Investar Holding Corporation — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019. Unaudited results. Investar provides banking services primarily in southeast Louisiana and southeast Texas. It completed the Mainland Bank acquisition on March 1, 2019, expanding into the Houston-area market.
Key financial results
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Net interest income | $16.3m | $14.3m | $31.5m | $28.2m |
| Net income | $4.9m | $3.8m | $8.9m | $6.2m |
| Diluted EPS | $0.48 | $0.39 | $0.88 | $0.64 |
| Net interest margin | 3.59% | 3.70% | 3.56% | 3.69% |
| Return on average assets | 1.01% | 0.93% | 0.94% | 0.76% |
| Return on average equity | 9.70% | 8.72% | 9.06% | 7.18% |
Q2 interest income rose to $22.4m from $18.0m; interest expense increased to $6.1m from $3.7m. For the first half, noninterest income was $3.0m versus $2.3m and noninterest expense was $22.9m versus $20.7m. The first-half effective tax rate was 19.7%, compared with 27.0% in 2018; the prior-year period included a $0.6m tax-remeasurement charge.
Financial position, funding and cash flow
- At June 30, total assets were $2.00bn, loans $1.54bn, deposits $1.55bn, and stockholders’ equity $205.5m. Since December 31, 2018, loans increased $142.5m (10.2%) and deposits increased $190.5m (14.0%). Excluding $77.5m of acquired loans, loan growth was $64.9m (4.6%).
- Cash and cash equivalents were $63.9m, up from $17.1m at year-end. First-half operating cash flow was $11.8m, investing cash use $24.3m, and financing cash inflow $59.3m.
- Funding included $196.6m of Federal Home Loan Bank advances, $1.9m of repurchase agreements, $18.2m of subordinated debt and $5.9m of junior subordinated debt. The Bank had $518.4m of remaining FHLB borrowing capacity and $60.0m of unsecured bank lines, with no draws on those lines at period-end.
- The Bank was classified as well-capitalized. Its June 30 capital ratios were 10.53% Tier 1 leverage, 11.95% common equity Tier 1 and Tier 1 capital, and 12.55% total capital.
- For the first half, cash dividends paid were $1.0m and share repurchases were $7.9m. The company repurchased 341,199 shares.
Material changes and unusual items
- Mainland Bank was acquired for approximately $18.6m in Investar shares. At acquisition, it contributed $128.4m of assets, including $82.4m of loans and $107.6m of deposits; Investar recorded $4.6m of goodwill and a $2.4m core deposit intangible. First-half acquisition expense was $0.9m. Mainland contributed approximately $0.7m to Q2 net income and $1.0m for the first half.
- Loan growth was concentrated in commercial and industrial lending and commercial real estate. Commercial and industrial loans increased to $276.9m from $210.9m at year-end; consumer loans declined to $34.8m from $46.0m, largely reflecting scheduled paydowns of the legacy indirect-auto portfolio.
- Deposit and funding costs rose: first-half deposit cost increased to 1.46% from 0.94%, while net interest margin fell 13 basis points year over year. Management attributed margin pressure to higher funding costs.
- Net nonperforming loans were $5.7m, 0.37% of loans, versus $5.9m and 0.42% at year-end; the company also reported nonperforming loans of $4.2m at June 30, 2018. The allowance for loan losses was $9.9m, or 0.64% of loans. First-half net charge-offs were $0.2m.
- Available-for-sale securities had $1.0m of gross unrealized losses, down from $5.0m at year-end. Management attributed losses primarily to interest rates and did not consider them credit-related or other-than-temporary.
- After quarter-end, the Federal Reserve cut its target rate by 25 basis points on July 31, 2019. Also after quarter-end, Investar agreed to acquire Bank of York for $15.0m, subject to the merger agreement; Bank of York reported $99.5m in assets, $46.0m in net loans and $82.3m in deposits at June 30. Investar’s bank subsidiary changed to a national bank charter on July 1.
Outlook, risks and contingencies
The filing provides no specific earnings or growth guidance. Management describes a strategy of organic lending and deposit growth, acquisitions, and developing fee-generating products. It notes that results for the interim period are not necessarily indicative of full-year results. Key risks include regional economic and borrower conditions, loan and industry concentrations, credit-loss estimation, integration and execution of acquisitions, deposit competition and funding costs, interest-rate movements, LIBOR transition, and the ability to retain qualified personnel.
Management expected adoption of the current expected credit losses standard (CECL) in 2020 to likely increase the allowance for loan losses and require an allowance for debt securities, but said the effect could not yet be reasonably estimated. The company had $306.7m in loan commitments and $14.1m in standby letters of credit at June 30; these may not all be drawn. The reserve for unfunded commitments was $143,000. Interest-rate sensitivity analysis estimated net interest income declines of 0.8% for a 100-basis-point rate rise and 0.4% for a 100-basis-point decline, with larger modeled declines under more extreme scenarios; management cautioned that actual results can differ from simulations.
Important facts for investors to verify
- Whether loan growth, particularly in commercial lending, is accompanied by stable credit quality and adequate loss reserves.
- Whether deposit pricing and other funding costs continue to compress net interest margin.
- Mainland integration, realized acquisition benefits, and final purchase-accounting adjustments; the disclosed fair values remain subject to refinement.
- The terms, regulatory approvals, financing and expected impact of the proposed Bank of York acquisition.
- The eventual CECL transition effect and the sensitivity of earnings and liquidity to rates, deposit behavior, and regional economic conditions.