KBRA Downgrades Ratings For Investar Holding Corporation; Outlook Stable

KBRA downgrades the senior unsecured debt rating to BBB- from BBB, downgrades the subordinated debt rating to BB+ from BBB-, and affirms the short-term debt rating of K3 for Baton Rouge, Louisiana-based Investar Holding Corporation (NASDAQ: ISTR) (“the company”). In addition, KBRA downgrades the deposit and senior unsecured debt ratings to BBB from BBB+, the subordinated debt rating to BBB- from BBB, and the short-term debt and deposit ratings to K3 from K2 for its subsidiary, Investar Bank, National Association. The Outlook for all long-term ratings is Stable.

Key Credit Considerations

The rating downgrade reflects persistently substandard capital ratios that have consecutively fallen short of KBRA’s previously stated expectations, compounded by earnings pressures that are heightened by a spread-reliant profile and a liability sensitive balance sheet. With respect to the latter, which contains largely fixed rate loan structures (>70% of loans) and elevated levels of maturity funding reliance, pressures from the Fed’s rate tightening cycle have weighed more heavily on ISTR’s earnings relative to many peers with ROAs continuing to underperform (0.40% in 3Q23 and 0.62% in 9M23). That said, marked decreases in the Fed rate would certainly be beneficial in aiding margin improvements. Capital protection as measured by the CET1 ratio (9.4% at 3Q23) have regressed compared to YE22 and trailed the peer average by 170 bps. In more recent quarters, regulatory capital growth has been impeded by deployment for commercial loan purchases, which is seemingly transactional at this juncture, while recent years’ constraints were due to a combination of elevated commercial loan growth, driving RWA density (86% at 3Q23) to moderately above peer levels, and meaningful share repurchases. As part of a balance sheet optimization strategy, which will encompass limiting loan growth, paying down noncore funding, and exiting the mortgage origination business, management anticipates positive CET1 ratio accretion throughout 2024. With respect to funding trends, the core deposits to total funding ratio (73% in 3Q23) has slipped to levels weaker than pre-pandemic measures. This has culminated in deposit costs (~2.20% in 3Q23) that have accelerated at a more rapid pace than many peers with the loans to core deposit ratio of 113% remaining comparatively high. Non-deposit funding also represented ~10% of total funding at 3Q23, although management appears committed to managing it down in 2024. KBRA recognizes the vast improvement in the NPA ratio stemming from paydowns of the problem loans that led to significant NPA formation and material impairments from 2021 and into 2022. A more normalized NPA ratio (0.48% at 3Q23) combined with modest classified loan balances (<1.00% of loans at 3Q23) and comparatively higher reserve coverage (1.42% of loans at 3Q23) gives KBRA confidence that credit costs will be manageable. Moreover, we consider the loan portfolio as relatively granular and diversified with limited office CRE and oil and gas exposures. Excluding the aforementioned impairment, we acknowledge well contained credit losses over time, although we note operating history is limited relative to many KBRA peers while the credit environment has largely been benign.

Rating Sensitivities

A rating upgrade is unlikely in the intermediate term. Positive ratings momentum could be considered if there is a sustained demonstration of managing capital ratios and earnings closer to peer-like levels over time while exhibiting meaningful improvement in the funding profile and solid asset quality. Conversely, material degradation in credit quality measures, aggressive capital management leading to regression or persistent variability in capital ratios, or further elevation in double leverage may result in negative rating momentum or downgrade.

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Methodologies