Investar Holding Corporation — Q3 2018 Form 10-Q
Business context and reporting period. Investar is a Louisiana-based bank holding company operating through Investar Bank, with 20 full-service branches. This unaudited report covers the three and nine months ended September 30, 2018; balance-sheet comparisons are with December 31, 2017. The company’s 2018 results include the effects of the 2017 Citizens and BOJ acquisitions.
Key financial results
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Interest income | $18.8 million | $14.4 million | $54.0 million | $37.4 million |
| Net interest income | $14.4 million | $11.5 million | $42.6 million | $29.7 million |
| Provision for loan losses | $0.8 million | $0.4 million | $2.0 million | $1.1 million |
| Noninterest income | $1.2 million | $1.2 million | $3.5 million | $2.9 million |
| Noninterest expense | $10.3 million | $9.1 million | $31.0 million | $22.7 million |
| Net income | $4.0 million | $2.1 million | $10.3 million | $5.9 million |
| Diluted EPS | $0.41 | $0.24 | $1.05 | $0.71 |
| Net interest margin | 3.56% | 3.40% | 3.64% | 3.32% |
Balance sheet and funding at September 30, 2018: Total assets were $1.735 billion; loans were $1.358 billion gross ($1.349 billion net of allowance); deposits were $1.296 billion; and stockholders’ equity was $178.4 million. Cash and cash equivalents were $24.8 million. FHLB advances were $208.1 million, repurchase agreements $17.9 million, subordinated debt carrying value $18.2 million, and junior subordinated debt $5.8 million.
Cash flows, nine months: Operating activities provided $12.2 million; investing activities used $123.9 million, including a $99.2 million net increase in loans; financing activities provided $106.1 million. Cash and cash equivalents decreased $5.6 million from $30.4 million at the start of the period.
Credit and capital: The allowance for loan losses was $9.0 million, or 0.66% of total loans. Nonperforming loans were $6.3 million (0.47% of loans), versus $3.7 million (0.29%) at year-end 2017. Substandard loans totaled $10.0 million, versus $5.7 million at year-end. The Bank was classified as well-capitalized; its total capital ratio was 13.59% and Tier 1 leverage ratio 10.98%.
Material changes versus comparable periods
- Q3 net income rose 89.9%; nine-month net income rose to $10.3 million from $5.9 million. Management attributed improved results chiefly to growth in earning assets and higher yields, with acquisitions also increasing average balances.
- Nine-month net interest income increased 43.3%. The average yield on interest-earning assets rose to 4.62% from 4.18%, while the cost of interest-bearing liabilities rose to 1.21% from 1.05%.
- From year-end 2017, loans grew $99.6 million, or 7.9%, and deposits grew $70.4 million, or 5.7%. Commercial and industrial loans increased substantially; consumer loans fell $24.0 million, largely from scheduled paydowns of the former indirect-auto portfolio.
- Nine-month noninterest expense increased 36.3%, mainly reflecting acquired and newly hired staff. Q3 expenses included $0.3 million of severance tied to a staffing optimization plan. Nine-month 2018 acquisition costs were $1.1 million; none were recorded in Q3.
- Accumulated other comprehensive loss widened to $5.3 million, including $4.1 million of after-tax unrealized losses on available-for-sale securities during the first nine months. Management attributed securities losses primarily to rising interest rates and said it did not consider them credit impairments.
Outlook, risks and unusual items
- Management expected the effective tax rate to be approximately 20% for the remainder of 2018. The nine-month rate was 21.6%, including a $0.6 million Tax Act-related deferred-tax remeasurement charge; Q3’s 11.3% rate included a $0.3 million discrete tax benefit.
- After quarter-end, Investar agreed to acquire Mainland Bank in Texas. Consideration is expected to be approximately 763,849 Investar shares; Mainland shareholders were expected to own about 7.4% of the combined company. Closing was expected in Q1 2019, subject to shareholder, regulatory and other customary approvals.
- Interest-rate sensitivity estimates indicated that a parallel 100-basis-point increase could reduce projected 12-month net interest income by 1.0%, while a 100-basis-point decrease could increase it by 3.5%. These estimates depend on assumptions and actual results may differ.
- Liquidity sources included $462.7 million of remaining FHLB borrowing capacity and $60.0 million in unsecured lines, with no outstanding unsecured-line balances. Loan commitments were $221.2 million and standby letters of credit $11.2 million at quarter-end; these amounts do not necessarily represent future cash outflows.
- Key disclosed risks include credit deterioration and allowance-estimation uncertainty, rising funding costs and interest-rate changes, dependence on South Louisiana markets, acquisition integration, and the conditions and execution of the pending Mainland transaction.
Important facts for investors to verify
- Whether loan growth and higher asset yields can continue to exceed rising deposit and borrowing costs.
- Trends in nonperforming, substandard and restructured loans, charge-offs, and allowance adequacy—particularly given the increase in nonperforming loans and three TDRs in default.
- Whether expense growth, including acquisition integration and staffing costs, is controlled as the company pursues further growth.
- Whether Mainland Bank receives required approvals and closes on the anticipated terms and timetable.
- The sensitivity of liquidity, securities values, and earnings to interest rates, and the realization of tax benefits and other tax-related estimates.