Investar Holding Corporation — Q3 2016 Form 10-Q
Business context and reporting period. The unaudited report covers the quarter and nine months ended September 30, 2016. Investar is a Louisiana bank holding company operating through Investar Bank, with 10 branches focused on South Louisiana individuals and small and medium-sized businesses. Amounts below are in U.S. dollars; financial statement amounts are generally in millions unless otherwise indicated.
Financial performance and condition
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Net interest income | $8.75 | $7.95 | $25.96 | $23.23 |
| Provision for loan losses | $0.45 | $0.40 | $1.70 | $1.50 |
| Noninterest income | $1.03 | $2.17 | $4.57 | $6.77 |
| Noninterest expense | $6.55 | $7.01 | $20.04 | $20.12 |
| Net income | $2.04 | $1.86 | $6.03 | $5.62 |
| Diluted EPS | $0.29 | $0.26 | $0.84 | $0.78 |
| Net interest margin | 3.23% | 3.52% | 3.36% | 3.64% |
- Growth and balance sheet: Total assets were $1.154 billion at September 30, 2016, up from $1.032 billion at year-end 2015. Loans excluding loans held for sale rose 13.6% to $846.8 million; deposits increased 23.0% to $907.1 million. Commercial real estate loans were $365.2 million, or 43.2% of total loans; all real estate loans represented 80.8%.
- Liquidity and funding: Cash and cash equivalents were $46.2 million. Core deposits funded 76% of assets, versus 69% at year-end 2015. The company reported $88.9 million of FHLB advances, $23.6 million of repurchase agreements and $3.6 million of junior subordinated debt. It had no borrowings on its $55 million of unsecured bank lines or its separate $20 million secured revolving line.
- Cash flows, nine months: Operating activities provided $33.1 million, versus $62.2 million in 2015; investing activities used $120.5 million versus $108.1 million; financing activities provided $112.6 million versus $46.3 million. Cash and cash equivalents increased $25.2 million to $46.2 million.
- Credit and capital: The allowance for loan losses was $7.4 million, 0.87% of loans. Nonperforming loans increased to $9.0 million, or 1.06% of loans, from $2.4 million, or 0.32%, at December 31, 2015. The Bank’s September 30 ratios included 9.94% Tier 1 leverage, 11.19% common equity Tier 1 and 11.93% total capital; the filing says the Bank was well-capitalized and both it and the holding company met regulatory capital requirements.
- Returns and taxes: Q3 return on average assets was 0.71% and return on average equity 7.15%; nine-month figures were 0.74% and 7.17%. The effective tax rate was 26.8% for Q3 and 31.4% year to date.
Material changes versus comparable periods
- Q3 net income rose 9.8% and diluted EPS increased from $0.26 to $0.29. Nine-month net income rose 7.3%. Higher loan and securities volumes lifted net interest income, but margin contracted 29 basis points in Q3 and 28 basis points year to date as asset yields declined and funding costs rose.
- Noninterest income fell 52.5% in Q3 and 32.5% year to date, chiefly reflecting reduced gains on loan sales after the Bank exited indirect auto loan originations at the end of 2015 and substantially reduced mortgage operations. Year-to-date income included a $1.25 million gain on sale of a branch property; 2016 expense included $0.58 million in customer reimbursements.
- The loan portfolio’s mix shifted toward real estate lending. Consumer loans declined, and loans held for sale fell 49.6% to $40.6 million. Management expects consumer balances and related servicing fees to decline over time following the indirect auto business exit.
- Credit quality weakened: nonperforming loans rose by $6.5 million from year-end, driven principally by a $4.7 million owner-occupied commercial real estate relationship and a $2.6 million commercial and industrial relationship placed on nonaccrual. Substandard loans increased to $10.2 million from $6.7 million.
Outlook, commentary, risks and unusual items
- Management continued to emphasize organic growth in high-quality loans, relationship deposit growth, cost management and selective acquisition opportunities. A new Gonzales branch was expected to open in 2017. No specific earnings or growth guidance was provided.
- Management expected the Q4 2016 effective tax rate to be approximately 32.5%. Time-deposit rates were lowered during and after Q3 to reduce funding costs.
- Following the August 2016 Baton Rouge-area flooding, the Bank placed approximately $23.5 million of loans, or 2.8% of its portfolio, on 90-day deferrals and allocated part of general reserves to potential effects. Management said it continued to assess possible additional reserve needs.
- Management said a $2.6 million nonaccrual commercial and industrial relationship had received additional cash collateral and a subsequent $0.5 million principal payment; it anticipated returning the loan to accrual in Q4 and did not expect a loss at that time. This was an expectation, not a reported completed action.
- Interest-rate sensitivity analysis estimated that a 100-basis-point increase would reduce 12-month net interest income by 1.0%, while a 100-basis-point decrease would increase it by 5.3%; actual results may differ because the model relies on assumptions. The company also held $50 million notional of interest-rate swaps, with a negative fair value of approximately $1.2 million.
- Principal risks include local economic conditions and concentration in South Louisiana, credit deterioration and reserve-estimation uncertainty, interest-rate and funding-cost changes, and the potential regional effects of the flooding. The filing reported $162.2 million of loan commitments, $1.0 million of standby letters of credit and $0.9 million of unfunded investment commitments.
Important facts for investors to verify
- Whether the flood-related loan deferrals resulted in delinquencies, nonaccruals or additional provisions after September 30.
- Performance, collateral coverage and accrual status of the two large nonaccrual relationships, including whether the anticipated return to accrual occurred.
- Subsequent trends in nonperforming and substandard loans, charge-offs, and allowance coverage as the loan book grows.
- Whether deposit growth remains sustainable and lower time-deposit rates reduce funding costs enough to stabilize net interest margin.
- The continuing effect on fee income and loan-sale gains of the indirect auto and reduced mortgage-originations decisions.
- Capital, liquidity and covenant headroom, including the effect of the secured credit-line covenants and any stock repurchases or dividends.