Investar Holding Corporation — Q3 2019 Form 10-Q
Business context and reporting period
Unaudited results cover the quarter and nine months ended September 30, 2019; balance-sheet comparisons are with December 31, 2018. Investar is a Louisiana-based bank holding company operating through Investar Bank, serving individuals and small and medium-sized businesses. At quarter-end it had 25 branches in Louisiana and Texas. The Bank changed from a Louisiana state charter to a national bank charter on July 1, 2019.
Financial performance and position
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Net interest income | $16.4 million | $14.4 million | $47.9 million | $42.6 million |
| Provision for loan losses | $0.5 million | $0.8 million | $1.2 million | $2.0 million |
| Noninterest income | $1.6 million | $1.2 million | $4.6 million | $3.5 million |
| Noninterest expense | $11.7 million | $10.3 million | $34.5 million | $31.0 million |
| Net income | $4.7 million | $4.0 million | $13.5 million | $10.3 million |
| Diluted earnings per share | $0.46 | $0.41 | $1.34 | $1.05 |
| Net interest margin | 3.48% | 3.56% | 3.53% | 3.64% |
- At September 30, total assets were $2.018 billion, loans were $1.586 billion gross ($1.576 billion net of allowance), deposits were $1.585 billion, and stockholders’ equity was $210.5 million.
- Loans grew $185.5 million, or 13.2%, and deposits grew $223.6 million, or 16.4%, from year-end 2018. Excluding acquired loans, loan growth was $112.3 million, or 8.0%.
- The allowance for loan losses was $10.3 million, 0.65% of total loans. Nonperforming loans were $5.7 million, or 0.36% of loans; allowance coverage of nonperforming loans was 182.4%.
- Nine-month cash from operating activities was $13.7 million; investing activities used $78.9 million, financing activities provided $77.0 million, and cash and cash equivalents increased $11.9 million to $29.0 million.
- Funding included $181.7 million of FHLB advances, $2.1 million of repurchase agreements, $18.3 million of subordinated debt and $5.9 million of junior subordinated debt. The Bank had $541.6 million of remaining FHLB credit availability and $60.0 million of unsecured bank lines, with no draws on the latter at quarter-end.
- The Company and Bank met regulatory capital requirements; the Bank was classified as well-capitalized. The Bank’s total capital ratio was 13.09% and Tier 1 leverage ratio was 10.58%.
Material changes versus comparable periods
- Q3 net income increased about 15% year over year; nine-month net income increased about 32%. Growth reflected higher loan balances and yields, acquisition contribution, and lower loan-loss provision, partly offset by higher funding costs and operating expenses.
- Net interest margin compressed by 8 basis points in Q3 and 11 basis points for the nine-month period. Management attributed the declines primarily to higher funding costs; nine-month deposit costs rose to 1.51% from 1.01%.
- Noninterest expense increased 13.9% in Q3 and 11.5% for the nine months, including higher staffing, depreciation and amortization, data processing, and acquisition costs.
- Credit indicators were mixed: substandard loans fell to $5.6 million from $9.5 million at year-end 2018, while special-mention loans rose to $3.8 million from $0.2 million. Nonperforming loans declined from $5.9 million at year-end 2018.
- Available-for-sale securities’ net unrealized loss narrowed substantially; accumulated other comprehensive income was $2.0 million versus a $3.1 million loss at year-end 2018.
Outlook, commentary, risks and unusual items
- No numerical earnings or growth guidance is provided. Management described organic lending and deposit growth, new branches and acquisitions as strategic priorities.
- Mainland Bank was acquired on March 1, 2019 for approximately $18.6 million in Investar shares; it added $128.5 million of assets, including $82.4 million of loans and $107.6 million of deposits, and generated $4.5 million of goodwill. Nine-month acquisition expense was $1.1 million.
- After quarter-end, Investar completed its Bank of York acquisition on November 1, 2019 for $15.0 million. At that date Bank of York had approximately $101 million of assets, $46 million of loans and $85 million of deposits. Investar also agreed to acquire two PlainsCapital branches, expected to add about $52 million of loans and $42 million of deposits, subject to approvals and closing conditions; expected closing was Q1 2020. A Lafayette branch opened in October, and another Louisiana branch was planned for Q4 2019.
- Interest-rate sensitivity modeling estimated net interest income declines of 1.1% for an immediate 100-basis-point increase and 1.3% for a 100-basis-point decrease; management said the Bank was within policy limits. The filing cautions that model assumptions are uncertain and actual results may differ.
- Management cited economic and market conditions, interest rates and LIBOR transition, loan and investment quality, geographic and credit concentrations, acquisition execution and integration, and retention of qualified personnel as significant risks. Management considered the allowance adequate but noted it could prove insufficient if conditions worsen.
- CECL adoption was expected January 1, 2023 following the announced effective-date delay. Management expected adoption likely to increase the loan-loss allowance but could not reasonably estimate the effect.
- During the first nine months, the Company repurchased $8.3 million of shares and paid $1.6 million in dividends. The securities portfolio was repositioned partly for potential short-term rate reductions; nine-month securities-sale gains were $0.2 million.
Important facts for investors to verify
- Whether loan and deposit growth, including acquired balances, can be sustained without further net interest margin compression.
- Whether credit quality remains stable, particularly given the increase in special-mention loans, and whether the allowance remains adequate as the portfolio expands.
- The realized costs, integration progress and contribution to earnings from Mainland and Bank of York, plus the timing and terms of the proposed PlainsCapital branch transaction.
- Deposit pricing, time-deposit maturities, reliance on FHLB funding and liquidity availability as rates and competition change.
- The eventual CECL allowance impact and the sensitivity of earnings to interest-rate changes and LIBOR transition.