Executive Summary / Key Takeaways

• Investar Holding Corporation (ISTR) is executing a strategic pivot from a growth-first approach to prioritizing consistent, quality earnings through balance sheet optimization, focusing on high-quality, variable-rate loans and lower-cost funding.
• First quarter 2025 results demonstrate the early success of this strategy, with net income increasing significantly year-over-year, driven by margin expansion (Net Interest Margin up 28 bps to 2.87%) and a favorable provision for credit losses due to a specific loan recovery.
• Asset quality metrics improved, with nonaccrual loans decreasing to 0.27% of total loans, while the Allowance for Credit Losses remains robust at 1.25% of total loans, though sensitive to economic conditions and portfolio changes.
• The company maintains a strong liquidity position, with cash and available funding sources significantly exceeding uninsured deposits, and remains well-capitalized according to regulatory requirements.
• While facing competitive pressures from larger regional banks and fintechs, ISTR leverages its regional presence and cost efficiency in lending, but must continue to invest in digital initiatives to enhance operational speed and customer experience to maintain its competitive standing.

Setting the Scene: A Regional Bank's Strategic Evolution

Investar Holding Corporation, headquartered in Baton Rouge, Louisiana, operates as a financial holding company primarily serving individuals, professionals, and small to medium-sized businesses across south Louisiana, southeast Texas, and Alabama through its subsidiary, Investar Bank, National Association. Since commencing banking operations in 2006 and completing its IPO in 2014, Investar has pursued a strategy combining organic growth with strategic acquisitions, completing seven whole-bank deals since 2011 to expand its footprint.

In 2023, the company embarked on a significant strategic pivot. Recognizing the evolving economic landscape, Investar shifted its near-term focus from aggressive growth to prioritizing consistent, quality earnings and optimizing its balance sheet. This involves a deliberate emphasis on originating and renewing high-quality loans, particularly those with variable rates, while actively managing down higher-risk credit relationships. Concurrently, the strategy targets keeping liability durations short to capitalize on opportunities for securing lower-cost funding, thereby enhancing the net interest margin. This strategic recalibration is complemented by efforts to improve operational efficiency, including optimizing the branch network, such as the closure of one branch in Alabama in early 2024, and leveraging digital initiatives.

Within the competitive landscape of the southeastern U.S. banking market, Investar faces established regional players like Origin Bancorp (OBNK), Hancock Whitney Corporation (HWC), and Regions Financial Corporation (RF), as well as indirect competition from fintech firms. These competitors often possess greater scale, broader branch networks, and more advanced technological platforms. Investar's competitive positioning relies on its deep regional ties, personalized service model tailored to its target market, and a focus on cost efficiency in its lending operations. While larger rivals benefit from economies of scale and faster digital processing speeds, Investar aims to differentiate through relationship banking and localized market expertise.

While the company does not appear to possess a unique, proprietary core banking technology in the same vein as specialized manufacturing processes, Investar's operational effectiveness is increasingly tied to its digital capabilities. The company is evaluating opportunities to leverage digital initiatives to improve branch network efficiency and reduce costs. In a banking environment where competitors like HWC and RF are noted for faster digital processing and loan approval times, Investar's strategic focus on digital enhancement is crucial. The stated goal is to improve efficiency and customer experience, which, if successful, could contribute to better capital efficiency and potentially lower operating costs per unit, helping to counter the scale advantages of larger rivals. Continued investment in these areas is essential to maintaining competitiveness and supporting the balance sheet optimization strategy.

Financial Performance Reflecting Strategic Shift

The early results of Investar's strategic pivot are evident in its financial performance for the first quarter of 2025. Net income rose to \$6.3 million, or \$0.63 per diluted common share, a substantial increase from \$4.7 million, or \$0.48 per diluted common share, in the first quarter of 2024. This improvement was significantly influenced by a favorable provision for credit losses. The company recorded a negative provision for credit losses of \$3.6 million in Q1 2025, compared to a negative provision of \$1.4 million in Q1 2024. The Q1 2025 figure included a notable \$3.3 million recovery of loans previously charged off, stemming from a property insurance settlement related to a loan relationship impacted by Hurricane Ida in 2021.

Net interest income, the core earnings driver, also saw positive momentum, increasing by 6.6% to \$18.3 million in Q1 2025 from \$17.2 million in Q1 2024. This expansion was primarily a result of a \$2.4 million decrease in interest expense, which more than offset a \$1.3 million decrease in interest income. The decrease in interest expense was largely attributable to a lower average balance of short-term borrowings, following the repayment of Bank Term Funding Program (BTFP) borrowings in late 2024, and a decrease in rates paid on time and brokered time deposits. While average loans decreased, contributing to lower interest income, the yield on the investment securities portfolio increased, helping to support overall interest income.

The strategic focus on optimizing the balance sheet contributed to margin expansion. The net interest margin improved by 28 basis points, reaching 2.87% in Q1 2025 compared to 2.59% in Q1 2024. This was predominantly driven by a 29 basis point decrease in the cost of interest-bearing liabilities, reflecting the efforts to manage funding costs, which outpaced the slight one basis point decrease in the yield on interest-earning assets.

Total noninterest income decreased by 26.8% to \$2.0 million in Q1 2025, primarily due to the absence of a \$0.4 million gain on the sale of fixed assets recorded in Q1 2024 related to a branch closure, as well as decreases in the fair value of equity securities and other operating income. Total noninterest expense increased by 6.2% to \$16.2 million, influenced by higher salaries and employee benefits (partly due to investments in the Texas market and health insurance claims), increased professional fees, and higher other operating expenses (including branch services and collection costs related to the Ida settlement), partially offset by lower depreciation and the absence of a gain on early extinguishment of subordinated debt recorded in Q1 2024. The effective income tax rate decreased to 18.4% in Q1 2025 from 22.7% in Q1 2024, with both periods benefiting from tax-exempt income sources.

On the balance sheet, total assets saw a slight increase to \$2.73 billion at March 31, 2025. Total loans decreased by 0.9% to \$2.11 billion, consistent with the strategy to optimize the portfolio mix and lower utilization of credit lines. Total deposits saw a marginal increase to \$2.35 billion. Notably, noninterest-bearing deposits increased by 1.1% to \$436.7 million, contributing to a lower cost of funds, while time deposits decreased due to maturities of higher-cost instruments. Estimated uninsured deposits stood at approximately 34% of total deposits at period end. The investment securities portfolio increased to \$388 million, with net unrealized losses in the Available-for-Sale portfolio decreasing to \$54.5 million, reflecting lower prevailing market interest rates.

Asset Quality, Risk, and Competitive Dynamics

Investar's asset quality showed improvement in the first quarter of 2025. Nonaccrual loans decreased to \$5.6 million, representing 0.27% of total loans, down from \$8.8 million (0.42% of total loans) at December 31, 2024. The Allowance for Credit Losses (ACL) stood at \$26.4 million, or 1.25% of total loans, compared to 1.34% at March 31, 2024. The decrease in the ACL ratio was attributed to lower total loans, portfolio aging, and an improved economic forecast. While management believes the ACL is sufficient, it acknowledges the inherent uncertainty tied to economic conditions, potential changes in trade policies, and other external factors that could necessitate future adjustments.

The company actively manages interest rate risk, a primary market risk, through its Asset-Liability Committee (ALCO). Net interest income simulation is the key tool used to measure earnings exposure, with a policy target of maintaining net interest income at risk below 5% in a +/- 100 basis point rate environment. At March 31, 2025, the bank was within these policy guidelines, indicating a degree of resilience to moderate rate fluctuations, although rapid or significant shifts could still impact performance.

Liquidity remains a key focus. Investar maintains diverse funding sources, including core deposits, investment securities, FHLB advances (\$60 million outstanding, with \$712.5 million available credit), repurchase agreements (\$11.3 million outstanding), and unsecured lines of credit (\$60 million available). The combination of cash and cash equivalents (\$43.5 million) and available funding sources totaled approximately \$816 million at March 31, 2025, representing a comfortable 102% coverage of estimated uninsured deposits. Capital resources are solid, with both the company and the bank exceeding all regulatory capital requirements, and the bank classified as well-capitalized. Stockholders' equity reached a record high of \$251.7 million, or \$25.63 per common share, supported by net income and a decrease in accumulated other comprehensive loss. The company also continued its share repurchase program, buying back \$0.6 million of stock in Q1 2025.

In the competitive arena, Investar's niche focus and regional strength provide advantages, particularly in personalized service and potentially lower operating costs per loan compared to larger, more diversified institutions like OBNK, HWC, and RF. However, these larger competitors benefit from significant economies of scale, broader product offerings, and more substantial investments in technology, leading to higher revenue growth rates (e.g., OBNK ~6%, HWC ~9%, RF ~8% vs. ISTR ~4% based on recent annual trends) and often more consistent profitability margins.

While Investar's cost efficiency in specific lending segments is a strength, its smaller scale and technological lags (e.g., slower digital processing speeds compared to some peers) represent vulnerabilities that could constrain growth and profitability over the long term if not addressed through strategic investment and execution. The company's strategy of optimizing the balance sheet and focusing on high-quality loans is a response to this competitive environment, aiming to maximize profitability within its current scale and market position.

Looking ahead, the Zacks Consensus Estimate for 2025 EPS is \$1.95, suggesting a modest year-over-year growth rate of around 3.2%. Analyst sentiment appears positive, with recent upward revisions to estimates. This outlook likely reflects the anticipated benefits of the balance sheet optimization strategy, stable credit quality, and controlled operating expenses, potentially supported by a more favorable interest rate environment than the prior year. The company's long-term strategy continues to include opportunistic acquisitions and organic growth, signaling a potential return to a more growth-oriented stance once the balance sheet optimization yields desired results and market conditions are favorable.

Conclusion

Investar Holding Corporation's first quarter 2025 results underscore the initial success of its strategic pivot towards balance sheet optimization and quality earnings. The focus on managing funding costs and curating a higher-quality loan portfolio has contributed to meaningful margin expansion and improved profitability, despite a decrease in overall loan volume. The favorable provision for credit losses, while partly influenced by a specific recovery event, also reflects stable asset quality metrics.

While Investar operates in a competitive market against larger, more technologically advanced regional banks, its emphasis on personalized service and regional expertise provides a foundational strength. The company's ability to maintain strong liquidity and capital ratios offers a solid base. The key to sustaining this positive momentum and driving future value for investors will lie in the continued effective execution of its balance sheet strategy, successful leveraging of digital initiatives to enhance efficiency and customer experience, and prudent risk management in a dynamic economic and competitive environment. The current trajectory, highlighted by margin improvement and stable credit quality, suggests the company is moving in the right direction under its refined strategic focus.