Business First Bancshares (BFST) Q1 2024: Deposit Growth Surges 24%, Pivoting Balance Sheet for Texas Expansion
Business First Bancshares’ Q1 exposed margin pressure, but deposit growth outpaced loans and set up the franchise for a strategic Texas push. The Oakwood Bank acquisition accelerates geographic diversification and C&I lending, while management eyes margin recovery and expense discipline into 2025. Investors should watch execution on integration and the evolving funding mix as the bank approaches the $10 billion asset threshold.
Summary
- Deposit Mix Shift: Rapid deposit gathering outpaced loan growth, strengthening liquidity and funding profile.
- Texas Market Expansion: Oakwood Bank deal positions BFST for accelerated C&I growth and credit risk diversification.
- Margin Stabilization Focus: Leadership targets margin improvement and cost control as integration and rate environment evolve.
Business Overview
Business First Bancshares (BFST) is a regional bank holding company with a commercial banking focus, operating primarily in Louisiana and Texas. The company generates revenue through net interest income—spread between loan yields and deposit costs—and non-interest income from fee-based services. Major segments include commercial and industrial (C&I) lending, real estate lending, and deposit gathering, with a growing emphasis on relationship-based deposit acquisition and non-interest income streams such as SBA loan servicing.
Performance Analysis
Q1 results reflected margin compression and elevated expenses, but underlying balance sheet dynamics signal a deliberate strategic pivot. Core net interest margin (NIM) declined sequentially, driven by strong deposit inflows—especially in money market accounts—outpacing loan growth. While loan yields continued to rise, the pace lagged expectations due to a large credit relationship with lower rates offset by deposit gains.
Loan growth remained solid at 8% annualized, led by C&I relationships and Texas markets, but was overshadowed by a 24% annualized surge in deposits. Noninterest-bearing deposits stabilized after seven quarters of outflows, aided by successful funding campaigns and a focus on relationship banking. Non-interest income was steady but expected to increase with the Waterstone SBA servicing acquisition.
- Deposit Gathering Outpaces Lending: Deposits grew at three times the rate of loans, improving liquidity but pressuring NIM.
- Expense Base Reset: Non-interest expense rose due to acquisition and IT investments, but management pegs Q1 as a sustainable run rate with modest sequential increases ahead.
- Credit Quality Remains Stable: Past due loans spiked due to one resolved credit, while non-performing loans ticked up but are not expected to result in losses.
Management’s actions have shifted the funding mix and positioned the bank for efficiency and scale, but success will hinge on integration, margin recovery, and prudent cost management as the Oakwood acquisition closes.
Executive Commentary
"A significant part of the margin miss was due to outside success in raising liquidity...if we're going to miss, my preference is to miss by gathering too much liquidity rather than too little, particularly given some of the opportunities we have on the horizon to continue putting those funds to work."
Jude Melville, President and CEO
"Net interest margin was down the first two months of the quarter by 14 basis points. Then in March, we actually picked up three basis points to end the quarter, down 11. This was partially due to the fact that the overall total new deposit cost had been declining each month since December."
Greg Robertson, Chief Financial Officer
Strategic Positioning
1. Texas Expansion and Geographic Diversification
The Oakwood Bank acquisition is a pivotal move, increasing Texas to 44% of the loan book and 31% of deposits pro forma. This not only accelerates growth in one of the most attractive U.S. banking markets but also diversifies credit risk away from Louisiana, advancing BFST’s long-term goal of a more balanced portfolio. Management expects to approach 50% Texas loan exposure by late 2025.
2. Relationship-Based Deposit Model
BFST’s funding strategy shifted toward relational deposits, with a focus on money market accounts paired with operational non-interest-bearing accounts. This approach improves funding stability and positions the bank for future loan deployment, though it temporarily compresses NIM as deposit costs reset faster than loan yields.
3. Non-Interest Income and Fee Business Development
The Waterstone acquisition brings in SBA servicing capabilities, expected to drive non-interest income and support the correspondent banking function. Management has reorganized leadership to prioritize this business, aiming to diversify revenue beyond traditional lending and interest spread income.
4. Margin Management and Expense Discipline
Leadership targets a 3.50% core NIM over the medium term, with expectations for modest improvement as funding costs stabilize and loan yields normalize. Expense control is a priority, with Q1’s elevated non-interest expense set as a new baseline and sequential increases capped at 2% to 3% per quarter, primarily from IT and integration investments.
5. Preparing for $10 Billion Asset Threshold
BFST is proactively investing in IT infrastructure and experienced talent, anticipating regulatory and operational requirements as it approaches the $10 billion asset mark. This “pre-investment” is designed to ensure a smooth transition and maintain strategic flexibility as scale increases.
Key Considerations
This quarter’s results reflect a bank in transition, balancing short-term margin pressure against long-term strategic moves. The Oakwood acquisition, funding mix evolution, and new fee income streams are all aimed at positioning BFST for sustainable growth and profitability.
Key Considerations:
- Deposit Gathering as Strategic Lever: Outsize deposit growth provides funding for future loan expansion but pressures near-term margins.
- Acquisition Integration Risk: Oakwood Bank adds scale and talent, but execution on cultural and operational integration will be key.
- Margin Recovery Trajectory: Reversal of NIM declines will depend on balancing funding costs, loan yields, and deposit mix.
- Non-Interest Income Ramp: Waterstone’s SBA servicing potential must translate into material fee income to diversify revenue.
- Regulatory Readiness: Early investment in people and technology is prudent as the bank nears the $10 billion asset threshold.
Risks
Margin pressure may persist if deposit costs remain elevated or loan yields lag, especially if rate cuts materialize. Integration risk from the Oakwood deal includes potential talent attrition and cultural misalignment. Regulatory hurdles, particularly around CRA compliance, could delay or complicate the acquisition. Credit quality remains stable, but any systemic deterioration in commercial real estate or C&I could pressure asset quality metrics.
Forward Outlook
For Q2 2024, BFST expects:
- Loan growth to continue at a high single-digit annualized rate, funded by core deposit growth.
- Non-interest expense to rise modestly, 2% to 3% sequentially per quarter, as integration and IT investments continue.
For full-year 2024, management maintained guidance for:
- Core non-interest expense in the $172 to $174 million range.
Management highlighted several factors that will influence the outlook:
- Continued focus on relationship-based deposit gathering and funding mix improvement.
- Integration of Oakwood Bank and Waterstone, with accretive earnings impact expected in 2025.
Takeaways
BFST’s Q1 was defined by a deliberate liquidity build and strategic market expansion, accepting temporary margin compression to position for future growth and diversification.
- Balance Sheet Pivot: Rapid deposit gathering and the Texas-focused Oakwood deal reshape the franchise for scale and risk mitigation, but demand disciplined execution.
- Margin and Expense Watch: Investors should monitor the pace of NIM recovery and expense containment as integration proceeds and funding costs normalize.
- Fee Income and Scale: The ability to ramp non-interest income and prepare for $10 billion in assets will be critical for valuation and competitive positioning in the next phase.
Conclusion
Business First Bancshares is trading near-term profitability for long-term optionality, leveraging deposit strength and strategic M&A to build a more durable, diversified regional bank. The next several quarters will test management’s ability to deliver on integration, margin recovery, and non-interest income growth as the franchise evolves toward the $10 billion asset tier.
Industry Read-Through
BFST’s results and strategy reflect broader industry themes: regional banks are prioritizing relationship-based funding, geographic diversification, and fee income streams amid a “higher for longer” rate environment. The willingness to accept near-term margin pressure for liquidity and scale signals a shift in balance sheet management across the sector. M&A activity focused on cultural fit and market expansion—especially in growth regions like Texas—will likely accelerate as banks seek to reposition for regulatory thresholds and competitive dynamics. Investors in regional banking should watch for similar funding mix shifts, margin stabilization efforts, and proactive investments in technology and talent as banks prepare for the next phase of industry consolidation.