Investar Holding Corporation — Q2 2015 Form 10-Q
Business and period. Investar is a Louisiana bank holding company serving primarily South Louisiana through Investar Bank, with 11 full-service offices. This unaudited filing covers the quarter and six months ended June 30, 2015; balance-sheet comparisons are with December 31, 2014. Amounts below are in millions unless stated otherwise.
Financial performance and position
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Interest income | $9.19 | $7.41 | $17.99 | $14.36 |
| Net interest income | $7.78 | $6.25 | $15.28 | $12.12 |
| Provision for loan losses | $0.40 | $0.45 | $1.10 | $0.69 |
| Noninterest income | $2.07 | $1.51 | $4.61 | $2.58 |
| Noninterest expense | $6.68 | $5.73 | $13.11 | $11.12 |
| Income before taxes | $2.76 | $1.58 | $5.68 | $2.88 |
| Net income | $1.81 | $1.07 | $3.76 | $1.95 |
| Basic / diluted EPS | $0.25 / $0.25 | $0.27 / $0.26 | $0.52 / $0.52 | $0.50 / $0.47 |
| Net interest margin | 3.70% | 3.85% | 3.71% | 3.89% |
- Growth and profitability: Q2 net income rose about 70% year over year, while six-month net income nearly doubled. Management attributed improvement mainly to higher net interest income and noninterest income. Q2 basic EPS declined despite higher net income, reflecting a substantially higher share count following the 2014 public offering.
- Balance sheet at June 30: Assets were $921.9 million, up from $879.4 million at year-end. Portfolio loans, excluding loans held for sale, were $673.6 million, up 8.2%; deposits were $706.0 million, up 12.4%. Loans held for sale were $78.2 million, down from $103.4 million.
- Margins and costs: Net interest income increased 24.5% in Q2 and 26.1% for the six-month period, primarily on loan and deposit growth. However, net interest margin contracted 15 basis points in Q2 and 18 basis points year over year for the six-month period as asset yields fell. Noninterest expense increased 16.6% in Q2 and 17.9% year to date, including costs of growth, a new branch, added staff and Sarbanes-Oxley compliance.
- Cash flow: For the six months, operating cash flow was $36.2 million, versus use of $22.4 million in 2014; investing cash use was $65.1 million versus $80.5 million; financing cash provided was $34.0 million versus $89.9 million. Cash and cash equivalents increased $5.0 million to $24.5 million. Operating cash flow included substantial loan-held-for-sale originations and sales.
- Funding and capital: FHLB advances were $79.1 million, down from $125.8 million, as excess cash was used to repay advances; repurchase agreements were $15.1 million and junior subordinated debt was $3.6 million. The Bank had $208.6 million of remaining FHLB borrowing capacity and $35 million in unsecured, uncommitted bank lines. The Bank was reported well-capitalized, with a 11.72% Tier 1 leverage ratio and 13.58% total capital ratio under Basel III.
Changes, outlook, and key risks
- Revenue mix: Six-month noninterest income rose 78.8%, led by loan-sale gains, which increased to $2.81 million from $1.66 million. Consumer loan originations for sale rose substantially; management said it expects to continue quarterly consumer-loan pool sales. The filing also notes that consumer loan fees formerly included in interest income are now recorded in noninterest income.
- Credit quality: Nonperforming loans were $2.69 million, or 0.40% of portfolio loans, versus $3.34 million at year-end. The allowance for loan losses was $5.73 million, 0.85% of loans, versus $4.63 million and 0.74% at year-end. Six-month provision increased to $1.10 million; net charge-offs were $2,000, aided by $236,000 of recoveries. Substandard and special-mention loans totaled about $6.1 million. Ten troubled debt restructurings totaled about $1.5 million; two, with balances of approximately $0.4 million, were in default and on nonaccrual.
- Interest-rate exposure: Management reported the Bank was within policy limits. Its model estimated that a parallel 100-basis-point increase would reduce 12-month net interest income by 3.60%, while a 100-basis-point decrease would increase it by 1.91%; actual results may differ because of modeling assumptions and customer behavior. A $20 million notional interest-rate swap had a negative fair value of approximately $0.54 million.
- Liquidity and commitments: Core deposits funded 63% of assets, down from 67% at year-end. The company reported $81.9 million of QwikRate internet deposits and no brokered deposits. Loan commitments and standby letters of credit totaled approximately $105.0 million, including $104.5 million of loan commitments; these are not necessarily expected to be fully drawn.
- Other commentary and risks: Management cited the prolonged low-rate environment, competition, operating costs and local economic conditions as relevant factors. Lending is concentrated in South Louisiana. Available-for-sale securities had $365,000 of gross unrealized losses; management considered the losses temporary, attributed them to interest rates rather than credit, and said it did not expect to have to sell the securities before recovery. No quantitative earnings guidance is provided. The filing reported no material changes to previously disclosed risk factors or market risk.
Important facts for investors to verify
- Whether loan and deposit growth can continue without further net interest margin compression or increased funding costs.
- Whether loan-sale gains and consumer-loan sales remain sustainable, and how they affect recurring earnings and liquidity.
- Future trends in nonperforming loans, TDR defaults, charge-offs, recoveries and the adequacy of the allowance as the portfolio grows.
- Actual sensitivity to changing interest rates, including the assumptions behind the reported rate-shock model and the effectiveness of the cash-flow hedge.
- Deposit stability and concentration, available borrowing capacity, and the potential funding effect if loan commitments are drawn.
- Dividend capacity: the holding company’s dividends depend on Bank distributions, regulatory conditions and payments on senior junior subordinated debentures.