Investar Holding: Long Runway For Growth At An Attractive Price
Summary
- A solid branch footprint lends itself to providing a long runway for multi-year core loan growth.
- Credit continues to improve, which should give investors solace in the discounted valuation.
- The margin looks likely to hold steady near current levels.
Investment Thesis
While most people are familiar with the mid-cap regional banks dotted across the United States, many fail to realize the dozens of community banks flying under the radar. Based on my assessment of investor interest, Investar Holding (NASDAQ:ISTR) is one of those little banks most people have never heard of, let alone be the target of investment due diligence.
Investar is based in Baton Rouge, Louisiana, and has 35 branches located throughout the entire gulf coast – from Alabama to Texas. It was founded in 2006 and uses both organic growth and well-timed, strategic acquisitions in order to expand its balance sheet. Most recently, it completed its pending merger with Cheaha Financial (closed April 1, 2021).
From a valuation perspective, the market continues to be too draconian on ISTR, pushing its shares to "deep-discount" territory relative to peers. When you look at it from a fundamental perspective, ISTR trading near 1.1x on price to tangible book value provides would-be investors a solid value play entry point. With the recent Russell 2000 exclusion in the rear-view mirror, I believe the bank will not only continue to grow loans faster than peers, but the valuation gap is likely to narrow. Its credit profile is getting better, especially with the oil environment rebounding off COVID lows. With respect to peers, ISTR trading at 1.1x is about 0.4x below peers (which are at 1.5x on price to tangible book value per share).
Recent Trends And Future Expectations
While excess liquidity continues to drive overall margin pressure on the bank pace, based on second quarter results, I got the sense that ISTR was hit harder than peers. Driven by its excess liquidity, the second quarter net interest margin was down 16 basis points from first quarter levels.
Also pre-provision, net revenue was a little below my expectations partly due to non-recurring expenses. Loan growth looked very solid, but largely driven by the recent deal closing. Astute Investors should back out Cheaha additions, and when doing so, one would find that growth was almost non-existent in the quarter. ISTR is actually getting hit on both sides of the balance sheet – outsized levels of loan paydowns and excess liquidity forcing bond purchases (driving the lower margin).
Going forward, I think we are near the bottom on the net interest margin contraction. I also think expectations should be for low single-digit net loan growth in 2H22. While optically my estimate seems pretty low, it's mainly to incorporate the above trend payoff activity. Some larger regional banks have seemed to have pulled back recently, so the next few quarters might have some renewed market share opportunities (likely a FY22 potential upside).
When looking at expenses, it's reasonable to see ISTR have higher expenses in 3Q and then work lower from there. The Cheaha deal was for an entire Alabama-based bank so integration and cost saves will likely take six to 12 months.
Wrapping it all up, modest expense growth in 3Q and a decline in 4Q21 should result in a better efficiency ratio as we head into FY22. Also, my margin expectations of roughly flat linked quarter could prove conservative if liquidity is deployed faster than expected. My initial target on return on assets (ROA) has been lowered a little – now just 1% (from 1.15%) for 4Q21 due to excess liquidity building.
Quick Thoughts On Credit
While the market might be concerned with higher nonperforming assets ((NPAs)), I don’t really see the need to ring any alarm bells. From the press release, it was indicated that just two loans were the main driver between first quarter NPAs increasing 26 basis points to 1.15% of total loans in the second quarter.
It does not appear there is loss exposure with either loan, otherwise there would have been a larger provision in the quarter. Most importantly, from a valuation perspective, the larger energy credits that have been a black-eye continue to be worked down.
All told, I think the credit quality outlook remains solid and there really should not be many net charge-offs going forward. Also, I think the provision is likely going to keep the reserve ratio near current levels. If loans continue to shrink, there could be some modest provision recapture run through the income statement.
Source: SEC Filings
Concluding Thoughts
With its profitability improvement roadmap closing the gap on peers, I view the shares as excessively undervalued. ISTR is a smaller bank, so driving cost synergies is a much more difficult task, but management has been very successful thus far. Also, the management team has done a great job expanding the footprint while keeping core expenses in check.
The longer term prospects for the bank look very bright, in my opinion. It has a solid team of lenders that should help ISTR grow tangible book value per share faster than regional peers. It also operates in a few key markets which might make it look appetizing to being acquired from the perspective of another large south-eastern bank.
While there is limited liquidity in the shares, I would recommend this bank to most any long-term investors. It should be noted though, with limited liquidity it can cause excessive up- and down- days, but over the long term I have a great deal of confidence that ISTR outperforms its peer banks.
This article was written by
Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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