Investar Holding Corporation — Q2 2017 Form 10-Q
Business context and reporting period
Unaudited results cover the three and six months ended June 30, 2017. Investar is a Louisiana-based community bank focused on individuals and small and medium-sized businesses, primarily in South Louisiana. At quarter-end it reported 12 offices; two new branches opened in June. The company reported 15 offices after adding Citizens Bank’s three branches in the July 1 acquisition.
Financial performance and position
- Q2 earnings: Net income was $1.9 million, versus $2.0 million a year earlier; diluted EPS was $0.22 versus $0.28. Net interest income rose 7.4% to $9.3 million, while noninterest income fell to $0.8 million from $2.3 million.
- First-half earnings: Net income was $3.8 million versus $4.0 million; diluted EPS was $0.47 versus $0.55. Net interest income increased 5.6% to $18.2 million. Noninterest income decreased to $1.7 million from $3.5 million.
- Margins and returns: Net interest margin was 3.28% for both Q2 and the first half, down from 3.38% and 3.42%, respectively, in 2016. First-half return on average assets was 0.65% versus 0.75%; return on average equity was 5.71% versus 7.19%.
- Balance sheet at June 30: Assets were $1.226 billion, up from $1.159 billion at year-end 2016. Gross loans were $933.0 million, up 4.4%; deposits were $894.8 million, down 1.4%. Stockholders’ equity was $150.8 million, compared with $112.8 million.
- Cash flow, first half: Operating activities provided $5.6 million; investing activities used $61.3 million; financing activities provided $61.2 million. Cash and cash equivalents increased $5.5 million to $35.0 million.
- Funding and capital: FHLB advances were $109.3 million and repurchase agreements $36.7 million. The company issued $18.6 million principal amount of subordinated notes at 6.00% fixed through March 2022, and raised $32.5 million net through a common stock offering. The Bank’s June 30 regulatory capital ratios included a 13.96% Tier 1 leverage ratio and 16.91% total capital ratio; it was classified as well-capitalized.
Material changes versus comparable periods
- Net interest income grew, supported by higher average loan and securities balances, but higher funding costs weighed on margin. First-half interest expense increased to $4.8 million from $3.9 million.
- Lower noninterest income largely reflects the absence of the prior-year $1.3 million gain on a branch-property sale. First-half 2016 also included $0.3 million of loan-sale gains; servicing income declined as the serviced indirect-auto portfolio ran off.
- Reported EPS declined partly because the March 2017 stock offering increased shares outstanding. First-half net income also included a $57,000 tax benefit from adopting stock-compensation accounting guidance.
- Loan growth was concentrated in real estate and commercial and industrial lending; consumer loans declined as the bank had stopped accepting indirect auto applications in 2015. Noninterest-bearing deposits grew, while time deposits fell $53.8 million, partly reflecting the bank’s effort to reduce higher-cost deposits.
Outlook, management commentary, risks and unusual items
- Management described a strategy of organic growth and acquisitions, with emphasis on high-quality lending, deposit growth, personalized service and cost management. No quantified earnings or margin guidance was provided.
- Citizens Bancshares and Citizens Bank were acquired July 1, 2017, for $45.8 million cash. At June 30, Citizens had approximately $250 million in assets, $130 million in net loans and $212 million in deposits.
- On August 4, Investar agreed to acquire BOJ Bancshares and The Highlands Bank for consideration valued at approximately $22.1 million at the stated share price, comprising $3.95 million cash and 799,559 Investar shares, subject to adjustments. Completion remained prospective.
- Credit quality indicators improved in some respects: nonperforming loans were $1.2 million (0.13% of loans), down from $2.0 million at year-end 2016; impaired loans were $3.5 million versus $4.4 million. Substandard loans rose to $5.1 million from $3.7 million. The $7.3 million allowance equaled 0.78% of loans. Eighteen troubled debt restructurings totaling about $2.4 million were performing under modified terms.
- Management cited South Louisiana economic conditions, borrower and geographic concentration, loan growth and credit quality, interest-rate changes, liquidity, personnel and acquisition integration as risks. Direct energy-sector exposure was reported as less than 1% of loans. A modeled 100-basis-point rate increase reduced projected 12-month net interest income by 0.4%; a 100-basis-point decrease increased it by 4.4%. Management cautioned that such simulations depend on uncertain assumptions.
- Available liquidity included $347.7 million of remaining FHLB borrowing capacity and $55.0 million in unused unsecured bank lines. Loan commitments were $119.9 million; standby letters of credit were $0.5 million. Management said the allowance was adequate but acknowledged it could prove insufficient if economic or borrower conditions deteriorate.
- The filing reported no material changes to previously disclosed risk factors or market risk, and management concluded disclosure controls were effective. Acquisition expenses were $225,000 for the first half.
Important facts for investors to verify
- Citizens acquisition accounting, integration progress, and the acquired assets, deposits, and credit profile reflected in subsequent reporting.
- Whether the proposed BOJ transaction closes on the stated terms, including share-count and consideration adjustments.
- Loan and deposit growth, particularly time-deposit runoff and the cost and availability of wholesale funding; monitor net interest margin as rates and funding mix change.
- Credit trends, including substandard loans, charge-offs, nonperforming assets, and whether the allowance remains adequate as the loan portfolio expands.
- How recurring earnings develop after excluding the prior-year property-sale gain and considering share dilution, acquisition costs, and servicing-portfolio runoff.