Investar Holding Corporation — Q1 2019 10-Q
Reporting period: Three months ended March 31, 2019; balance-sheet figures are as of March 31, 2019, unless otherwise noted. Investar is a Louisiana-based bank holding company serving southeast Louisiana and southeast Texas.
Business context and material changes
On March 1, 2019, Investar acquired Mainland Bank for approximately $18.6 million in Investar shares. Mainland added approximately $128.4 million of assets, including $82.4 million of loans and $107.6 million of deposits, and expanded the company into the greater Houston area with three branches. The acquisition generated $5.1 million of goodwill and a $2.4 million core deposit intangible. Results include only one month of Mainland’s operations.
Year-over-year comparisons also reflect different tax effects: Q1 2018 included a $0.6 million tax charge related to the Tax Cuts and Jobs Act remeasurement; no comparable charge was recorded in Q1 2019.
Key financial results
| Metric | Q1 2019 | Q1 2018 or prior date |
|---|---|---|
| Interest income | $20.7 million | $17.2 million |
| Net interest income | $15.2 million | $13.9 million |
| Net interest margin | 3.53% | 3.70% |
| Noninterest income | $1.3 million | $1.1 million |
| Noninterest expense | $11.3 million | $10.6 million |
| Provision for loan losses | $0.3 million | $0.6 million |
| Net income | $3.9 million | $2.4 million |
| Diluted earnings per share | $0.40 | $0.25 |
| Cash dividends declared per share | $0.05 | $0.04 |
Net income increased about 63%. Management attributed higher net interest income mainly to growth in average loans and securities; higher interest expense, particularly the cost of deposits, partly offset that benefit. Net interest margin fell 17 basis points as funding costs rose. Return on average assets was 0.86% versus 0.60%, and return on average equity was 8.37% versus 5.62%.
Financial position, cash flow and capital
- Assets and lending: Total assets were $1.962 billion, versus $1.786 billion at December 31, 2018. Loans were $1.495 billion, up $94.1 million, or 6.7%; excluding $81.1 million of acquired loans, the increase was $13.0 million, or 0.9%. Commercial real estate represented the largest loan category.
- Deposits and liquidity: Deposits were $1.533 billion, up $171.1 million, or 12.6%; excluding Mainland deposits, they grew $63.5 million, or 4.7%. Cash and cash equivalents were $72.4 million, compared with $17.1 million at year-end. The company reported $499.5 million of remaining FHLB borrowing capacity and $60 million of unsecured bank lines, with no balances drawn on those unsecured lines.
- Debt and funding: FHLB advances were $185.1 million, repurchase agreements $2.2 million, subordinated debt carrying value $18.2 million, and junior subordinated debt $5.9 million. Average cost of interest-bearing liabilities increased to 1.59% from 1.10%; total average funding cost was 1.36% versus 0.93%.
- Cash flows: Operating activities provided $5.9 million. Investing activities provided $15.7 million, including $38.4 million of cash acquired with Mainland, partly offset by securities purchases, loan growth and fixed-asset purchases. Financing activities provided $33.7 million, including deposit growth, offset in part by debt repayments, dividends and $3.4 million of share repurchases.
- Credit quality: The allowance for loan losses was $9.6 million, or 0.64% of loans. Nonperforming loans were $6.0 million, or 0.40% of loans; allowance coverage of nonperforming loans was 159.93%. Net charge-offs were $77,000. There were no loans classified as loss; $9.4 million were substandard and $0.2 million doubtful. The filing says management considers the allowance adequate but notes it is subject to estimation uncertainty.
- Capital: The Bank was classified as well-capitalized and met regulatory capital requirements. Its ratios were 10.92% Tier 1 leverage, 12.48% common equity Tier 1 and Tier 1 capital, and 13.09% total capital.
Outlook, risks and unusual items
The filing provides no specific earnings or growth guidance. Management describes a strategy of organic growth in high-quality loans and deposits, complemented by acquisitions, and says it continues to review acquisition opportunities. It expects to develop fee-generating products, while noting that servicing income from the legacy indirect-auto portfolio is expected to decline as that portfolio runs off.
Principal disclosed risks include regional economic conditions in Louisiana and Texas, loan and industry concentration, borrower repayment capacity, loan-loss estimate uncertainty, deposit competition and funding costs, interest-rate changes, acquisition integration, and potential LIBOR cessation or replacement. A modeled immediate 100-basis-point rate increase would reduce projected 12-month net interest income by 0.4%; a 100-basis-point decrease would increase it by 4.9%. These modeled results depend on assumptions and may differ from actual outcomes.
Mainland-related acquisition costs were $0.9 million in Q1 2019. The filing’s unaudited pro forma net income, assuming Mainland had been acquired at the start of 2018, was $3.875 million for Q1 2019 and $2.710 million for Q1 2018; the 2019 pro forma figure excludes the tax-affected amount of $1.6 million of acquisition expenses. The company also disclosed that adoption of the expected-credit-loss standard, effective January 1, 2020, is likely to increase its allowance, although the amount could not yet be reasonably estimated.
Other items to note: unrealized securities losses were attributed primarily to interest-rate changes and were not considered credit-related by management; $95.3 million of securities were pledged as collateral. Three troubled debt restructurings were in default of modified terms. Loan commitments were $269.7 million and standby letters of credit $11.1 million. The company repurchased $3.4 million of shares and declared a $0.05-per-share dividend; dividend capacity is subject to bank regulatory restrictions and debt terms.
Important facts for investors to verify
- How Mainland integration, acquired deposits and loans, and purchase-accounting adjustments affect future earnings and reported growth.
- Whether deposit pricing and other funding costs continue to outpace asset-yield gains, pressuring net interest margin.
- Trends in nonperforming loans, criticized credits, charge-offs, and the adequacy of the allowance, including the effect of adopting the expected-credit-loss standard.
- The sustainability of reported earnings after excluding unusual tax and acquisition effects, and the outlook for acquisition and integration expenses.
- Liquidity and capital resilience, including reliance on time and network deposits, pledged securities, borrowing capacity, and constraints on dividends or repurchases.
- Exposure to interest-rate changes and LIBOR-related contracts, and the assumptions underlying the company’s modeled sensitivity results.