Investar Holding Corporation — Q1 2017 Form 10-Q
Business context and reporting period. Investar is a Louisiana bank holding company serving South Louisiana through Investar Bank. This unaudited quarterly report covers the three months ended March 31, 2017, compared with Q1 2016 for operating results and December 31, 2016 for balance-sheet changes.
Financial performance and position
| Metric | Q1 2017 / March 31, 2017 | Comparison |
|---|---|---|
| Interest income | $11.1 million | $10.4 million in Q1 2016 |
| Net interest income | $8.9 million; net interest margin 3.27% | $8.5 million and 3.47% in Q1 2016 |
| Provision for loan losses | $350,000 | $454,000 in Q1 2016 |
| Noninterest income | $885,000 | $1.3 million in Q1 2016 |
| Noninterest expense | $6.7 million | $6.4 million in Q1 2016 |
| Net income / diluted EPS | $1.9 million / $0.26 | $2.0 million / $0.28 in Q1 2016 |
| Cash flow from operations | $9.1 million provided | $27.4 million provided in Q1 2016 |
| Total assets | $1.176 billion | $1.159 billion at Dec. 31, 2016 |
| Total loans | $902.1 million | $893.4 million at Dec. 31, 2016 |
| Total deposits | $868.6 million | $907.8 million at Dec. 31, 2016 |
| Stockholders’ equity | $148.3 million | $112.8 million at Dec. 31, 2016 |
Return on average assets was 0.65% and return on average equity was 6.44%, versus 0.76% and 7.20%, respectively, in Q1 2016. Cash and cash equivalents were $26.6 million at quarter-end, down from $29.4 million at year-end; cash decreased $2.8 million during the quarter.
At March 31, deposits were $868.6 million; FHLB advances were $82.4 million, repurchase agreements $36.4 million, subordinated debt carrying value $18.1 million, and junior subordinated debt $3.6 million. The company and bank met regulatory capital requirements; the bank was classified as well-capitalized. The bank’s Tier 1 leverage, common equity Tier 1, Tier 1, and total capital ratios were 14.23%, 16.68%, 16.68%, and 17.41%, respectively.
Material changes and management commentary
- Net interest income rose 3.7%, largely because average loans and securities increased. However, net interest margin fell 20 basis points as asset yields declined and funding costs increased.
- Noninterest income fell 31.2%, chiefly due to lower loan-sale gains after the bank exited indirect auto loan originations, and lower servicing income as the serviced portfolio ran off.
- Deposits declined $39.2 million, or 4.3%, primarily as time deposits fell $42.0 million. Management said some depositors, including financial institutions, withdrew funds seeking higher rates; the company had been lowering time-deposit rates to reduce funding costs and reliance on certificates of deposit.
- Loans grew $8.7 million, or 1.0%, from year-end; excluding indirect auto loans, management reported 2.5% growth, equivalent to a 10% annualized rate. Consumer loans continued to run off following the exit from indirect auto lending.
- Equity increased following a March common-stock offering of approximately 1.6 million shares at $21.25 per share, generating $32.6 million net proceeds. The company also issued $18.6 million of 6.00% fixed-to-floating subordinated notes due 2027, with net proceeds intended to fund part of the proposed acquisition.
Outlook, risks, and unusual items
- The company announced a definitive agreement to acquire Citizens Bancshares and Citizens Bank, which operate three branches in Evangeline Parish. Closing was expected in Q3 2017; completion remained prospective. Q1 included approximately $145,000 of acquisition-related expense. The company said the transaction would expand its Louisiana footprint and core deposit base.
- No specific earnings or revenue guidance was provided. Management described organic loan and deposit growth and acquisitions as parts of its strategy and said it continued to focus on deposit growth.
- Credit indicators warrant monitoring: substandard loans increased to $6.2 million from $3.7 million at year-end. Nonperforming loans were $2.1 million, or 0.24% of loans, versus $2.0 million, or 0.22%, at year-end. The allowance for loan losses was $7.2 million, 0.80% of total loans. All 18 troubled debt restructurings, totaling approximately $2.4 million, were performing under modified terms.
- Management said direct energy-sector lending was less than 1% of loans, but a prolonged or further decline in oil and gas prices could weaken the South Louisiana economy and borrowers’ repayment capacity. Other stated risks include local economic conditions, interest-rate changes, loan quality, funding and deposit competition, and geographic and credit concentrations.
- Interest-rate sensitivity analysis estimated net interest income would decline 0.7% under an immediate 100-basis-point rate increase and rise 4.4% under a 100-basis-point decrease. Management cautioned that actual outcomes may differ because the analysis depends on assumptions.
- The portfolio had unrealized securities losses attributed by management to interest-rate changes, not credit concerns; the company said it did not intend, and was not more likely than not required, to sell the securities before recovery. It reported no material changes in market risk or risk factors from its prior annual report.
Most important facts for investors to verify
- Whether the Citizens acquisition closed as expected, its final terms, funding, integration costs, and contribution to deposits and earnings.
- Whether deposit outflows continued, particularly in time deposits, and how deposit pricing affected funding costs and net interest margin.
- Trends in substandard and nonperforming loans, allowance adequacy, charge-offs, and exposure to South Louisiana economic and energy-sector conditions.
- The impact of the subordinated notes’ 6.00% fixed rate and later LIBOR-based floating rate, alongside the dilution from the stock offering.
- Whether the decline in indirect-auto-related loan-sale and servicing income is offset by growth in core banking revenue.