# Investar Holding Corp (ISTR) FY 2022 MD&A

Verbatim Item 7 Management's Discussion and Analysis from Investar Holding Corp's 10-K for fiscal year 2022.

SEC filing source: https://www.sec.gov/Archives/edgar/data/1602658/000143774923005810/istr20221231_10k.htm
Accession: 0001437749-23-005810
Filing date: 2023-03-08
Report date: 2022-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary. Published MD&A gate trimmed front/tail over-capture.
Confidence: high

Company profile: /company/ISTR/
All MD&A years: /company/ISTR/mda/
Previous year: /company/ISTR/mda/fy2021/ (FY 2021)
Next year: /company/ISTR/mda/fy2023/ (FY 2023)

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

This section presents management’s perspective on the financial condition and results of operations of Investar Holding Corporation (the “Company,” “we,” “our,” or “us”) and its wholly-owned subsidiary, Investar Bank, National Association (the “Bank”). The following discussion and analysis should be read in conjunction with the Company’s consolidated financial statements and related notes and other supplemental information included herein. Certain risks, uncertainties and other factors, including those set forth under Item 1A. Risk Factors in Part I, and elsewhere in this Annual Report on Form 10-K, may cause actual results to differ materially from those projected results discussed in the forward-looking statement appearing in this discussion and analysis.

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This annual report on Form 10-K, both in Management’s Discussion and Analysis of Financial Condition and Results of Operations, and elsewhere, contains forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These forward-looking statements include statements relating to our projected growth, anticipated future financial performance, changes in our allowance for loan or credit losses including due to the adoption of ASU 2016-13, anticipated future credit quality and our potential ability to achieve performance and strategic goals, as well as statements relating to the anticipated effects of these factors on our business, financial condition and results of operations. These statements can typically be identified through the use of words or phrases such as “may,” “should,” “could,” “predict,” “potential,” “believe,” “think,” “will likely result,” “expect,” “continue,” “will,” “anticipate,” “seek,” “estimate,” “intend,” “plan,” “projection,” “would” and “outlook,” or the negative version of those words or other comparable words or phrases of a future or forward-looking nature.

Our forward-looking statements contained herein are based on assumptions and estimates that management believes to be reasonable in light of the information available at this time. However, many of these statements are inherently uncertain and beyond our control and could be affected by many factors. Factors that could have a material effect on our business, financial condition, results of operations, cash flows and future growth prospects can be found in Item 1A. Risk Factors. These factors include, but are not limited to, the following, any one or more of which could materially affect the outcome of future events:

[[GREPCENT_TABLE]]
[["\u2022","the significant risks and uncertainties for our business, results of operations and financial condition, as well as our regulatory capital and liquidity ratios and other regulatory requirements caused by business and economic conditions generally and in the financial services industry in particular, whether nationally, regionally or in the markets in which we operate, including risks and uncertainties caused by the ongoing COVID-19 pandemic, potential continued higher inflation and interest rates, supply and labor constraints, the war in Ukraine and uncertainty regarding whether the United States Congress will raise the statutory debt limit;"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["\u2022","our ability to achieve organic loan and deposit growth, and the composition of that growth;"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["\u2022","changes (or the lack of changes) in interest rates, yield curves and interest rate spread relationships that affect our loan and deposit pricing, including potential continued increases in interest rates in 2023;"],["\u2022","our ability to identify and enter into agreements to combine with attractive acquisition partners, finance acquisitions, complete acquisitions after definitive agreements are entered into, and successfully integrate and grow acquired operations;"],["\u2022","the estimated 20% to 30% increase in our allowance for loan losses in the first quarter of 2023 and corresponding decrease in retained earnings of the after-tax amount, resulting from our adoption on January 1, 2023 of ASU 2016-13, and inaccuracy of the assumptions and estimates we make in establishing reserves for credit losses and other estimates;"],["\u2022","changes in the quality or composition of our loan portfolio, including adverse developments in borrower industries or in the repayment ability of individual borrowers;"],["\u2022","changes in the quality and composition of, and changes in unrealized losses in, our investment portfolio, including whether we may have to sell securities before their recovery of amortized cost basis and realize losses;"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["\u2022","the extent of continuing client demand for the high level of personalized service that is a key element of our banking approach as well as our ability to execute our strategy generally;"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["\u2022","our dependence on our management team, and our ability to attract and retain qualified personnel;"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["\u2022","cessation of the one-week and two-month U.S. dollar settings of LIBOR as of December 31, 2021 and announced cessation of the remaining U.S. dollar LIBOR settings after June 30, 2023, and the related effect on our LIBOR-based financial products and contracts, including, but not limited to, hedging products, debt obligations, investments and loans;"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["\u2022","the concentration of our business within our geographic areas of operation in Louisiana, Texas and Alabama;"]]
[[/GREPCENT_TABLE]]

29

Table of Contents

[[GREPCENT_TABLE]]
[["\u2022","concentration of credit exposure;"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["\u2022","any deterioration in asset quality and higher loan charge-offs, and the time and effort necessary to resolve problem assets;"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["\u2022","a reduction in liquidity, including as a result of a reduction in the amount of deposits we hold or other sources of liquidity;"],["\u2022","ongoing disruptions in the oil and gas industry due to the significant fluctuations in the price of oil and natural gas;"],["\u2022","data processing system failures and errors;"],["\u2022","cyberattacks and other security breaches;"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["\u2022","potential impairment of our goodwill and other intangible assets;"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["\u2022","our potential growth, including our entrance or expansion into new markets, and the need for sufficient capital to support that growth;"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["\u2022","the impact of litigation and other legal proceedings to which we become subject;"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["\u2022","competitive pressures in the commercial finance, retail banking, mortgage lending and consumer finance industries, as well as the financial resources of, and products offered by, competitors;"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["\u2022","the impact of changes in laws and regulations applicable to us, including banking, securities and tax laws and regulations and accounting standards, as well as changes in the interpretation of such laws and regulations by our regulators;"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["\u2022","changes in the scope and costs of FDIC insurance and other coverages;"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["\u2022","governmental monetary and fiscal policies, including the potential for the Federal Reserve Board to raise target interest rates one or more times during 2023;"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["\u2022","hurricanes, tropical storms, tropical depressions, floods, winter storms, tornadoes, and other adverse weather events, all of which have affected our market areas from time to time; other natural disasters; oil spills and other man-made disasters; acts of terrorism, an outbreak or intensifying of hostilities including the war in Ukraine or other international or domestic calamities, acts of God and other matters beyond our control; and"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["\u2022","other circumstances, many of which are beyond our control."]]
[[/GREPCENT_TABLE]]

The foregoing factors should not be construed as exhaustive and should be read together with the other cautionary statements included herein. If one or more events related to these or other risks or uncertainties materialize, or if our underlying assumptions prove to be incorrect, actual results may differ materially from what we anticipate. Accordingly, you should not place undue reliance on any such forward-looking statements.

Any forward-looking statement speaks only as of the date on which it is made, and we do not undertake any obligation to publicly update or review any forward-looking statement, whether as a result of new information, future developments or otherwise. New factors emerge from time to time, and it is not possible for us to predict which will arise. In addition, we cannot assess the impact of each factor on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. We qualify all of our forward-looking statements by these cautionary statements.

30

Table of Contents

Overview

Through our wholly-owned subsidiary Investar Bank, National Association, we provide full banking services, excluding trust services, tailored primarily to meet the needs of individuals, professionals, and small to medium-sized businesses. Our primary areas of operation are south Louisiana (approximately 76% of our total deposits as of December 31, 2022), including Baton Rouge, New Orleans, Lafayette, Lake Charles, and their surrounding areas; southeast Texas, primarily Houston and its surrounding area and Alabama, including York and Oxford and their surrounding areas. Our Bank commenced operations in 2006 and we completed our initial public offering in July 2014. On July 1, 2019, the Bank changed from a Louisiana state bank charter to a national bank charter and its name changed to Investar Bank, National Association. Our strategy includes organic growth through high quality loans and growth through acquisitions, including whole-bank acquisitions and strategic branch acquisitions. We currently operate 29 full service branches comprised of 21 full service branches in Louisiana, two full service branches in Texas, and six full service branches in Alabama. We have completed seven whole-bank acquisitions since 2011 and regularly review acquisition opportunities. In addition to our branches acquired through acquisitions, during our last three fiscal years, we opened two de novo branch locations.

We closed five branches during our last three fiscal years as we continued to evaluate opportunities to improve our branch network efficiency, leverage our digital initiatives and further reduce costs. Four of the branches had been acquired, and the closures involved anticipated synergies that resulted in significant cost savings. In 2022, we sold these five former branch locations and three tracts of land that were being held for future branch locations. On January 27, 2023, we completed our previously announced sale of certain assets, deposits and other liabilities associated with our Alice, Texas and Victoria, Texas branch locations to First Community Bank in order to focus more on our core markets. Of the Bank’s entire branch network, these two locations were geographically the most distant from our Louisiana headquarters. 

Our principal business is lending to and accepting deposits from individuals and small to medium-sized businesses in our areas of operation. We generate our income principally from interest on loans and, to a lesser extent, our securities investments, as well as from fees charged in connection with our various loan and deposit services. Our principal expenses are interest expense on interest-bearing customer deposits and borrowings, salaries and employee benefits, occupancy costs, data processing and other operating expenses. We measure our performance through our net interest margin, return on average assets, and return on average equity, among other metrics, while seeking to maintain appropriate regulatory leverage and risk-based capital ratios.

31

Table of Contents

For certain GAAP performance measures, see “Certain Performance Indicators” below. We also monitor changes in our tangible equity, tangible assets, tangible book value per share, and our efficiency ratio, shown in the section “Certain Performance Indicators: Non-GAAP Financial Measures” below.

Certain Performance Indicators

[[GREPCENT_TABLE]]
[["","As of and for the years ended December 31,"],["(In thousands, except share data)","","2022","","","2021(1)","","","2020(1)","","","2019(1)","","","2018"],["Financial Information"],["Total assets","$","2,753,807","","$","2,513,203","","$","2,321,181","","$","2,148,916","","$","1,786,469"],["Total stockholders' equity","","215,782","","","242,598","","","243,284","","","241,976","","","182,262"],["Net interest income","","89,785","","","83,814","","","73,534","","","64,818","","","57,370"],["Net income","","35,709","","","8,000","","","13,889","","","16,839","","","13,606"],["Diluted earnings per share","","3.50","","","0.76","","","1.27","","","1.66","","","1.39"],["Performance Ratios"],["Return on average assets","","1.37","%","","0.31","%","","0.61","%","","0.85","%","","0.81","%"],["Return on average equity","","15.63","","","3.22","","","5.77","","","8.21","","","7.68"],["Net interest margin","","3.67","","","3.53","","","3.49","","","3.51","","","3.61"],["Dividend payout ratio","","10.31","","","40.26","","","19.69","","","13.55","","","12.09"],["Capital Ratios"],["Total equity to total assets","","7.84","%","","9.65","%","","10.48","%","","11.26","%","","10.20","%"],["Tangible equity to tangible assets(2)","","6.37","","","8.04","","","9.22","","","9.96","","","9.20"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","(1)","Certain performance indicators includes the effect of acquisitions from the date of each acquisition. On March 1, 2019, the Company acquired Mainland Bank, by merger with and into the Bank. On November 1, 2019, the Company acquired Bank of York, by merger with and into the Bank. On February 21, 2020, the Bank acquired two branches from PlainsCapital Bank. On April 1, 2021, the Company acquired Cheaha Financial Group, Inc. and its wholly-owned subsidiary Cheaha Bank, by merger with and into the Company and Bank, respectively."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","(2)","Non-GAAP financial measure. See reconciliation below."]]
[[/GREPCENT_TABLE]]

Certain Performance Indicators: Non-GAAP Financial Measures

Our accounting and reporting policies conform to accounting principles generally accepted in the United States, or GAAP, and the prevailing practices in the banking industry. However, we also evaluate our performance based on certain additional metrics. The efficiency ratio, tangible book value per share, and the ratio of tangible equity to tangible assets are not financial measures recognized under GAAP and, therefore, are considered non-GAAP financial measures.

32

Table of Contents

Our management, banking regulators, financial analysts and investors use these non-GAAP financial measures to compare the capital adequacy of banking organizations with significant amounts of preferred equity and/or goodwill or other intangible assets, which typically stem from the use of the purchase accounting method of accounting for mergers and acquisitions. Tangible equity, tangible assets, tangible book value per share or related measures should not be considered in isolation or as a substitute for total stockholders’ equity, total assets, book value per share or any other measure calculated in accordance with GAAP. Moreover, the manner in which we calculate tangible equity, tangible assets, tangible book value per share and any other related measures may differ from that of other companies reporting measures with similar names. The following table reconciles, as of the dates set forth below, stockholders’ equity (on a GAAP basis) to tangible equity and total assets (on a GAAP basis) to tangible assets and calculates both our tangible book value per share and efficiency ratio (dollars in thousands).

[[GREPCENT_TABLE]]
[["","","As of and for the years ended December 31,"],["","","2022","","","2021","","","2020","","","2019","","","2018"],["Total stockholders\u2019 equity - GAAP","","$","215,782","","","$","242,598","","","$","243,284","","","$","241,976","","","$","182,262"],["Adjustments:"],["Goodwill","","","40,088","","","","40,088","","","","28,144","","","","26,132","","","","17,424"],["Core deposit intangible","","","2,959","","","","3,848","","","","3,988","","","","4,803","","","","2,263"],["Trademark intangible","","","100","","","","100","","","","100","","","","100","","","","100"],["Tangible equity","","$","172,635","","","$","198,562","","","$","211,052","","","$","210,941","","","$","162,475"],["Total assets - GAAP","","$","2,753,807","","","$","2,513,203","","","$","2,321,181","","","$","2,148,916","","","$","1,786,469"],["Adjustments:"],["Goodwill","","","40,088","","","","40,088","","","","28,144","","","","26,132","","","","17,424"],["Core deposit intangible","","","2,959","","","","3,848","","","","3,988","","","","4,803","","","","2,263"],["Trademark intangible","","","100","","","","100","","","","100","","","","100","","","","100"],["Tangible assets","","$","2,710,660","","","$","2,469,167","","","$","2,288,949","","","$","2,117,881","","","$","1,766,682"],["Total shares outstanding","","","9,901,847","","","","10,343,494","","","","10,608,869","","","","11,228,775","","","","9,484,219"],["Book value per share","","$","21.79","","","$","23.45","","","$","22.93","","","$","21.55","","","$","19.22"],["Effect of adjustments","","","(4.36",")","","","(4.25",")","","","(3.04",")","","","(2.76",")","","","(2.09",")"],["Tangible book value per share","","$","17.43","","","$","19.20","","","$","19.89","","","$","18.79","","","$","17.13"],["Total equity to total assets","","","7.84","%","","","9.65","%","","","10.48","%","","","11.26","%","","","10.20","%"],["Effect of adjustments","","","(1.47",")","","","(1.61",")","","","(1.26",")","","","(1.30",")","","","(1.00",")"],["Tangible equity to tangible assets","","","6.37","%","","","8.04","%","","","9.22","%","","","9.96","%","","","9.20","%"],["Efficiency ratio(1)"],["Noninterest expense","","$","60,865","","","$","63,062","","","$","57,131","","","$","48,168","","","$","41,882"],["Net interest income","","","89,785","","","","83,814","","","","73,534","","","","64,818","","","","57,370"],["Noninterest income","","","18,350","","","","12,042","","","","12,096","","","","6,216","","","","4,318"],["Efficiency ratio","","","56.29","%","","","65.79","%","","","66.72","%","","","67.81","%","","","67.89","%"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","(1)","Calculated as noninterest expense divided by the sum of net interest income (before provision for loan losses) and noninterest income."]]
[[/GREPCENT_TABLE]]

Critical Accounting Estimates

The preparation of our consolidated financial statements in accordance with GAAP requires us to make estimates and judgments that affect our reported amounts of assets, liabilities, income and expenses and related disclosure of contingent assets and liabilities. Although independent third parties are often engaged to assist us in the estimation process, management evaluates the results, challenges assumptions used and considers other factors which could impact these estimates. Actual results may differ from these estimates under different assumptions or conditions.

For more detailed information about our accounting policies, please refer to Note 1. Summary of Significant Accounting Policies, in the Notes to Consolidated Financial Statements contained in Item 8. Financial Statements and Supplementary Data. The following discussion presents our critical accounting estimates, which are those estimates made in accordance with GAAP that involve a significant level of estimation uncertainty and have had or are reasonably likely to have a material impact on our financial condition or results of operations. We believe that the judgments, estimates and assumptions that we use in the preparation of our consolidated financial statements are appropriate.

33

Table of Contents

Allowance for Loan Losses. One of the accounting policies most important to the presentation of our financial statements relates to the allowance for loan losses and the related provision for loan losses. The allowance for loan losses is established as losses are estimated through a provision for loan losses charged to earnings. Through December 31, 2022, the allowance for loan losses is based on the amount that management believes will be adequate to absorb probable losses inherent in the loan portfolio based on, among other things, evaluations of the collectability of loans and prior loan loss experience. The evaluations take into consideration such factors as changes in the nature and volume of the loan portfolio, overall portfolio quality, review of specific problem loans, and current economic conditions that may affect borrowers’ ability to pay. Another component of the allowance is losses on loans assessed as impaired under Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 310, Receivables (“ASC 310”). The balance of the loans determined to be impaired under ASC 310 and the related allowance is included in management’s estimation and analysis of the allowance for loan losses. Allowances for impaired loans are generally determined based on collateral values or the present value of estimated cash flows.

The determination of the appropriate level of the allowance is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available. We have an established methodology to determine the adequacy of the allowance for loan losses that assesses the risks and losses inherent in our portfolio and portfolio segments. We have an internally developed model that requires significant judgment to determine the estimation method that fits the credit risk characteristics of the loans in our portfolio and portfolio segments. Qualitative and environmental factors that may not be directly reflected in quantitative estimates include: asset quality trends, changes in loan concentrations, new products and process changes, changes and pressures from competition, changes in lending policies and underwriting practices, trends in the nature and volume of the loan portfolio, and national and regional economic trends. Changes in these factors are considered in determining changes in the allowance for loan losses. The impact of these factors on our qualitative assessment of the allowance for loan losses can change from period to period based on management’s assessment of the extent to which these factors are already reflected in historic loss rates. The uncertainty inherent in the estimation process is also considered in evaluating the allowance for loan losses.

In June 2016, the Financial Accounting Standards Board (“FASB”) issued a new accounting standard (Accounting Standards Update “ASU” 2016-13), referred to as the Current Expected Credit Loss (“CECL”) standard, which became effective for us, as a smaller reporting company, on January 1, 2023. The CECL standard changes the manner in which we account for our allowance for loan losses. Please refer to Note 1. Summary of Significant Accounting Policies – Recent Accounting Pronouncements, in the Notes to Consolidated Financial Statements contained in