Investar (ISTR) - 2019 Q1 - Quarterly Report

Part I. Financial Information Unaudited financial statements, management's operational analysis, market risk disclosures, and internal control effectiveness are presented Financial Statements (Unaudited) Unaudited financial statements show substantial growth in assets, loans, deposits, and net income, largely from the Mainland Bank acquisition Consolidated Balance Sheets Consolidated balance sheets show significant increases in total assets, loans, deposits, and equity, primarily from the Mainland Bank acquisition Consolidated Balance Sheet Highlights (Unaudited) | Metric | March 31, 2019 (in thousands) | December 31, 2018 (in thousands) | Change | | :--- | :--- | :--- | :--- | | Total Assets | $1,961,894 | $1,786,469 | +9.8% | | Loans, net | $1,485,277 | $1,391,371 | +6.8% | | Goodwill and other intangible assets, net | $27,143 | $19,787 | +37.2% | | Total Deposits | $1,532,793 | $1,361,731 | +12.6% | | Total Liabilities | $1,758,880 | $1,604,207 | +9.6% | | Total Stockholders' Equity | $203,014 | $182,262 | +11.4% | - The increase in assets, deposits, and goodwill is primarily attributable to the Mainland Bank acquisition in Q1 2019[70] Consolidated Statements of Income Consolidated income statements show increased net interest income, noninterest income, and net income, with diluted EPS rising significantly Consolidated Income Statement Highlights (Unaudited) | Metric | Three months ended March 31, 2019 (in thousands) | Three months ended March 31, 2018 (in thousands) | Change | | :--- | :--- | :--- | :--- | | Net Interest Income | $15,156 | $13,858 | +9.4% | | Provision for loan losses | $265 | $625 | -57.6% | | Total Noninterest Income | $1,281 | $1,072 | +19.5% | | Total Noninterest Expense | $11,303 | $10,562 | +7.0% | | Net Income | $3,917 | $2,402 | +63.1% | | Diluted EPS | $0.40 | $0.25 | +60.0% | Consolidated Statements of Comprehensive Income Total comprehensive income significantly increased, driven by higher net income and positive unrealized gains on investment securities - Total comprehensive income was $6.0 million for Q1 2019, a significant increase from $0.9 million in Q1 2018, driven by higher net income and a positive swing in other comprehensive income, primarily from a $2.2 million unrealized gain on investment securities, compared to a $1.8 million loss in the prior year period[15] Consolidated Statements of Changes in Stockholders' Equity Stockholders' equity increased, driven by common stock issuance for acquisition, net income, and OCI, partially offset by repurchases and dividends - Stockholders' equity increased from $182.3 million at year-end 2018 to $203.0 million at March 31, 2019, with key drivers including the issuance of $18.6 million in common stock for the Mainland acquisition, net income of $3.9 million, and other comprehensive income of $2.0 million, partially offset by share repurchases of $3.4 million and dividends of $0.5 million[17] Consolidated Statements of Cash Flows Net cash and cash equivalents significantly increased, primarily from cash acquired in the Mainland Bank acquisition within investing activities Consolidated Cash Flow Summary (Unaudited) | Cash Flow Activity | Three months ended March 31, 2019 (in thousands) | Three months ended March 31, 2018 (in thousands) | | :--- | :--- | :--- | | Net cash provided by operating activities | $5,866 | $4,019 | | Net cash provided by (used in) investing activities | $15,679 | ($33,546) | | Net cash provided by financing activities | $33,718 | $20,208 | | Net change in cash and cash equivalents | $55,263 | ($9,319) | - The significant increase in cash from investing activities was primarily due to $38.4 million in cash acquired from the Mainland Bank acquisition, which more than offset net loan increases and securities purchases[21] Notes to the Consolidated Financial Statements Notes detail the Mainland Bank acquisition's financial impact, loan portfolio specifics, tax rate changes, and off-balance sheet commitments - On March 1, 2019, the Company completed its acquisition of Mainland Bank for approximately $18.6 million in stock, adding $128.4 million in assets, $82.4 million in loans, and $107.6 million in deposits, and resulting in the recording of $5.1 million in goodwill[70][72] - Total loans increased to $1.49 billion at March 31, 2019, from $1.40 billion at December 31, 2018, with the allowance for loan losses at $9.6 million, representing 0.64% of total loans[97][128] - The effective tax rate for Q1 2019 was 19.6%, compared to 35.8% for Q1 2018, with the higher rate in 2018 due to a $0.6 million charge related to the revaluation of deferred tax assets and liabilities from the Tax Cuts and Jobs Act[189] - The Company had unfunded loan commitments of $269.7 million and standby letters of credit of $11.1 million as of March 31, 2019[193] Management's Discussion and Analysis of Financial Condition and Results of Operations Management attributes 63% net income growth to strong loan expansion and lower loan loss provision, with stable credit quality Financial Condition Financial condition improved with significant increases in total loans and deposits, largely driven by the Mainland Bank acquisition and organic growth - Total loans increased by $94.1 million (6.7%) to $1.49 billion at March 31, 2019, compared to year-end 2018, primarily driven by the acquisition of Mainland Bank, which contributed $81.1 million in loans[215] - Total deposits grew by $171.1 million (12.6%) to $1.53 billion, with the Mainland acquisition accounting for $107.6 million of this increase, and the remainder from organic growth[227] - Investment securities increased by $15.1 million (5.7%) to $280.1 million, mainly due to purchases of mortgage-backed securities[221] Results of Operations Results show increased net income, EPS, and returns, with net interest income growth offset by NIM compression and higher noninterest expenses Performance Summary | Metric | Q1 2019 | Q1 2018 | | :--- | :--- | :--- | | Net Income | $3.9 million | $2.4 million | | Diluted EPS | $0.40 | $0.25 | | Return on Average Assets | 0.86% | 0.60% | | Return on Average Equity | 8.37% | 5.62% | - Net interest income grew 9.4% to $15.2 million in Q1 2019, driven by higher average loan balances, but the net interest margin declined by 17 basis points to 3.53% from 3.70% in Q1 2018, as the cost of interest-bearing liabilities rose faster than the yield on interest-earning assets[236][239] - Noninterest income increased 19.5% to $1.3 million, mainly due to a $0.2 million positive change in the fair value of equity securities[246] - Noninterest expense rose 7.0% to $11.3 million, driven by higher salaries and benefits related to strategic hires and the Mainland acquisition, as well as increased depreciation and other operating costs[249] Risk Management Risk management highlights stable credit quality with a lower loan loss provision, while noting the company's liability-sensitive position to interest rate changes Credit Quality Indicators | Metric | March 31, 2019 | December 31, 2018 | | :--- | :--- | :--- | | Allowance for Loan Losses | $9.6 million | $9.5 million | | ALL / Total Loans | 0.64% | 0.64% | | Nonperforming Loans | $6.0 million | $5.9 million | | NPLs / Total Loans | 0.40% | 0.42% | - The provision for loan losses decreased to $0.3 million for Q1 2019 from $0.6 million in Q1 2018, reflecting stable credit quality and the impact of a specific charge-off in the prior-year period[260] - The Company is liability-sensitive in a rising rate environment, with an immediate 100 basis point increase in interest rates projected to decrease net interest income by 0.4%, while a 100 basis point decrease would increase it by 4.9%[283] Liquidity and Capital Resources Liquidity is supported by core deposits and FHLB access, with both the company and bank maintaining strong, compliant capital ratios - Core deposits, a primary source of liquidity, funded 64% of total assets at March 31, 2019, and the Company also has access to FHLB advances, with $499.5 million of remaining credit available[286][288] Regulatory Capital Ratios (Company) | Ratio | March 31, 2019 | Requirement | | :--- | :--- | :--- | | Tier 1 Leverage | 10.03% | N/A | | Common Equity Tier 1 | 11.07% | N/A | | Total Capital | 13.23% | N/A | - Both the holding company and the bank were in compliance with all regulatory capital requirements and the bank was considered 'well-capitalized' as of March 31, 2019[293] Quantitative and Qualitative Disclosures about Market Risk No material changes in market risk since December 31, 2018, with detailed information referenced elsewhere in the report - There have been no material changes in the Company's market risk since December 31, 2018[304] Controls and Procedures Disclosure controls and procedures were deemed effective, with no material changes to internal control over financial reporting during the quarter - The Company's Principal Executive Officer and Principal Financial Officer concluded that disclosure controls and procedures were effective as of the end of the reporting period[305] - No changes in internal control over financial reporting occurred during the quarter that have materially affected, or are reasonably likely to materially affect, these controls[306] Part II. Other Information Updated risk factors, unregistered equity sales and use of proceeds, and a list of exhibits are presented Risk Factors The company refers to its 2018 Annual Report on Form 10-K for a comprehensive discussion of potential risks affecting its financial condition - The company directs investors to the risk factors section of its Annual Report on Form 10-K for the year ended December 31, 2018, for a comprehensive discussion of potential risks[308] Unregistered Sales of Equity Securities and Use of Proceeds The company repurchased shares in Q1, authorized additional repurchases, and notes dividend payment restrictions Issuer Purchases of Equity Securities (Q1 2019) | Period | Total Shares Purchased | Average Price Paid per Share | | :--- | :--- | :--- | | January 2019 | 79,701 | $23.55 | | February 2019 | 29,445 | $23.32 | | March 2019 | 43,773 | $23.55 | | Total | 152,919 | $23.50 | - On February 5, 2019, the board authorized the repurchase of an additional 300,000 shares of common stock under its repurchase plan[312] Exhibits This section lists exhibits filed with the report, including the Mainland Bank acquisition agreement and required officer certifications - A list of exhibits filed with the report is provided, including governance documents, material contracts, and required certifications[315] Signatures This section contains the required legal signatures for the filing of the report