Investar Holding Corporation — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; balance-sheet comparisons are to December 31, 2015 unless otherwise stated. Investar is a Louisiana-based bank holding company operating 11 full-service branches, primarily in South Louisiana. Financial statement amounts below are in millions of dollars unless indicated otherwise.
Financial performance and condition
| Metric | Q1 2016 / March 31, 2016 | Comparable period / prior year-end |
|---|---|---|
| Net income | $1.99 million; $0.28 basic and diluted EPS | $1.95 million; $0.27 EPS in Q1 2015 |
| Net interest income | $8.55 million | $7.50 million in Q1 2015 |
| Net interest margin | 3.47% | 3.71% in Q1 2015 |
| Return on average assets / equity | 0.76% / 7.20% | 0.91% / 7.54% in Q1 2015 |
| Total assets | $1,073.5 million | $1,031.6 million |
| Total loans, excluding loans held for sale | $797.6 million | $745.4 million |
| Total deposits | $808.7 million | $737.4 million |
| Cash and cash equivalents | $21.3 million | $21.0 million |
| Stockholders’ equity | $111.5 million | $109.4 million |
- Revenue and margins: Interest income rose to $10.4 million from $8.8 million, while interest expense increased to $1.8 million from $1.3 million. Higher loan and securities volumes supported net interest income growth, but lower asset yields and higher funding costs compressed net interest margin by 24 basis points.
- Other income and expenses: Noninterest income fell 49% to $1.3 million, chiefly due to lower loan-sale gains. Noninterest expense was nearly unchanged at $6.4 million. Provision for loan losses was $0.45 million, down from $0.70 million.
- Cash flow: Operating activities provided $27.4 million versus $47.4 million in Q1 2015; investing activities used $65.0 million versus $26.6 million; financing activities provided $38.0 million versus using $19.6 million. Cash increased $0.36 million. These flows include substantial loan-sale activity and loan growth.
- Funding and debt: Deposits rose 9.7% during the quarter, with time deposits up 17.2%. FHLB advances declined to $104.0 million from $127.5 million, and repurchase agreements declined to $29.7 million from $39.1 million. Junior subordinated debt was $3.6 million. The company reported no draws on its $35 million bank credit lines; remaining FHLB capacity was $240.2 million.
- Liquidity and capital: Core deposits funded 73.2% of assets, compared with 69.4% at year-end. The Bank was considered well-capitalized; its March 31 ratios were 10.52% Tier 1 leverage, 11.57% common equity Tier 1 and Tier 1 risk-based, and 12.25% total risk-based capital.
Material changes and operating developments
- Loans grew $52.2 million, or 7.0%, from year-end, led by real estate lending; commercial and industrial loans increased 7.2%. Deposits increased $71.3 million, or 9.7%.
- Loans held for sale declined to $50.9 million from $80.5 million. Investar exited indirect auto originations, stopped accepting applications on December 31, 2015, and continued processing previously accepted applications. Consumer-loan sale gains fell to $0.3 million from $1.2 million year over year.
- The Bank significantly reduced mortgage operations. Mortgage originations for sale were $0.5 million versus $17.0 million in Q1 2015; mortgage-loan sale gains were $13,000 versus $0.5 million. Management does not intend to grow mortgage lending and expects production to remain at current levels.
- Investment securities increased to $154.8 million from $139.8 million, primarily from purchases to manage liquidity. The allowance for loan losses increased to $6.46 million from $6.13 million.
Outlook, risks, contingencies and unusual items
- No earnings or financial guidance was provided. Management describes continued focus on organic growth in high-quality loans and deposits, relationship banking, and potential acquisitions.
- Management cited the prolonged low-rate environment, competition, and deposit pricing as factors affecting net interest margin. Its modeled 12-month net interest income response to an immediate 100-basis-point rate increase was negative 1.1%; a 100-basis-point decrease was positive 4.5%. These are estimates based on assumptions, not forecasts.
- Credit risks include geographic concentration in South Louisiana and potential economic effects of low oil and gas prices. The company reported energy-sector exposure below 1% of loans but cautioned that prolonged weakness could affect borrowers and local markets.
- Nonperforming loans were $2.31 million, or 0.29% of loans, down from $2.41 million and 0.32% at year-end. There were 20 troubled debt restructurings totaling approximately $2.6 million, versus 11 totaling $2.2 million; two were in default and on nonaccrual at quarter-end. Management warned that loan-loss estimates are judgmental and may need adjustment.
- Interest-rate swaps had $40 million notional value and a negative fair value of $1.27 million. The company expects the hedges to remain effective; accumulated losses could be reclassified to earnings if forecast transactions cease to be probable.
- Off-balance-sheet commitments included $148.7 million of loan commitments, $0.37 million of standby letters of credit, and $1.4 million of unfunded commitments to investment funds. Commitments may expire undrawn and are not equivalent to expected cash outflows.
- The company repurchased 20,694 shares under its announced program during the quarter for approximately $0.315 million. The filing notes that dividends are subject to regulatory, subsidiary-distribution, and debt-related limitations.
- Management reported no material changes to previously disclosed risk factors, market risk, or contractual obligations; disclosure controls were deemed effective, with no material internal-control changes reported.
Important facts for investors to verify
- Whether loan and deposit growth can continue without further net interest margin compression or increased reliance on time and online-sourced deposits.
- Whether reduced indirect auto and mortgage activity continues to depress loan-sale gains and fee income, and how the remaining loans held for sale are managed.
- Credit quality trends, including criticized and nonperforming loans, troubled debt restructurings, charge-offs, and adequacy of the allowance amid regional economic and energy-sector risks.
- Funding costs, liquidity sources, and the sensitivity of earnings to changing interest rates, including the performance and accounting of the interest-rate swaps.
- Capital and liquidity headroom after loan growth, share repurchases, and dividends, alongside the terms and availability of borrowings and regulatory permissions.