Investar Holding Corporation — 2018 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2018. This is an annual filing, not a standalone fourth-quarter report. The company is a Louisiana bank holding company operating through Investar Bank, serving individuals and small and midsized businesses. Its main markets were in Louisiana; the Mainland Bank acquisition expanded its footprint into southeast Texas after year-end.
Financial performance and condition
| Metric | 2018 | 2017 |
|---|---|---|
| Total assets at year-end | $1.786 billion | $1.623 billion |
| Loans, net of allowance, at year-end | $1.391 billion | $1.251 billion |
| Total deposits at year-end | $1.362 billion | $1.225 billion |
| Net interest income | $57.4 million | $42.5 million |
| Net income | $13.6 million | $8.2 million |
| Diluted earnings per share | $1.39 | $0.96 |
| Net interest margin | 3.61% | 3.39% |
| Return on average assets / equity | 0.81% / 7.68% | 0.62% / 5.65% |
| Efficiency ratio | 67.89% | 69.80% |
Interest income was $73.9 million and interest expense was $16.5 million. Noninterest income was $4.3 million and noninterest expense was $41.9 million. The loan-loss provision was $2.6 million. The lower effective tax rate—21.1%, versus 34.1% in 2017—primarily reflected the federal corporate tax rate reduction under the Tax Cuts and Jobs Act.
Cash flow from operating activities was $16.4 million; investing activities used $182.4 million and financing activities provided $152.7 million. Cash and cash equivalents fell by $13.3 million to $17.1 million. Year-end stockholders’ equity was $182.3 million, and the allowance for loan losses was $9.5 million, or 0.67% of loans.
Total borrowings were $232.5 million, including $206.5 million of Federal Home Loan Bank advances, $18.2 million of subordinated debt, $5.8 million of junior subordinated debt, and $2.0 million of repurchase agreements. The Bank had $481.7 million of additional FHLB borrowing capacity and $60 million of unsecured credit lines available, with no balance drawn on those lines. The Bank was classified as well capitalized; its year-end total risk-based capital ratio was 13.31%.
Changes versus the prior comparable period
- Net income increased 65.9%, mainly reflecting growth in interest-earning assets, including organic loan growth and loans acquired in 2017. Net interest income rose 34.9%.
- Loans and deposits each grew about 11% year over year. Commercial and industrial loans increased to $210.9 million from $135.4 million; consumer loans declined to $46.0 million from $76.3 million.
- Interest expense rose 52.6% to $16.5 million as funding balances and costs increased. Noninterest expense rose 29.5% to $41.9 million, chiefly due to staffing, branch operations, and acquisition-related costs.
- Nonperforming loans increased to $5.9 million, or 0.42% of loans, from $3.7 million, or 0.29%. Net charge-offs were $1.0 million, versus $0.7 million.
- Cash dividends declared rose to $0.17 per share from $0.10. The company repurchased 132,484 shares during 2018.
Business developments, outlook, and risks
- The company completed the Citizens and BOJ acquisitions in 2017. On March 1, 2019, after the reporting date, it completed the Mainland Bank acquisition for 763,849 shares. Mainland reported approximately $125.5 million in assets, $83.6 million in gross loans, and $107.6 million in deposits at closing; purchase accounting fair values were still being evaluated.
- Management described a continued growth strategy combining relationship-based lending, branch expansion, and selective acquisitions. It expected to open two de novo branches in 2019. No specific earnings or revenue guidance was provided.
- Management cited higher interest-earning asset yields and growth as drivers of results, while noting rising funding costs and increased operating expenses. The 2018 rate environment included four Federal Reserve rate increases.
- Key exposures include geographic concentration in southern Louisiana, real estate-backed and commercial lending, interest-rate and deposit-cost sensitivity, and natural disasters such as hurricanes and floods. The energy sector represented approximately 2.6% of loans; management warned that a prolonged oil and gas downturn could affect its markets.
- Other notable risks include the integration and execution of the first expansion outside Louisiana, cybersecurity and third-party service providers, and the transition from LIBOR, which affected some contracts and hedges and was expected to be discontinued or replaced after 2021.
- CECL, the expected-credit-loss accounting standard, was scheduled to become effective for the company on January 1, 2020. Management had not quantified the impact and expected the standard could increase allowance requirements.
- Other unusual items: a $0.6 million write-down of an other-real-estate-owned property in fourth-quarter 2018; the property was sold in January 2019 at its recorded value. The company also recognized a $0.3 million decrease in fair value of equity securities under a newly adopted accounting standard.
Ernst & Young issued unqualified opinions on the 2018 and 2017 consolidated financial statements and on internal control over financial reporting. Management and the auditor concluded that internal control was effective as of December 31, 2018. The company reported no legal proceedings expected to have a material adverse effect, while noting that litigation outcomes are inherently uncertain.
Important facts for investors to verify
- Whether loan growth and the shift toward commercial lending can be sustained without further deterioration in credit quality; review nonperforming loans, troubled debt restructurings, and acquired-loan performance.
- Whether the $9.5 million allowance remains adequate, particularly given the increase in nonperforming loans and the upcoming CECL adoption.
- How deposit pricing, time-deposit maturities, FHLB funding, and interest-rate movements affect net interest margin and liquidity.
- The final fair values, integration costs, and realized benefits of the Mainland acquisition, including the company’s entry into Texas.
- Whether branch expansion and higher staffing and operating costs produce the expected revenue growth and efficiency improvements.
- The company’s detailed quarterly results and cash-flow drivers, and its progress on LIBOR transition planning and other key risk controls.