Investar Holding Corporation — Q2 2020 Form 10-Q
Business context and reporting period. This unaudited filing covers the quarter and six months ended June 30, 2020. Investar is a Louisiana-based bank holding company serving individuals and small to medium-sized businesses in Louisiana, southeast Texas and west Alabama. It operated 31 branches and had 336 employees at quarter-end. Amounts below are U.S. dollars; financial statement figures are in millions unless stated otherwise.
Financial performance and position
- Q2 earnings: Net income was $4.27 million, down from $4.93 million in Q2 2019. Basic and diluted EPS were $0.39, versus $0.49 and $0.48. Net interest income rose to $18.34 million from $16.33 million, but provision for loan losses increased to $2.50 million from $0.37 million. Noninterest income was $3.93 million versus $1.74 million; noninterest expense rose to $14.48 million from $11.55 million.
- First-half earnings: Net income was $4.88 million, down from $8.85 million; basic and diluted EPS were $0.44 versus $0.89 and $0.88. Net interest income increased to $35.67 million from $31.49 million, while loan-loss provision rose to $6.26 million from $0.63 million.
- Margins and returns: Net interest margin was 3.46% for Q2, down from 3.59%; first-half margin was 3.47% versus 3.56%. First-half return on average assets was 0.44% versus 0.94%, and return on average equity was 4.09% versus 9.06%.
- Balance sheet at June 30: Total assets were $2.36 billion, up from $2.15 billion at December 31, 2019. Total loans were $1.81 billion, up 7.2%; deposits were $1.89 billion, up 10.7%. Cash and cash equivalents were $130.96 million, compared with $44.70 million at year-end.
- Credit quality: The allowance for loan losses was $16.66 million, up from $10.70 million at year-end; allowance equaled 0.92% of total loans. Nonperforming loans were $13.05 million, or 0.72% of loans, versus $6.29 million, or 0.37%, at year-end. Net charge-offs were $0.30 million in the first half. Management said the allowance was adequate but acknowledged the estimate could prove insufficient.
- Cash flow: First-half operating cash flow was $4.17 million, versus $11.83 million in 2019; investing cash outflow was $82.54 million and financing cash inflow was $164.65 million. Cash and cash equivalents increased $86.27 million.
- Debt and liquidity: Quarter-end borrowings included $158.5 million of FHLB advances, $4.9 million of repurchase agreements, $42.9 million of subordinated debt and $5.9 million of junior subordinated debt. The company reported $617.7 million of remaining FHLB borrowing capacity and $60 million of undrawn unsecured lines. Core deposits funded 70% of assets. The Bank was reported well-capitalized; its total capital ratio was 13.25% and common equity Tier 1 ratio was 12.33%.
Material changes versus comparable periods
- Earnings declined despite higher net interest income, principally reflecting pandemic-related loan-loss provisioning, lower asset yields and higher operating costs. Q2 interest-earning asset yield fell to 4.49% from 4.93%; lower funding costs partly offset that decline.
- First-half noninterest expense increased 24.2% to $28.39 million, with higher salaries and operating costs associated with acquisitions, branch expansion and staffing. Q2 salaries also included a $0.3 million severance charge.
- Loan growth included $109.5 million of Paycheck Protection Program loans. Excluding PPP loans and PlainsCapital-acquired loans, the filing reports first-half loan growth of 0.7% versus year-end.
- Deposits grew partly due to stimulus payments, reduced customer spending and PPP-related balances; management cautioned these factors may be temporary. The share of noninterest-bearing demand deposits rose to 24.8% of deposits from 20.6% at year-end.
- Investar completed the acquisition of two PlainsCapital branches in Texas in February 2020. It terminated its proposed approximately $41.1 million Cheaha Financial Group acquisition after June 30 because pandemic-related uncertainty made completion impractical.
Outlook, risks and unusual items
- The filing gives no earnings or growth guidance. Management expected the 2020 effective tax rate to approximate 20%.
- COVID-19, economic weakness and renewed restrictions were key uncertainties. At June 30, $490.3 million, or 27% of loans, were in the 90-day deferral program; by August 3, the reported balance had fallen to $98.8 million, or 5%, including borrowers granted a second deferral. These deferrals were not classified as TDRs, past due or nonaccrual under the cited relief provisions.
- The Bank had originated 998 PPP loans totaling $109.5 million. The filing identifies risks including borrower defaults, further reserve needs, potential SBA guarantee disputes, weaker collateral values, deposit instability and operational or cyber risks.
- Loans to oil and gas, food services, hospitality and entertainment represented 6.8% of the portfolio, or 5.8% excluding PPP loans. A $6.4 million oil-and-gas commercial loan relationship was among nonaccrual loans. Nonaccrual loans and TDRs increased materially from year-end.
- Management found no goodwill impairment at June 30, but warned that prolonged economic disruption could prompt future impairment. The six-month results also included a $0.58 million fair-value loss on equity securities, partly offset by $1.35 million of investment-security sale gains.
- On May 29, the Bank bought the first floor of its headquarters from an entity controlled by a director for $1.8 million; the filing says the price approximated an independent appraisal. Cash dividends declared were $0.12 per share for the first half, and the company repurchased 429,473 shares.
Important facts for investors to verify
- Whether loan deferrals roll off as expected and whether borrowers subsequently become delinquent, nonaccrual or TDRs.
- Whether credit deterioration, particularly in oil and gas and other pandemic-sensitive sectors, requires additional provisions beyond the $16.66 million allowance.
- The sustainability of deposit growth and liquidity, including customer balances tied to stimulus and PPP activity, and continued access to FHLB and other funding.
- PPP loan forgiveness, fee recognition and SBA guarantee compliance, as well as the performance of the broader commercial loan book.
- The effect of lower interest rates on future asset yields and net interest margin, and any impacts from the LIBOR transition on hedges and contracts.
- Whether the halted Cheaha transaction, ongoing pandemic conditions or market changes affect future acquisition plans, expenses, goodwill or capital needs.