Investar Holding Corporation — Q3 2020 Form 10-Q
Business context and reporting period
Investar is a Louisiana-based bank holding company serving individuals and small to midsize businesses in Louisiana, southeast Texas and west Alabama. This unaudited filing covers the quarter and nine months ended September 30, 2020; balance-sheet comparisons are with December 31, 2019. The company operated 31 branches and had 318 employees.
Financial performance and condition
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Net interest income | $18.7 million | $16.4 million | $54.4 million | $47.9 million |
| Provision for loan losses | $2.5 million | $0.5 million | $8.8 million | $1.2 million |
| Noninterest income | $3.4 million | $1.6 million | $8.4 million | $4.6 million |
| Noninterest expense | $14.1 million | $11.7 million | $42.4 million | $34.5 million |
| Net income | $4.5 million | $4.7 million | $9.3 million | $13.5 million |
| Basic/diluted EPS | $0.41 / $0.41 | $0.46 / $0.46 | $0.85 / $0.85 | $1.35 / $1.34 |
| Net interest margin | 3.46% | 3.48% | 3.46% | 3.53% |
Balance sheet at September 30, 2020: Total assets were $2.323 billion, loans $1.830 billion, deposits $1.834 billion and stockholders’ equity $237.3 million. Loans increased $137.7 million and deposits increased $126.7 million from year-end 2019. Cash and cash equivalents were $50.6 million.
Credit, debt and liquidity: The allowance for loan losses was $19.0 million, or 1.04% of loans, versus $10.7 million, or 0.63%, at December 31, 2019. Nonperforming loans were $12.4 million (0.68% of loans), compared with $6.3 million (0.37%) at year-end. Borrowings included $178.5 million of FHLB advances, $5.9 million of repurchase agreements, $42.9 million of subordinated debt and $5.9 million of junior subordinated debt. The company reported $592.8 million of remaining FHLB credit availability and $60 million of unused unsecured bank lines. The Bank was considered well-capitalized and met regulatory capital requirements; its total capital ratio was 13.50%.
Cash flow, nine months: Operating activities provided $11.3 million, investing activities used $132.4 million, and financing activities provided $127.0 million. Cash and cash equivalents increased $5.9 million to $50.6 million.
Material changes versus comparable periods
- Net income fell to $4.5 million for Q3 and $9.3 million for the first nine months. Management attributed the year-to-date decline primarily to the larger loan-loss provision amid COVID-19-related economic uncertainty, as well as higher operating costs associated with growth.
- Net interest income rose year over year, supported by loan growth and lower deposit funding costs. Lower yields on interest-earning assets partly offset these benefits; the nine-month net interest margin declined seven basis points.
- Loan growth included $110.3 million of PPP loans at quarter-end. Excluding PPP loans, total loans increased $27.4 million, or 1.6%, from year-end 2019.
- Noninterest income benefited from investment-security gains of $0.9 million in Q3 and $2.3 million year to date. Noninterest expenses rose 20.3% in Q3 and 22.9% year to date, with higher salaries and other operating costs cited as largely growth-related.
- Deposit growth included higher noninterest-bearing and demand balances, which management associated with stimulus payments, lower customer spending and PPP-related deposits. Time deposits declined as the company repriced or allowed higher-cost balances to run off.
Outlook, management commentary, risks and unusual items
- Management gave no specific earnings or growth guidance. It said the pandemic’s duration and economic effects remain uncertain and could lead to additional credit provisions, lower customer activity, pressure on collateral values, or goodwill impairment. Management expected an effective tax rate of approximately 20% in 2020.
- At September 30, $56.5 million of loans were in the short-term COVID-19 deferral program; management reported that most borrowers whose deferrals had expired had resumed regular payments. As of November 2, the balance was $17.9 million, including borrowers with second or third deferrals. These loans were not classified as TDRs, past due or nonaccrual under the applicable relief guidance.
- COVID-19-sensitive industries identified by the company—oil and gas, food services, hospitality and entertainment—represented 6.6% of loans, or 5.6% excluding PPP loans. Management noted pandemic-related uncertainty in estimating the allowance and goodwill; it concluded goodwill was not impaired at September 30.
- The company terminated its planned acquisition of Cheaha Financial Group on June 30, 2020, citing unpredictable pandemic-related economic conditions. It completed the acquisition of two PlainsCapital branches in February 2020.
- Other notable items include $2.0 million of cash dividends paid and $10.8 million spent repurchasing shares during the first nine months. Investment-security unrealized losses were considered temporary by management. Cash-flow hedge swaps had a negative fair value of $4.0 million and a $3.2 million accumulated loss in other comprehensive income.
- Loan commitments were $283.6 million and standby letters of credit were $14.5 million. The filing also identifies risks from LIBOR transition, regional economic and industry concentrations, cybersecurity, and severe weather.
Important facts for investors to verify
- Whether credit quality, nonperforming loans and required loan-loss provisions worsen as pandemic-related deferrals expire; assess the $19.0 million allowance against portfolio risks.
- How PPP loan forgiveness, repayment and related processing fees affect future loan balances and revenue.
- Whether the deposit growth and lower funding costs persist, and how asset-yield pressure affects net interest margin.
- Whether growth-related expenses and acquisition integration costs moderate, and whether security-sale gains are repeatable.
- Capital, liquidity and interest-rate sensitivity under changing economic conditions; management’s reported rate simulations are estimates and actual results may differ.
- Potential effects of LIBOR transition and any later goodwill impairment testing or accounting changes, including adoption of the expected-credit-loss standard scheduled for January 1, 2023.