Investar Holding Corporation (NASDAQ: ISTR) — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; balance-sheet comparisons are to December 31, 2019. Investar is a Louisiana-based bank holding company serving south Louisiana, southeast Texas and west Alabama. Figures below are in U.S. dollars; financial statement amounts are generally in millions.
Financial performance and position
| Metric | Q1 2020 / March 31, 2020 | Comparable period / prior year-end |
|---|---|---|
| Net interest income | $17.3 million | $15.2 million in Q1 2019 |
| Provision for loan losses | $3.8 million | $0.3 million in Q1 2019 |
| Net income; diluted EPS | $0.6 million; $0.05 | $3.9 million; $0.40 in Q1 2019 |
| Net interest margin | 3.46% | 3.53% in Q1 2019 |
| Return on average assets / equity | 0.11% / 1.00% | 0.86% / 8.37% in Q1 2019 |
| Total assets | $2,199.4 million | $2,148.9 million at year-end |
| Total loans / deposits | $1,729.8 million / $1,728.8 million | $1,692.0 million / $1,707.7 million at year-end |
| Allowance for loan losses | $14.2 million, or 0.82% of loans | $10.7 million at year-end |
| Cash and cash equivalents | $38.5 million | $44.7 million at year-end |
| Operating cash flow | $0.8 million | $5.9 million in Q1 2019 |
Net interest income rose 14.4% year over year, reflecting higher average loan balances and acquisitions, but margin declined as asset yields fell and funding costs increased. Total noninterest income declined to $1.1 million from $1.3 million, including a $0.8 million fair-value loss on equity securities. Noninterest expense increased 23% to $13.9 million, principally due to staffing and operating costs associated with growth and acquisitions.
Q1 cash flows were $0.8 million from operations, negative $20.7 million from investing and positive $13.7 million from financing; cash declined $6.2 million during the quarter. Total liabilities were $1,966.1 million and stockholders’ equity was $233.3 million at March 31. FHLB advances were $167.7 million, subordinated debt $42.8 million, and junior subordinated debt $5.9 million. Liquidity sources included $595.0 million of remaining FHLB borrowing capacity and $60.0 million of unsecured credit lines, with no draws on those lines. The company and bank met regulatory capital requirements; the bank was classified as well-capitalized. The bank’s total capital ratio was 12.87%.
Material changes and notable events
- Year-over-year net income fell to $0.6 million from $3.9 million. Management attributed the decline primarily to the pandemic-related loan-loss provision and the equity-securities valuation loss.
- Asset quality indicators weakened: nonperforming loans were $7.6 million, or 0.44% of loans, at March 31, versus $6.3 million, or 0.37%, at December 31. Substandard loans rose to $18.7 million from $8.7 million; net charge-offs were $0.2 million in Q1.
- Loans increased 2.2% and deposits 1.2% from year-end, but excluding the PlainsCapital branch acquisition, loans declined 0.4% and deposits declined 0.9%. The company acquired two Texas branches in February, adding about $45.3 million of loans and $37.0 million of deposits.
- Management reported $55 million of loans on 90-day deferral at March 31. By May 4, the program covered approximately $531 million, or 30% of the loan portfolio; 87% of those loans were real-estate-secured, with average loan-to-value of 67%. These pandemic-related modifications were not classified as TDRs or reported as past due/nonaccrual under applicable relief guidance.
- During Q1, the company repurchased 326,636 shares for $6.6 million and declared dividends of $0.06 per share. The securities portfolio’s unrealized losses increased amid pandemic-related market volatility; management considered them temporary and did not identify credit impairment.
Outlook, commentary and risks
- The filing provides no earnings or financial guidance. Management stated that the pandemic’s duration, economic effects and impact on borrowers could not be predicted with certainty; it cautioned that further credit-loss provisions or goodwill impairment may be required.
- Management performed an interim goodwill impairment test following the market-capitalization decline and concluded goodwill of $27.4 million was not impaired at March 31. Further economic deterioration could prompt another assessment.
- COVID-19 risks include borrower defaults, further reserve increases, delayed or forgone interest and fees, lower collateral values, pressure on deposits and loan demand, and effects from low interest rates. Oil and gas, food services, hospitality and entertainment represented 6.0% of loans combined.
- The bank began originating SBA Paycheck Protection Program loans in April. By May 4, it had funded approximately $75 million to more than 300 customers. The filing notes risks involving SBA loan guarantees and potential customer litigation.
- The announced $41.1 million Cheaha Financial Group acquisition was delayed from its expected Q2 2020 closing; regulatory approvals remained pending as of the report. Timing was unknown.
- Interest-rate sensitivity modeling estimated net interest income changes of -0.8% for a 100-basis-point rise and +0.5% for a 100-basis-point decline, subject to assumptions and uncertainty.
Key facts investors should verify
- Whether deferred borrowers resume payments and how the $531 million deferral portfolio performs, including subsequent delinquencies, nonaccruals and charge-offs.
- Whether the $14.2 million allowance adequately reflects pandemic-related credit risk, particularly in commercial real estate, commercial and industrial lending, and oil-and-gas exposures.
- Subsequent trends in deposits, funding costs, FHLB borrowings, liquidity availability and regulatory capital as economic conditions evolve.
- Actual PPP loan forgiveness, fee recognition, SBA guarantee eligibility and any related claims or disputes.
- Closing status and integration costs for the Cheaha acquisition, and any later goodwill impairment assessment or charge.