Investar Holding Corporation — Q2 2016 Form 10-Q
Reporting period: Three and six months ended June 30, 2016; balance-sheet comparisons are to December 31, 2015. Amounts are in millions unless stated otherwise.
Business context and financial performance
Investar is a Louisiana-based community bank serving South Louisiana through 10 full-service branches. Its strategy emphasizes organic loan and deposit growth and acquisitions. Management reported that the Bank was well-capitalized and both the Bank and holding company met regulatory capital requirements.
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Net interest income | $8.7 | $7.8 | $17.2 | $15.3 |
| Provision for loan losses | $0.8 | $0.4 | $1.3 | $1.1 |
| Noninterest income | $2.3 | $2.1 | $3.5 | $4.6 |
| Noninterest expense | $7.1 | $6.7 | $13.5 | $13.1 |
| Net income | $2.0 | $1.8 | $4.0 | $3.8 |
| Diluted EPS | $0.28 | $0.25 | $0.55 | $0.52 |
| Net interest margin | 3.38% | 3.70% | 3.42% | 3.71% |
Q2 return on average assets was 0.74% and return on average equity was 7.18%; six-month figures were 0.75% and 7.19%. Net interest income increased on asset growth, but lower asset yields and higher funding costs compressed margin.
Financial position, liquidity and credit
- Growth: Total assets were $1,126.9 million, up 9.2% from year-end. Loans excluding loans held for sale were $817.5 million, up 9.7%; deposits were $867.2 million, up 17.6%.
- Funding and debt: Deposits included $456.0 million of time deposits, 52.6% of total deposits. FHLB advances were $93.6 million, down from $127.5 million; repurchase agreements were $28.9 million, down from $39.1 million. Junior subordinated debt was $3.6 million. No amounts were drawn on the bank lines or new $20 million TIB revolving facility at quarter-end.
- Cash flow: Six-month operating cash flow was $33.7 million versus $36.2 million. Investing activities used $101.5 million, principally reflecting $61.6 million of net loan growth and $52.3 million of securities purchases. Financing activities provided $84.0 million, largely from deposit growth. Cash and equivalents ended at $37.1 million.
- Capital: Bank regulatory ratios at June 30 included 10.26% Tier 1 leverage, 11.25% common equity Tier 1 and 11.97% total capital, above the stated “well-capitalized” thresholds.
- Credit quality: Nonperforming loans were $5.5 million, or 0.67% of loans, versus $2.4 million, or 0.32%, at year-end. Impaired loans were $8.0 million versus $4.0 million; substandard loans were $7.1 million. The allowance was $7.1 million, 0.87% of loans, and 129.59% of nonperforming loans. Provision rose to $0.8 million for Q2.
- Commitments: Loan commitments were $180.9 million and standby letters of credit $1.0 million at quarter-end. The company also had $0.9 million of unfunded commitments to SBIC-qualified funds.
Material changes and unusual items
- Q2 noninterest income included a $1.25 million gain from selling a branch land and building to a healthcare company. This helped lift quarterly noninterest income despite lower loan-sale gains.
- Six-month noninterest income declined 23.1%, mainly because gains on loan sales fell $2.5 million after the Bank exited indirect auto originations at the end of 2015. Loans held for sale fell to $46.7 million from $80.5 million.
- Q2 and six-month expenses included $0.6 million of customer reimbursements paid during the quarter.
- A $2.7 million commercial-and-industrial relationship, unrelated to oil and gas, contributed to increased impaired and nonperforming loans. Management said it was well collateralized, specifically reserved, and expected to be resolved without additional material financial-statement impact.
- The company reported $50 million notional of cash-flow interest-rate swaps, with a negative fair value of $1.6 million at quarter-end. Management expected the hedges to remain effective.
Outlook, commentary and risks
The filing provides no specific earnings or growth guidance. Management described continued focus on high-quality lending, deposit growth, relationship banking and cost management; a new Gonzales branch was expected to open in 2016. It noted that the low-rate environment pressured net interest margin and that a further or prolonged decline in oil and gas prices could weaken the South Louisiana economy, although direct energy-sector lending was less than 1% of the portfolio. Management also highlighted uncertainty in loan-loss estimates and sensitivity to interest rates. Its modeled 12-month net interest income impact ranged from a 0.4% decrease for an immediate 100-basis-point rate increase to a 4.7% increase for a 100-basis-point decrease; actual results could differ.
The company disclosed no material changes to previously reported risk factors, market risk, or contractual obligations. Disclosure controls were reported effective, with no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether the $2.7 million C&I credit and broader rise in nonperforming and impaired loans resolve as management expects, and whether reserves remain adequate.
- Underlying earnings excluding the branch-property gain and customer reimbursements, alongside the continued reduction in loan-sale income following the indirect-auto exit.
- Deposit growth quality and cost, particularly the increase in time deposits and QwikRate deposits, and the Bank’s reliance on FHLB and other borrowing capacity.
- Compliance with the new TIB facility’s capital, return, classified-asset and loan-to-asset covenants, and the effect of share repurchases and dividends on capital flexibility.
- Whether net interest margin stabilizes as asset yields and funding costs change, given the disclosed rate sensitivity and Louisiana economic concentration.