Investar Holding Corporation — Q2 2018 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2018. Investar is a Louisiana-based bank holding company operating through Investar Bank, primarily in South Louisiana, with 20 full-service branches. Results include the effects of the 2017 Citizens and BOJ acquisitions; year-over-year comparisons are therefore not purely organic.
Financial performance and position
| Metric | Q2 2018 | Six months 2018 | Comparable 2017 period |
|---|---|---|---|
| Net interest income | $14.3 million | $28.2 million | $9.3 million Q2; $18.2 million six months |
| Net income | $3.8 million | $6.2 million | $1.9 million Q2; $3.8 million six months |
| Basic/diluted EPS | $0.39 / $0.39 | $0.64 / $0.64 | $0.22 / $0.22 Q2; $0.48 / $0.47 six months |
| Net interest margin | 3.70% | 3.69% | 3.28% in both comparable periods |
| Return on average assets | 0.93% | 0.76% | 0.64% Q2; 0.65% six months |
| Return on average equity | 8.72% | 7.18% | 5.15% Q2; 5.71% six months |
Q2 interest income was $18.0 million and noninterest income $1.2 million; six-month amounts were $35.2 million and $2.3 million, respectively. Six-month provision for loan losses was $1.2 million, versus $0.7 million in 2017. Noninterest expense was $10.2 million in Q2 and $20.7 million for six months, up 46.7% and 52.2%, respectively, largely reflecting acquired staff and operations, plus $1.1 million of six-month acquisition expenses.
At June 30, total assets were $1.697 billion, loans $1.300 billion, deposits $1.231 billion, and stockholders’ equity $177.2 million. Loans grew $41.5 million (3.3%) and deposits $5.7 million (0.5%) from year-end 2017. Cash and cash equivalents were $34.8 million. First-half operating cash flow was $8.2 million; investing cash flow was negative $74.5 million and financing cash flow positive $70.7 million, producing a $4.4 million increase in cash.
Borrowings included $237.1 million of FHLB advances, $16.8 million of repurchase agreements, $18.2 million of subordinated debt, and $5.8 million of junior subordinated debt. FHLB advances rose $70.4 million from year-end, primarily to fund loan growth and investment activity. The company reported $432.1 million of remaining FHLB credit availability and $55.0 million of unsecured bank lines, with none drawn. The Bank was reported well-capitalized and compliant with regulatory capital requirements; its total capital ratio was 13.82%.
Material changes and notable items
- Growth in average loans and securities, higher asset yields, and the 2017 acquisitions drove higher net interest income. The company attributed much of the increase in earnings to acquisitions and the resulting expansion in average earning assets.
- Interest-earning asset yield rose to 4.61% for the first half from 4.14% a year earlier; the cost of interest-bearing liabilities increased to 1.14% from 1.04%. Management reported a 41-basis-point year-over-year improvement in first-half net interest margin.
- The loan mix shifted: commercial business lending increased, while consumer loans fell $16.5 million (21.7%), largely from scheduled paydowns in the legacy indirect auto portfolio. Servicing income also declined as that portfolio aged.
- Nonperforming loans were $4.3 million, or 0.33% of loans, compared with $3.7 million at year-end. The allowance for loan losses was $8.5 million, 0.65% of total loans; management considered it adequate but cautioned that actual losses could exceed estimates. No loans were classified as doubtful or loss.
- Available-for-sale securities had $5.9 million of gross unrealized losses at June 30, which management attributed mainly to interest rates and considered temporary; the company stated it did not intend, and was not more likely than not required, to sell before recovery.
- The Tax Act reduced the federal corporate tax rate to 21%. First-half tax expense included a $0.6 million first-quarter deferred-tax remeasurement charge. The effective tax rate was 27.0% for six months and 20.2% for Q2.
Outlook, risks and contingencies
Management expected an effective tax rate of approximately 20% for the remainder of 2018 and did not expect additional Tax Act remeasurement charges. The filing provides no earnings, revenue, or growth guidance. Management described further gradual rate increases as possible and reported that a modeled +100-basis-point rate shock reduced projected 12-month net interest income by 1.0%, while a -100-basis-point shock increased it by 3.8%; these estimates depend on uncertain assumptions.
Key stated risks include local and broader economic conditions, South Louisiana geographic concentration, credit quality and loan-loss estimation, interest-rate and funding costs, acquisition integration and expected cost savings, and the ability to grow loans and deposits and retain qualified staff. Loan commitments were $228.4 million and standby letters of credit $6.8 million; these off-balance-sheet amounts may not be fully drawn. The filing reports effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Investor verification priorities
- Separate organic performance from the effects of the Citizens and BOJ acquisitions, including their contribution to earnings and ongoing integration costs.
- Track loan delinquencies, nonperforming assets, charge-offs, acquired-loan marks, and whether the allowance remains adequate as the portfolio grows.
- Assess the increased reliance on FHLB funding, deposit mix and pricing, large time-deposit maturities, and liquidity availability.
- Review commercial real estate exposure and the geographic concentration of lending in Louisiana, alongside the runoff in indirect auto loans and servicing income.
- Monitor securities valuation losses and sensitivity of net interest income to changing rates; verify actual results against the filing’s modeled scenarios.
- Confirm the final tax accounting and the sustainability of the approximately 20% expected effective tax rate.