Investar Holding Corp. — Q3 2017 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2017. Unaudited consolidated results. Investar is a Louisiana community bank focused on South Louisiana. Unless noted otherwise, dollar amounts below are in millions.
Financial performance
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Interest income | $14.4 | $11.0 | $37.4 | $32.1 |
| Net interest income | $11.5 | $8.8 | $29.7 | $26.0 |
| Provision for loan losses | $0.4 | $0.5 | $1.1 | $1.7 |
| Noninterest income | $1.2 | $1.0 | $2.9 | $4.6 |
| Noninterest expense | $9.1 | $6.5 | $22.7 | $20.0 |
| Net income | $2.1 | $2.0 | $5.9 | $6.0 |
| Diluted EPS | $0.24 | $0.29 | $0.71 | $0.84 |
| Net interest margin | 3.40% | 3.23% | 3.32% | 3.36% |
For the nine-month period, return on average assets was 0.62% and return on average equity was 5.65%, compared with 0.74% and 7.17%, respectively, in 2016. Management attributed lower EPS and returns largely to the enlarged share count and asset/equity base following the 2017 stock offering, as well as Citizens acquisition costs.
Cash flow: Nine-month operating cash flow was $7.4 million, versus $33.1 million in 2016; investing cash outflow was $85.2 million, versus $120.5 million; financing cash inflow was $96.9 million, versus $112.6 million. Cash and equivalents ended at $48.5 million, up from $29.4 million at year-end 2016.
Financial position, funding and credit
- Total assets were $1.476 billion, up from $1.159 billion at December 31, 2016. Net loans were $1.103 billion, compared with $886.4 million; total deposits were $1.101 billion, compared with $907.8 million.
- Loan growth was $217.1 million, or 24.3%, year to date, including $124.4 million of acquired loans. Excluding Citizens-acquired loans, management reported loan growth of $92.7 million, or 10.4%.
- Deposits increased $193.6 million, or 21.3%, including $212.2 million acquired with Citizens. Excluding acquired deposits, deposits declined $18.6 million, or 2.0%, principally as time deposits ran off.
- Borrowings included $162.7 million of FHLB advances, $24.9 million of repurchase agreements, $18.2 million carrying value of subordinated debt, and $3.6 million of junior subordinated debt. FHLB advances rose from $82.8 million at year-end, primarily to fund organic loan growth.
- Stockholders’ equity was $152.9 million, compared with $112.8 million at year-end. The Bank’s regulatory capital ratios exceeded “well-capitalized” thresholds; its total capital ratio was 14.10% and Tier 1 leverage ratio was 11.21%. Management stated the Company and Bank met applicable capital requirements.
- The allowance for loan losses was $7.6 million, equal to 0.68% of total loans. Nonperforming loans were $2.2 million, or 0.20% of loans; there were no loans classified as doubtful or loss. Substandard loans increased to $6.6 million from $3.7 million at year-end, primarily due to acquired Citizens loans. All 18 troubled debt restructurings, totaling $1.6 million, were performing under modified terms.
- Liquidity sources included $327.0 million of remaining FHLB credit availability and $55.0 million of unused unsecured bank lines. The Company reported no brokered deposits; QwikRate deposits were $75.1 million, down from $123.2 million at year-end.
Material changes and unusual items
- Investar completed its acquisition of Citizens Bancshares on July 1, 2017 for $45.8 million cash. Citizens added approximately $250 million of assets, $130 million of net loans, $212 million of deposits and three branches. The company recorded $8.7 million of goodwill and $1.5 million of core deposit intangible; purchase accounting remains subject to refinement.
- Acquisition costs were $0.8 million in Q3 and $1.0 million for the nine months. Higher quarterly expenses also reflected acquired and new employees and two de novo branches.
- In March, Investar issued 1.6 million shares at $21.25 per share, generating $32.5 million net proceeds, and issued $18.6 million principal amount of 6.00% fixed-to-floating subordinated notes due 2027. The notes reset to LIBOR plus 394.5 basis points beginning in 2022.
- Nine-month noninterest income fell 37.6%, mainly because prior-year fixed-asset sale gains were $1.0 million higher; servicing income and gains on loan sales also declined. Q3 included a $0.2 million gain from selling a former branch property.
- Unrealized investment-security losses were attributed mainly to interest-rate movements; management said it did not intend, and was not likely required, to sell the securities before recovery.
Outlook, risks and contingencies
No earnings or financial guidance was provided. Management expects the pending BOJ Bancshares acquisition to close in Q4 2017, subject to remaining conditions, including BOJ shareholder approval. Regulatory approvals had been received; the shareholder vote was scheduled for November 15, 2017. The stated transaction value was approximately $22.8 million at the cited share price, with cash and stock consideration subject to collars and other adjustments. BOJ shareholders were expected to own approximately 8% of the combined company.
Key risks include integrating Citizens and potentially BOJ, realizing expected synergies, retaining customers and employees, credit deterioration, loan-loss estimate uncertainty, interest-rate and funding sensitivity, and concentration in South Louisiana. The Company noted that economic conditions in its markets and borrower repayment capacity could affect results. Loan commitments were $176.5 million and standby letters of credit were $0.7 million at quarter-end; these commitments may not be fully drawn. The Company also disclosed $0.3 million of unfunded investment commitments.
In its rate-sensitivity model, a 100-basis-point rise was estimated to reduce 12-month net interest income by 0.9%, while a 100-basis-point decline was estimated to increase it by 3.8%; actual outcomes may differ because model assumptions are uncertain. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether BOJ closes on the expected terms and schedule, including shareholder approval, closing conditions, consideration adjustments and appraisal-rights provisions.
- Whether Citizens integration costs, acquired-loan marks and expected benefits develop as anticipated; purchase-accounting values remain subject to refinement.
- Organic deposit trends and funding costs, particularly time-deposit runoff, FHLB dependence and the cost of borrowings.
- Credit quality and reserve adequacy as the loan portfolio expands, including acquired and substandard loans and exposure to South Louisiana economic conditions.
- Whether net interest margin, earnings and returns improve after the acquisition and equity issuance effects; nine-month EPS declined despite higher net interest income.