Investar Holding Corporation — 2017 Form 10-K
Business context and reporting period. This annual report covers the fiscal year ended December 31, 2017. Investar is a Louisiana bank holding company operating through Investar Bank, serving individuals and small and midsize businesses primarily in southern Louisiana. It reported 20 full-service branches and managed its banking business as one reportable segment.
Financial performance and position
| Metric | 2017 | 2016 |
|---|---|---|
| Total assets, year-end | $1.623 billion | $1.159 billion |
| Loans, gross, year-end | $1.259 billion | $893.4 million |
| Deposits, year-end | $1.225 billion | $907.8 million |
| Net interest income | $42.5 million | $34.7 million |
| Net income | $8.2 million | $7.9 million |
| Diluted earnings per share | $0.96 | $1.10 |
| Net interest margin | 3.39% | 3.32% |
| Return on average assets / equity | 0.62% / 5.65% | 0.71% / 6.99% |
| Efficiency ratio | 69.80% | 66.25% |
- Total revenue, calculated as net interest income plus noninterest income, was $46.3 million? The filing reports $42.5 million of net interest income and $3.8 million of noninterest income, totaling approximately $46.3 million; both components are reported separately.
- Provision for loan losses was $1.5 million, down from $2.1 million. Net charge-offs were $0.7 million, or 0.07% of average loans. The allowance was $7.9 million, 0.63% of loans and 214% of nonperforming loans.
- Nonperforming assets were 0.46% of total assets; nonperforming loans were 0.29% of total loans. Nonaccrual loans rose to $3.5 million from $2.0 million. All 18 reported troubled debt restructurings, totaling $1.6 million, were performing under modified terms.
- Operating cash flow was $9.5 million, compared with $37.3 million in 2016. Investing activities used $98.3 million and financing activities provided $89.9 million. Cash and cash equivalents ended the year at $30.4 million.
- Total borrowings were $212.6 million, including $166.7 million of FHLB advances, $21.9 million of repurchase agreements, $18.2 million carrying value of subordinated debt, and $5.8 million of junior subordinated debt. Stockholders’ equity was $172.7 million; total equity was 10.64% of assets.
- Investar Bank’s year-end capital ratios were 11.63% leverage, 13.35% common equity Tier 1 and Tier 1 risk-based, and 13.95% total risk-based. The Bank was classified as well capitalized.
Material changes versus prior year
- Assets grew 40%, loans 41%, and deposits 35%, with a substantial portion of growth from the Citizens and BOJ acquisitions. Excluding acquired deposits, deposits declined 1.2%; management cited a planned reduction in reliance on non-retail time deposits.
- On July 1, Investar acquired Citizens for $45.8 million cash, adding approximately $251 million of assets, $129 million of loans and $212 million of deposits. On December 1, it acquired BOJ for $3.95 million cash and 799,559 shares, adding approximately $152 million of assets, $103 million of loans and $126 million of deposits. The acquisitions added $14.4 million of goodwill.
- Net interest income rose 22%, helped by balance-sheet growth and higher asset yields; net interest margin increased 7 basis points. Interest expense also increased, reflecting higher funding costs and new debt.
- Net income increased 4%, but diluted EPS declined from $1.10 to $0.96, primarily because of shares issued in a public offering and the BOJ acquisition. The offering generated $32.5 million net proceeds; Investar also issued $18.6 million of subordinated notes.
- Noninterest income declined 30% to $3.8 million, chiefly as loan-servicing income and one-time fixed-asset gains decreased. Noninterest expense rose 21%, including $1.9 million of acquisition costs and higher staffing and operating costs. ROA, ROE and the efficiency ratio weakened.
- Fourth-quarter 2017 net income was $2.284 million and diluted EPS was $0.25, compared with $1.848 million and $0.26 in fourth-quarter 2016.
Outlook, commentary, risks and unusual items
- Management described continued organic growth, branch expansion and selective acquisitions as strategic priorities, while emphasizing disciplined acquisition pricing and maintaining credit quality. No numerical earnings or growth guidance was provided.
- Management expected the effective tax rate to be approximately 20% beginning in 2018 following the Tax Cuts and Jobs Act. The law reduced the federal corporate rate to 21%; Investar recorded a $0.3 million tax expense from revaluing deferred tax balances in 2017, and said its accounting remained subject to refinement.
- Interest-rate modeling estimated net interest income would decrease 1.8% under an immediate 100-basis-point rise and increase 4.6% under a 100-basis-point decline. Larger modeled shocks showed a 5.4% decrease at +300 basis points and a 2.2% increase at -200 basis points. These are scenario estimates, not forecasts.
- Key risks include geographic concentration in southern Louisiana, real-estate collateral exposure, commercial real-estate and construction lending, loan seasoning, acquisition integration and goodwill impairment, deposit competition and funding costs, interest-rate changes, hurricanes and flooding, cyber and vendor disruptions, and extensive banking regulation. Approximately 83% of loans had real estate as a primary or secondary collateral component; energy-sector loans were approximately 1% of total loans.
- Available liquidity included $401 million of additional FHLB capacity and $55 million of unused unsecured lines. Core deposits funded 66% of assets, down from 76% in 2016. The filing reported $174.3 million of loan commitments and $3.8 million of standby letters of credit.
- The company reported no legal proceeding expected to have a material adverse effect and no material unresolved contingencies identified in the filing. The financial-statement audit opinion was unqualified. Management and the auditor reported effective internal controls, but BOJ’s controls—covering 9% of consolidated assets—were excluded from the year-end assessment.
Important facts for investors to verify
- How the Citizens and BOJ integrations perform, including realized cost savings, deposit retention, acquired-loan credit performance and final purchase-accounting adjustments.
- Whether asset quality trends warrant higher reserves: nonaccrual loans increased, the allowance-to-loans ratio fell, and acquired loans were recorded at fair value rather than initially included in the allowance.
- Whether deposit composition and funding costs remain supportive as time deposits mature and market rates change; review the $351.996 million of scheduled 2018 time-deposit maturities.
- Whether earnings growth can absorb acquisition, staffing and operating costs while improving ROA, ROE and the efficiency ratio, and whether the expected lower 2018 tax rate materializes.
- Confirm cash-flow trends and liquidity needs alongside loan growth, increased FHLB borrowing and the concentration of lending and collateral in Louisiana.