Investar Holding Corp quarterly report, Q2 FY2022

Investar Holding Corporation (NASDAQ: ISTR) — Q2 2022 Form 10-Q

Business context and reporting period. Investar is a Louisiana-based bank holding company serving individuals and businesses primarily in Louisiana, Texas and Alabama. This unaudited filing covers the quarter and six months ended June 30, 2022; comparisons are with the corresponding 2021 periods unless noted. Financial amounts below are in millions of dollars unless otherwise stated.

Financial performance and position

Metric	Q2 2022	Six months 2022	Comparable period
Net interest income	$22.0	$43.8	$21.2 and $40.8
Net interest margin	3.70%	3.72%	3.48% and 3.56%
Net income	$9.4	$19.5	$5.7 and $11.0
Diluted earnings per share	$0.92	$1.89	$0.53 and $1.04
Noninterest income	$6.4	$12.2	$4.1 and $6.4
Noninterest expense	$15.6	$31.0	$18.0 and $32.8

Q2 pretax income was $11.9 million, versus $7.2 million a year earlier. Six-month pretax income was $24.6 million, versus $14.0 million.
For the six months, return on average assets was 1.54% and return on average equity was 16.52%, compared with 0.89% and 8.93%, respectively, in 2021.
At June 30, total assets were $2.59 billion; loans were $1.92 billion, up 2.4% from year-end 2021; and deposits were $2.06 billion, down 2.7%. Noninterest-bearing deposits increased 5.2% to $615.8 million.
Cash and cash equivalents were $51.0 million, versus $97.0 million at December 31, 2021. Six-month operating cash flow was $21.8 million; investing activities used $157.5 million and financing activities provided $89.6 million.
FHLB advances rose $161.3 million to $239.8 million. Subordinated debt, net of issuance costs, was $44.2 million; junior subordinated debt was $8.5 million. The company issued $20 million of 5.125% fixed-to-floating notes due 2032 and redeemed $18.6 million of 6.00% notes due 2027.
Stockholders’ equity was $219.4 million, down from $242.6 million at year-end. Accumulated other comprehensive loss was $32.8 million, including significant unrealized losses on available-for-sale securities as interest rates rose.
The allowance for loan losses was $22.0 million, or 1.15% of loans. Nonaccrual loans were $16.6 million, or 0.87% of loans; six-month net recoveries were $0.6 million. The Bank was well-capitalized and the Company and Bank met regulatory capital requirements.

Material changes versus prior periods

Six-month net income rose primarily due to $8.1 million of swap termination income and $2.1 million less interest expense, partly offset by the absence of $2.3 million in prior-year securities-sale gains. Q2 included $4.7 million of swap termination income.
Lower deposit costs supported net interest margin growth. Six-month deposit cost fell 31 basis points to 0.25%; however, loan yields declined year over year, while investment-security yields increased.
Loans excluding PPP balances grew $64.2 million, or 3.5%, from year-end. PPP loans declined to $3.5 million from $23.3 million; the company reported approximately 98% of originated PPP balances had been forgiven or repaid.
Deposits declined as the company ran off higher-cost time deposits and customers drew down balances, partly offset by growth in noninterest-bearing deposits. FHLB borrowing increased to support loan and investment activity.
Noninterest expense fell, largely because 2021 included Cheaha acquisition costs. The company repurchased 381,919 shares for $7.6 million during the first half and declared dividends of $0.175 per share.
Other comprehensive loss was $33.9 million for the first half, versus comprehensive income of $12.8 million in 2021, primarily reflecting securities valuation losses and swap-related reclassifications.

Outlook, risks and unusual items

The filing gives no specific earnings or revenue guidance. Management noted that rising interest rates could require higher deposit pricing, potentially pressuring margins; interest-rate simulations estimated net interest income would decline 2.5% under an immediate 100-basis-point rise and 7.9% under a 300-basis-point rise.
Management cited inflation, supply and labor constraints, economic and pandemic uncertainty, borrower credit quality, local-market and industry concentration, liquidity and deposit competition, cybersecurity, severe weather, and regulatory and LIBOR-transition changes among relevant risks. It cautioned that the loan-loss allowance is based on estimates and could prove insufficient.
The company voluntarily terminated its remaining $115 million notional interest-rate swaps during the first half, recording $8.1 million of termination fee income. It had no such hedges outstanding at June 30. These gains are an unusual contributor to reported earnings.
On July 15, 2022, the Bank agreed to sell the Alice and Victoria, Texas branches, with approximately $23 million of loans and $27 million of deposits expected to transfer. Closing was expected in Q1 2023, subject to approvals; management did not expect a material financial impact.
The Bank closed two branches in Q2 and sold former branch properties and land. Management said it did not expect to open de novo branches during the remainder of 2022.
Expected adoption of the current expected credit loss standard (CECL) on January 1, 2023 is likely to increase the allowance, but the company could not reasonably estimate the impact.

Important facts for investors to verify

How much of first-half earnings growth is sustainable after excluding the $8.1 million swap termination income and other period-specific items.
Whether loan growth, deposit retention and deposit pricing sustain net interest income and margin as rates rise and FHLB reliance increases.
Whether credit quality and the $22.0 million allowance remain adequate, particularly given impaired and nonaccrual exposures and economic uncertainty.
The effects of securities unrealized losses on tangible capital, liquidity flexibility and any potential need to sell securities.
Regulatory approvals, timing and final financial effects of the planned Texas branch transaction, and the actual impact of CECL adoption.