposits grew 23% to $907.8 million; noninterest-bearing deposits increased 20% to $108.4 million. FHLB advances fell to $82.8 million from $127.5 million; repurchase agreements were $39.1 million. The company had $344.1 million of additional FHLB capacity and $55.0 million in unused unsecured lines. Core deposits funded 76% of assets, versus 69% in 2015.
- Debt and capital: Year-end borrowings included $82.8 million of FHLB advances, $39.1 million of repurchase agreements, $3.6 million of junior subordinated debt, and $1.0 million drawn on a secured revolving line. The Bank was categorized as well capitalized; its leverage ratio was 10.03%, common equity Tier 1 ratio 11.67%, and total risk-based capital ratio 12.39%. These ratios were lower than in 2015 but above well-capitalized thresholds.
Material changes versus 2015
- Assets increased 12%, loans increased about 20%, and deposits increased 23%, primarily through organic growth.
- Net interest income grew, but net interest margin fell from 3.61% to 3.32% as funding costs rose and earning-asset yields declined.
- Noninterest income fell 34.5%, mainly because gains on loan sales declined by $4.0 million after Investar stopped originating indirect auto loans for sale. A $1.3 million gain on the sale of a branch property partly offset the decline.
- Net charge-offs rose, while nonperforming loans declined. The allowance-to-loan ratio edged down from 0.82% to 0.79%.
- Available-for-sale securities had $3.2 million of net unrealized losses at year-end, which management attributed primarily to interest-rate changes and considered temporary; accumulated other comprehensive loss increased to $2.1 million.
Outlook, commentary, and risks
- No formal earnings or financial guidance is provided. Management expected two new Louisiana branches to open in 2017, subject to regulatory approval, and said it did not anticipate consumer loan sales in 2017.
- In March 2017, after year-end, Investar agreed to acquire Citizens Bancshares and Citizens Bank for $45.8 million in cash. Citizens reported $245.5 million in assets, $126.8 million in net loans, and $208.7 million in deposits at December 31, 2016. Closing depends on regulatory approvals; the filing notes review of capital, compliance, safety and soundness, and fair-lending matters, including completion of compliance improvements requested by the FDIC.
- Flooding in the Baton Rouge area in August 2016 led to a 90-day deferral plan covering approximately $23.5 million of loans. Management was continuing to assess borrower effects and potential reserve needs.
- Interest-rate exposure is material: management’s model estimated that an immediate 100-basis-point increase would reduce 12-month net interest income by 2.1%, while a 100-basis-point decrease would increase it by 5.6%. The filing cautions that actual outcomes may differ from modeled results.
- Key risks include the concentration of lending and operations in southern Louisiana; real-estate and commercial-loan exposure; loan growth and seasoning; funding and deposit competition; interest-rate changes; natural disasters; acquisition integration and approvals; regulatory compliance; and cybersecurity and third-party technology dependence.
- The filing reports no material litigation and no material off-balance-sheet transactions expected to affect financial condition or results. The independent auditor issued unqualified opinions on the financial statements and internal control; management also concluded internal control was effective.
Important facts for investors to verify
- Track credit performance after the 2016 flooding, including delinquencies, deferrals, charge-offs, the allowance, and the increase in commercial real estate transfers to other real estate owned.
- Assess whether deposit growth remains durable and affordable, particularly given the increase in time deposits and online QwikRate deposits, and monitor borrowing levels and liquidity capacity.
- Monitor net interest margin, deposit repricing, and actual results against the disclosed interest-rate sensitivity estimates.
- Verify the timing, regulatory conditions, financing, and expected economics of the proposed Citizens acquisition, including any required compliance remediation.
- Distinguish recurring earnings from unusual items, especially the branch-property sale gain and the reduced loan-sale and servicing income following the auto-lending exit.
- Reconcile reported loan measures: the filing presents $893.4 million of loans before allowance and $886.4 million net of allowance; some narrative comparisons use differing loan figures or descriptions.