Investar (ISTR) - 2019 Q4 - Annual Report

Part I Item 1. Business Investar Holding Corporation, a financial holding company with $2.1 billion in assets, provides commercial banking services in south Louisiana, southeast Texas, and west Alabama, growing through organic expansion and strategic acquisitions - Financial Snapshot as of December 31, 2019 (in billions) | Metric | Value (in billions) | | :--- | :--- | | Total Assets | $2.1 | | Net Loans | $1.7 | | Total Deposits | $1.7 | | Stockholders' Equity | $0.242 | - The company's primary markets are south Louisiana (86% of deposits), southeast Texas, and west Alabama, served by 30 full-service branches[13] - Growth strategy is a combination of organic expansion and strategic acquisitions, with six whole-bank acquisitions completed since the bank was chartered[13][26] - Income from lending activities constituted 85% of total revenue in 2019, with an increased focus on commercial real estate and commercial and industrial loans[19] Operations The company's community banking segment generates 85% of its revenue from lending, with a diversified loan portfolio focused on commercial real estate and industrial loans, complemented by a full suite of deposit services - Loan Portfolio Composition (December 31, 2019) | Loan Category | Percentage of Total Loans | | :--- | :--- | | Commercial Real Estate | 48% | | Commercial and Industrial | 19% | | One-to-four family residential | 19% | | Construction and development | 12% | | Consumer loans | 2% | - The bank has been exiting the indirect auto loan origination business since December 2015, with the remaining portfolio having a weighted average term of 2 years at the end of 2019[23] - The company offers a competitive suite of cash management products for business clients, including remote deposit capture, virtual vault, and ACH origination[24] Acquisition Activity The company actively pursues acquisitions, completing four whole-bank deals since 2017 and expanding into Texas and Alabama, alongside a pending acquisition and recent branch purchases - Recent and Pending Acquisitions | Target | Completion Date | Location | Key Details | | :--- | :--- | :--- | :--- | | Citizens Bancshares, Inc. | July 1, 2017 | Louisiana | $45.8M cash; Acquired $250.7M assets, $212.2M deposits | | BOJ Bancshares, Inc. | Dec 1, 2017 | Louisiana | $22.7M consideration ($3.95M cash, 799,559 shares); Acquired $152.1M assets, $125.8M deposits | | Mainland Bank | March 1, 2019 | Texas | $18.6M consideration (763,849 shares); Acquired $128.4M assets, $107.6M deposits | | Bank of York | Nov 1, 2019 | Alabama | $15.0M cash; Acquired $102.0M assets, $85.0M deposits | | Cheaha Financial Group, Inc. | Pending | Alabama | Definitive agreement for ~$41.1M cash. Cheaha had $209.6M assets, $179.0M deposits at YE 2019 | - In February 2020, the Bank acquired two branches from PlainsCapital Bank in Texas, adding approximately $45.9 million in loans and $37.3 million in deposits[31] Competition Investar competes in an intense financial market by leveraging its community bank approach, strong local relationships, and quality service, viewing market consolidation as a growth opportunity - Deposit Market Share (as of June 30, 2019) | Location | Investar Total Deposits (in millions) | Investar Share of Deposits | | :--- | :--- | :--- | | Baton Rouge, LA | $749 | 4.0% | | New Orleans, LA | $198 | 1.0% | | Lafayette, LA | $171 | 2.5% | | Evangeline Parish, LA | $190 | 30.2% | | East/West Feliciana Parishes, LA | $132 | 27.6% | | Houston, TX | $113 | 0.1% | | Sumter County, AL (pro forma) | $82 | 41.8% | - The company believes its local leadership, responsive service, and competitive products allow it to compete effectively against larger institutions[15][35] Supervision and Regulation As a financial holding company, Investar and its subsidiary bank are subject to extensive federal and state banking regulations, including the Dodd-Frank Act, governing capital, activities, and consumer protection - The Company is a registered financial holding company supervised by the Federal Reserve, and the Bank is a national bank supervised by the OCC[39] - The Dodd-Frank Act has had a profound effect on the industry, establishing the Consumer Financial Protection Bureau (CFPB), increasing deposit insurance, and altering capital requirements[41][42] - Minimum Regulatory Capital Ratios (including conservation buffer) | Ratio | Minimum Requirement | | :--- | :--- | | Common Equity Tier 1 to Risk-Weighted Assets | 7.0% | | Tier 1 Capital to Risk-Weighted Assets | 8.5% | | Total Capital to Risk-Weighted Assets | 10.5% | | Tier 1 Capital to Average Assets (Leverage) | 4.0% | - As of December 31, 2019, the Bank met the requirements to be categorized as "well capitalized" under the prompt corrective action framework[54] Item 1A. Risk Factors The company faces significant business risks from economic conditions, multi-state growth, management dependence, and geographic concentration, alongside industry risks from competition, regulation, and investment risks like stock price volatility Risks Related to our Business Business risks include economic dependency on primary markets, integration challenges from growth strategies, real estate loan concentration, increased allowance for loan losses from CECL, and LIBOR cessation impacts - The company's financial performance is highly dependent on the business environment in its primary markets of south Louisiana, southeast Texas, and west Alabama, with the coronavirus outbreak noted as a significant risk to economic activity[89][90] - Approximately 79% of the total loan portfolio has real estate as a primary or secondary component of collateral, exposing the company to risks from a downturn in the real estate market[101] - The adoption of the new Current Expected Credit Loss (CECL) accounting standard, effective for the company on January 1, 2023, is likely to result in an increase in the allowance for loan losses[110] - The planned cessation of LIBOR after 2021 creates uncertainty and risk for the company's LIBOR-linked financial instruments, including loans, debt, and hedging products that extend beyond 2021[118] Risks Related to Our Industry The company operates in a highly regulated industry, facing increased compliance costs from federal and state laws, and risks of sanctions from noncompliance with consumer protection and anti-money laundering regulations - The company is subject to extensive regulation and supervision under federal and state banking laws, with the Dodd-Frank Act significantly changing the regulatory structure and increasing compliance burdens[153][154] - Failure to comply with the Community Reinvestment Act (CRA) and other fair lending laws could result in sanctions, including restrictions on mergers, acquisitions, and branch expansion[158] - Noncompliance with the Bank Secrecy Act and other anti-money laundering regulations could lead to significant fines, regulatory actions, and reputational damage[159] Risks Related to an Investment in our Common Stock Investment in common stock carries risks of price volatility, dividend policy changes due to regulatory restrictions, and potential anti-takeover provisions that could limit shareholder value - The company's ability to pay dividends is dependent on receiving dividends from its subsidiary, Investar Bank, which is subject to numerous legal and regulatory restrictions[166][167] - Anti-takeover provisions in corporate documents and banking laws could discourage potential acquisition proposals and delay or prevent a change in control[168][170] - An investment in the company's common stock is not an insured deposit and is subject to risk of loss[172] Item 1B. Unresolved Staff Comments The company reports no unresolved staff comments from the SEC - There are no unresolved staff comments[174] Item 2. Properties The company operates 30 branch offices across Louisiana, Texas, and Alabama, with its main office in Baton Rouge, owning most locations while leasing some in Texas - The main executive and operations center is located at 10500 Coursey Boulevard in Baton Rouge, Louisiana[175] - The company operates 30 branch offices across Louisiana, Texas, and Alabama, with most facilities in Louisiana and Alabama owned, while some in Texas are leased[175][176] Item 3. Legal Proceedings The company is not currently party to any legal proceedings expected to materially adversely affect its business, financial condition, or results of operations - The company reports no material legal proceedings[179] Item 4. Mine Safety Disclosures This item is not applicable - This item is not applicable to the company[180] Part II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock trades on Nasdaq under "ISTR," with a history of quarterly dividends since 2011, and repurchased 127 shares in Q4 2019 - The company's common stock trades on the Nasdaq Global Market under the symbol "ISTR"[182] - The company has a history of paying quarterly dividends since 2011, but future payments are at the discretion of the board and are subject to various legal and regulatory restrictions[183][184] - Issuer Purchases of Equity Securities (Q4 2019) | Period | Total Shares Purchased | Average Price Paid per Share | | :--- | :--- | :--- | | Oct 1 - Oct 31, 2019 | 127 | $23.70 | | Nov 1 - Nov 30, 2019 | — | — | | Dec 1 - Dec 31, 2019 | — | — | Item 6. Selected Financial Data Selected financial data for 2019 shows consistent growth in assets, loans, and deposits, with net income increasing to $16.8 million and improved performance ratios like Return on Average Assets at 0.85% - Selected Financial Data (in thousands, except per share data) | Metric | 2019 | 2018 | 2017 | | :--- | :--- | :--- | :--- | | Financial Condition | | | | | Total Assets | $2,148,916 | $1,786,469 | $1,622,734 | | Total Gross Loans | $1,681,275 | $1,391,371 | $1,250,888 | | Total Deposits | $1,707,706 | $1,361,731 | $1,225,237 | | Total Stockholders' Equity | $241,976 | $182,262 | $172,729 | | Income Statement | | | | | Net Interest Income | $64,818 | $57,370 | $42,517 | | Net Income | $16,839 | $13,606 | $8,202 | | Per Share Data | | | | | Diluted EPS | $1.66 | $1.39 | $0.96 | | Book Value Per Share | $21.55 | $19.22 | $18.15 | | Performance Ratios | | | | | Return on Average Assets | 0.85% | 0.81% | 0.62% | | Return on Average Equity | 8.21% | 7.68% | 5.65% | | Net Interest Margin | 3.51% | 3.61% | 3.39% | Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Management attributes the 23.8% net income increase in 2019 to strong interest-earning asset growth from organic expansion and acquisitions, despite a slight net interest margin compression, while maintaining strong credit quality and capital ratios - Net income for 2019 was $16.8 million, a 23.8% increase from 2018, primarily due to growth in interest-earning assets[230] - Total assets increased by 20.3% to $2.1 billion, and total loans grew by 20.8% to $1.7 billion at year-end 2019[231] - The company completed two acquisitions in 2019: Mainland Bank in Texas and Bank of York in Alabama, which significantly contributed to asset and deposit growth[232][233] - Net interest income grew 13.0% to $64.8 million in 2019, while the net interest margin decreased 10 basis points to 3.51% compared to 2018[276] Financial Condition As of December 31, 2019, the company's financial condition strengthened with total assets reaching $2.1 billion, driven by significant growth in loans and deposits from organic expansion and acquisitions, alongside managed borrowings - Loan Portfolio Composition (in thousands) | Loan Type | Dec 31, 2019 | Dec 31, 2018 | | :--- | :--- | :--- | | Commercial Real Estate (Owner & Nonowner) | $731,060 | $627,004 | | Commercial and Industrial | $323,786 | $210,924 | | 1-4 Family Residential | $321,489 | $287,137 | | Construction and Land Development | $197,797 | $157,946 | | Consumer | $29,446 | $45,957 | | Total Loans | $1,691,975 | $1,400,825 | - Total deposits grew by $346.0 million (25.4%) to $1.7 billion, with noninterest-bearing deposits showing strong growth of 61.8% to $351.9 million[256] - Advances from the FHLB decreased by $74.9 million to $131.6 million, as the company utilized available capital for repayments[260] Results of Operations Net income for 2019 increased 23.8% to $16.8 million, driven by higher net interest income from asset growth, despite a slight margin decline, and supported by increased noninterest income, partially offset by higher noninterest expenses - Performance Summary | Metric | 2019 | 2018 | | :--- | :--- | :--- | | Net Income | $16.8M | $13.6M | | Diluted EPS | $1.66 | $1.39 | | Return on Average Assets | 0.85% | 0.81% | | Return on Average Equity | 8.21% | 7.68% | - The increase in net interest income was driven by a $12.6 million increase due to higher asset volume and a $3.0 million increase due to higher rates, partially offset by an $8.1 million increase in interest expense[231] - Noninterest income increased by $1.9 million, primarily due to a $0.9 million increase in other operating income and a $0.6 million positive change in the fair value of equity securities[287] - Noninterest expense increased by $6.3 million, with salaries and employee benefits rising by $3.2 million due to acquisitions and new branches[303][304] Risk Management The company actively manages credit, interest rate, and liquidity risks, maintaining low nonperforming loans, an adequate allowance for loan losses, and sufficient liquidity, while monitoring interest rate sensitivity - Asset Quality Ratios | Metric | Dec 31, 2019 | Dec 31, 2018 | | :--- | :--- | :--- | | Nonperforming Loans to Total Loans | 0.37% | 0.42% | | Allowance for Loan Losses to Total Loans | 0.63% | 0.67% | | Allowance for Loan Losses to Nonperforming Loans | 171% | 159% | | Net Charge-offs to Average Loans | 0.04% | 0.08% | - The allowance for loan losses increased to $10.7 million at year-end 2019 from $9.5 million in 2018 to support organic loan growth[319] - Interest Rate Sensitivity Analysis (as of Dec 31, 2019) | Rate Shock (basis points) | Estimated Change in Net Interest Income | | :--- | :--- | | +200 | (0.1)% | | +100 | 0.1% | | -100 | (3.0)% | - The company had $594.6 million in remaining credit available from the FHLB at December 31, 2019[356] Item 7A. Quantitative and Qualitative Disclosures About Market Risk This section incorporates by reference the market risk disclosures from the "Risk Management" section within Item 7 - The required disclosures about market risk are included in the 'Risk Management' section of Item 7[380] Item 8. Financial Statements and Supplementary Data This section presents the company's consolidated financial statements for the fiscal year ended December 31, 2019, including balance sheets, income statements, cash flows, and accompanying notes, along with management's and auditor's reports Management's Report on Internal Control over Financial Reporting Management concluded that the company's internal control over financial reporting was effective as of December 31, 2019, excluding the recently acquired Bank of York operations - Management concluded that the company's internal control over financial reporting was effective as of December 31, 2019[385] Report of Independent Registered Public Accounting Firm Ernst & Young LLP issued unqualified opinions on both the consolidated financial statements and the effectiveness of the company's internal control over financial reporting as of December 31, 2019 - The independent auditor, Ernst & Young LLP, provided an unqualified opinion on both the consolidated financial statements and the effectiveness of internal control over financial reporting[388][397] Consolidated Financial Statements The consolidated financial statements show total assets of $2.15 billion and net income of $16.8 million for 2019, with net cash provided by operating and financing activities, and used in investing activities - Consolidated Balance Sheet Highlights (in thousands) | Account | Dec 31, 2019 | Dec 31, 2018 | | :--- | :--- | :--- | | Assets | | | | Cash and cash equivalents | $44,695 | $17,140 | | Loans, net | $1,681,275 | $1,391,371 | | Total Assets | $2,148,916 | $1,786,469 | | Liabilities & Equity | | | | Total Deposits | $1,707,706 | $1,361,731 | | Total Liabilities | $1,906,940 | $1,604,207 | | Total Stockholders' Equity | $241,976 | $182,262 | - Consolidated Income Statement Highlights (in thousands) | Account | 2019 | 2018 | 2017 | | :--- | :--- | :--- | :--- | | Net Interest Income | $64,818 | $57,370 | $42,517 | | Provision for Loan Losses | $1,908 | $2,570 | $1,540 | | Noninterest Income | $6,216 | $4,318 | $3,815 | | Noninterest Expense | $48,168 | $41,882 | $32,342 | | Net Income | $16,839 | $13,606 | $8,202 | Notes to Consolidated Financial Statements The notes provide detailed disclosures on accounting policies, business combinations, loan portfolio quality, investment securities, deposits, borrowings, regulatory capital, and employee benefit plans - Note 2 details the acquisitions of Mainland Bank for $18.6 million in stock and Bank of York for $15.0 million in cash during 2019, resulting in goodwill of $4.5 million and $4.2 million, respectively[494][500] - Note 4 provides a detailed breakdown of the loan portfolio, credit quality indicators, and activity in the allowance for loan losses, with 99.2% of the loan portfolio rated 'Pass' at year-end 2019[542][551] - Note 19 confirms that as of December 31, 2019, both the Company and the Bank were in compliance with all regulatory capital requirements, and the Bank was considered 'well capitalized'[693][694] Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure The company reported no changes in or disagreements with its accountants regarding accounting and financial disclosure - None reported[728] Item 9A. Controls and Procedures Management concluded that disclosure controls and procedures were effective, with no material changes to internal control over financial reporting during Q4 2019 - The CEO and CFO concluded that the company's disclosure controls and procedures were effective[729] - No material changes to internal control over financial reporting occurred in Q4 2019[730] Item 9B. Other Information No other information is reported - None reported[732] Part III Item 10. Directors, Executive Officers and Corporate Governance Information for this item is incorporated by reference from the 2020 Proxy Statement, detailing the company's adopted Code of Ethics and Code of Conduct - Information is incorporated by reference from the 2020 Proxy Statement[735] Item 11. Executive Compensation Executive compensation information is incorporated by reference from the company's 2020 Proxy Statement - Information is incorporated by reference from the 2020 Proxy Statement[737] Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Security ownership and related stockholder matters are incorporated by reference from the 2020 Proxy Statement, with 396,411 securities available for future issuance under equity compensation plans - Equity Compensation Plan Information (as of Dec 31, 2019) | Plan Category | Securities to be issued upon exercise | Weighted-average exercise price | Securities remaining available for future issuance | | :--- | :--- | :--- | :--- | | Approved by security holders | 68,772 | $24.35 | 396,411 | | Not approved by security holders | 288,442 | $15.20 | — | | Total | 357,214 | $16.96 | 396,411 | Item 13. Certain Relationships and Related Transactions, and Director Independence Information on certain relationships, related transactions, and director independence is incorporated by reference from the 2020 Proxy Statement - Information is incorporated by reference from the 2020 Proxy Statement[742] Item 14. Principal Accountant Fees and Services Principal accountant fees and services information is incorporated by reference from the company's 2020 Proxy Statement - Information is incorporated by reference from the 2020 Proxy Statement[743] Part IV Item 15. Exhibits, Financial Statement Schedules This section lists the financial statements, schedules, and exhibits filed as part of the Form 10-K report, including consolidated financial statements and various corporate documents - This section provides an index of all financial statements and exhibits filed with the Form 10-K[746] Item 16. Form 10-K Summary This item is not applicable - This item is not applicable[752]