Investar Holding Corporation — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022. Investar is a community banking holding company serving Louisiana, Texas and Alabama. Unless noted otherwise, amounts below are in millions of dollars; quarterly and nine-month results are compared with the corresponding 2021 periods.
Financial performance and condition
- Profit: Third-quarter net income was $7.3 million, or $0.74 basic and $0.73 diluted EPS, compared with a $10.0 million net loss, or $0.95 loss per share, in Q3 2021. Nine-month net income was $26.8 million, or $2.64 basic and $2.62 diluted EPS, versus $1.1 million, or $0.10 basic and $0.09 diluted EPS.
- Interest revenue and margin: Q3 net interest income increased 8.9% to $23.5 million; nine-month net interest income rose 7.9% to $67.3 million. Net interest margin was 3.77% for Q3 (3.44% in 2021) and 3.73% for the nine months (3.52%). Management attributed the improvement mainly to higher securities yields and lower deposit costs.
- Other income and expenses: Q3 noninterest income fell to $2.7 million from $3.9 million, largely because swap termination fee income was absent in the quarter. Nine-month noninterest income rose to $14.9 million from $10.4 million, principally reflecting $8.1 million of swap termination fees in 2022 versus $1.8 million in 2021. Noninterest expense was $16.0 million for Q3 and $47.0 million for nine months, down 2.5% and 4.5%, respectively, year over year.
- Returns: Nine-month return on average assets was 1.39% versus 0.06%; return on average equity was 15.30% versus 0.57%.
- Balance sheet and lending: Total assets were $2.66 billion at September 30, 2022, up from $2.51 billion at year-end 2021. Loans were $2.01 billion, up 7.1% from year-end; excluding PPP loans, growth was 8.4%. Commercial and industrial loans rose to $397.8 million from $310.8 million. Allowance for loan losses was $23.2 million, or 1.15% of loans.
- Credit quality: Nonaccrual loans were $12.7 million, or 0.63% of loans, compared with $32.8 million, or 1.74%, at September 30, 2021. Net recoveries were $0.7 million for the first nine months of 2022, versus $22.0 million of net charge-offs in 2021. The 2021 charge-offs included a $21.6 million impairment related to a borrower affected by Hurricane Ida.
- Deposits and liquidity: Deposits were $2.05 billion, down 3.2% from year-end 2021; noninterest-bearing deposits increased to $590.6 million and represented 28.8% of deposits. Cash and cash equivalents were $36.0 million, down from $97.0 million. FHLB advances increased to $333.1 million from $78.5 million. Remaining FHLB capacity was $562.8 million, and available unsecured federal funds lines were $59.8 million.
- Debt and capital: At quarter-end, the company reported $333.1 million of FHLB advances, $44.2 million of subordinated debt and $8.5 million of junior subordinated debt. It issued $20.0 million of 5.125% fixed-to-floating subordinated notes due 2032 and used most proceeds to redeem $18.6 million of 2027 notes. The Bank was considered well-capitalized and the Company and Bank met regulatory capital requirements. Stockholders’ equity was $205.7 million, down $36.9 million from year-end, primarily due to securities valuation losses.
- Cash flow: For the first nine months, operating activities provided $33.5 million; investing activities used $263.8 million, largely reflecting securities purchases and loan growth; financing activities provided $169.3 million. Cash and equivalents declined by $61.0 million.
Material changes and unusual items
- The year-over-year earnings improvement chiefly reflects the absence of the $21.6 million Hurricane Ida-related impairment charge recorded in Q3 2021, alongside higher net interest income.
- Available-for-sale securities had a $64.5 million gross unrealized loss at September 30, 2022; fair value was $413.2 million against amortized cost of $477.2 million. The nine-month after-tax unrealized securities loss in other comprehensive income was $49.7 million. Management attributed losses primarily to higher market interest rates and stated it did not consider the securities other-than-temporarily impaired and expected not to need to sell them before recovery.
- The company voluntarily terminated its remaining $115 million notional interest-rate swaps during the first nine months of 2022. It recognized $8.1 million in swap termination fee income for the period, including amounts reclassified from accumulated other comprehensive income.
- The company repurchased 508,780 shares for $10.3 million in the first nine months and declared dividends of $0.27 per share. At September 30, 396,912 shares remained authorized for repurchase.
Outlook, risks and contingencies
- No specific earnings or financial guidance is provided. Management said it did not expect to open de novo branches during the remainder of 2022.
- Investar agreed to sell certain assets, deposits and other liabilities associated with its Alice and Victoria, Texas locations to First Community Bank. Closing was expected in Q1 2023, subject to regulatory approval and customary conditions; management did not expect a material financial impact.
- Management cited inflation, higher interest rates, economic and geopolitical uncertainty, COVID-19 effects, deposit competition and possible loan-quality deterioration as risks. It noted that deposit pricing may need to rise to maintain or grow deposits.
- The Bank’s modeled 12-month net interest income sensitivity was -2.0% for an immediate 100-basis-point rate increase, -4.4% for +200 basis points and -6.6% for +300 basis points; a 100-basis-point decrease was modeled at -0.1%. These estimates assume a static balance sheet and depend on uncertain assumptions.
- Unfunded loan commitments were $370.4 million and standby letters of credit were $15.3 million. The reserve for unfunded commitments was $0.3 million. These commitments may not be drawn in full.
- CECL credit-loss accounting was scheduled to take effect for the company on January 1, 2023. Management expected adoption likely to increase the loan-loss allowance and require an allowance for expected losses on debt securities, but could not yet reasonably estimate the impact.
- Disclosure controls were assessed as effective, and the filing reported no material changes in internal control over financial reporting or significant changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether deposit balances, deposit costs and reliance on FHLB advances evolve as interest rates and competition change.
- Whether the large unrealized securities losses remain unrealized and how any securities sales or further rate changes affect equity and liquidity.
- Whether credit quality and the allowance remain adequate, particularly for commercial real estate, commercial and industrial lending, and the Hurricane Ida-affected relationship.
- The eventual CECL adoption impact on the allowance, earnings and regulatory capital.
- Completion and final financial effects of the planned Alice and Victoria branch-related transaction, including required regulatory approvals.
Financial statement amounts are unaudited. Management cautions that interim results are not necessarily indicative of full-year results.