Business First Bancshares (BFST) Q2 2024: Loan Discount Accretion Adds $1.7M, Margin Rebounds as Deposit Mix Improves
Business First Bancshares delivered a margin rebound in Q2 2024, aided by $1.7M in loan discount accretion and a $1.9M USDA loan sale gain, while core deposit mix and capital levels improved. The bank’s disciplined balance sheet transition, focus on C&I lending, and measured approach to growth position it for stability as the Oakwood acquisition nears. Investors should watch for normalization of one-time gains and further deposit cost relief as rate cuts loom.
Summary
- Deposit Mix Shift: Non-interest-bearing deposits rose, supporting margin stability and funding cost relief.
- One-Time Gains Highlight Upside: $1.9M USDA loan sale and elevated accretion boosted earnings above run-rate.
- Balance Sheet Transition: C&I loan growth and CRE reduction signal a lasting strategic pivot.
Business Overview
Business First Bancshares (BFST) operates as a regional bank holding company, primarily through its subsidiary, b1BANK. The company generates revenue from net interest income—spread between loan yields and deposit/funding costs—and fee income from loan sales, government-guaranteed lending, and asset management. Major segments include commercial & industrial (C&I) lending, construction & development (C&D), commercial real estate (CRE), and wealth management through SSW, its fixed income advisory business. The bank’s geographic focus spans Louisiana and Texas, with a pending expansion via the Oakwood Bank acquisition in Dallas.
Performance Analysis
BFST’s Q2 results reflected both underlying operational progress and the impact of outsized one-time items. Net interest margin (NIM) rebounded, with a seven-basis-point sequential increase in core NIM, aided by moderating deposit cost pressure and robust new loan yields above 8.5 percent. The quarter’s earnings were flattered by $1.7 million in loan discount accretion—well above normal run rate—and a $1.9 million gain on sale of a USDA-guaranteed loan, both of which are not expected to recur regularly.
Deposit composition improved, with non-interest-bearing deposits increasing to 23.5 percent of total deposits, reversing a multi-quarter decline. The bank repaid $75 million in higher-cost brokered deposits, further lowering funding costs. Loan growth was driven by C&I portfolio expansion, offsetting reductions in C&D and CRE, reflecting a deliberate mix shift. Core non-interest expense rose modestly, in line with expectations, as wage pressures persisted.
- Margin Expansion Achieved: Core NIM up for the first time in seven quarters, reflecting both loan repricing and funding cost moderation.
- Deposit Cost Relief Emerges: Weighted average new money market deposit rates declined from March to June, and brokered/CD maturities offer further relief if rates fall.
- C&I Lending Drives Growth: 5.9 percent annualized loan growth, led by C&I, while CRE and C&D concentrations declined.
Asset quality remained stable, though CRE special mention loans increased—driven by both economic factors and more granular internal risk rating. The SSW asset management business saw AUM decline due to client portfolio shrinkage, not client loss, with potential for recovery as rates fall and bank investment portfolios rebuild.
Executive Commentary
"Our team produced a healthy rebound in net interest margins and an appropriate amount of loan growth, an improvement in the composition of our deposit base, increasing the capital levels and tangible book value, and our asset quality remained consistent, an all-around solid quarter."
Jude Melville, Chair's President and CEO
"The seven basis points link quarter expansion in the core NIM benefited from continued strong new and renewed loan yields, repricing tailwinds, and moderating funding pressure."
Greg Robertson, Chief Financial Officer
Strategic Positioning
1. Deposit Base Optimization
BFST prioritized growing non-interest-bearing and core deposits, reducing reliance on brokered funding. This shift, supported by new C&I relationships and product design requiring operating accounts, positions the bank to benefit from lower funding costs in a rate-cut environment.
2. Loan Portfolio Realignment
The bank continues its multi-year pivot from CRE and construction exposure toward C&I lending, lowering risk concentration and aligning with longer-term capital allocation goals. Over five quarters, construction exposure as a percent of tangible capital dropped from 120 percent to the low 80s.
3. Fee Income and Loan Sale Ramp
Fee income lines, especially government-guaranteed lending (SBA, USDA) and loan sales, are gaining traction. The Waterstone acquisition is fueling internal SBA origination, with expectations for incremental growth in gain-on-sale income over the next year.
4. Oakwood Acquisition Integration
The pending Oakwood Bank acquisition in Dallas is on track for a Q4 close, with integration expected next year. Oakwood’s performance is tracking with BFST’s modeling, and the deal will increase Texas loan exposure and scale in a key growth market.
5. Asset Management Headwinds and Optionality
SSW, BFST’s fixed income advisory arm, faces AUM pressure as bank clients shrink portfolios, but client count remains stable. AUM and fee potential may rebound as banks rebuild investment portfolios post-rate cuts.
Key Considerations
This quarter’s results highlight both the benefits and limitations of one-time gains and the importance of underlying core trends. BFST’s management is transparent about the non-repeatable nature of certain items, while emphasizing the durability of its strategic shift toward core funding and C&I lending.
Key Considerations:
- Deposit Cost Leverage: $1.9B in money market balances and $450M in maturing CDs provide flexibility to reprice downward if the Fed cuts rates.
- Loan Repricing Tailwind: 48 percent of loans will reprice in the next 12 months, supporting core NIM expansion even in a rate cut scenario.
- Expense Discipline Required: Core non-interest expense is expected to rise 2–3 percent in coming quarters, driven by wage inflation and talent retention.
- CRE Credit Monitoring: Special mention CRE loans rose, but overall asset quality remains sound; increased granularity in risk-rating may drive further volatility.
Risks
BFST faces several risks as it executes its transition strategy: normalization of one-time fee and accretion income could pressure near-term earnings, while wage inflation and integration costs from Oakwood may drive higher non-interest expense. CRE credit quality remains a watchpoint, with special mention loans rising amid economic and internal rating changes. The SSW business is sensitive to client AUM trends, and further industry-wide portfolio shrinkage could weigh on fee income.
Forward Outlook
For Q3 2024, BFST guided to:
- Core NIM improvement in the low to mid-single digit basis point range per quarter
- Gain-on-sale income run rate of $1.04M, with potential incremental growth in Q4
For full-year 2024, management maintained its non-interest expense target of $175M and expects:
- Loan growth in the mid to high single digits, with continued C&I mix shift
- Oakwood acquisition closing in Q4, with financial contribution modeled as planned
Management emphasized that rate cuts would offer additional funding cost relief, and that loan repricing and deposit mix improvements should support margin expansion into 2025.
- Deposit cost pressures are expected to ease further as CDs and brokered funds reprice
- Fee income from loan sales and government-guaranteed lending should ramp gradually, not spike
Takeaways
BFST’s Q2 demonstrated the combined impact of core progress and non-repeatable gains, with margin expansion, improved deposit mix, and a clear shift toward C&I lending. The Oakwood deal is on track, and SSW’s client base remains stable despite AUM headwinds.
- Margin and Deposit Progress: Core NIM expanded as deposit costs moderated and non-interest-bearing balances rose, laying groundwork for further cost leverage if rates fall.
- Strategic Loan Shift: The deliberate reduction in CRE/C&D exposure and focus on C&I lending is a durable, risk-aware repositioning, not a short-term response.
- Forward Watchpoint: Investors should monitor normalization of one-time income, the pace of fee ramp from Waterstone, and CRE credit trends as economic conditions evolve.
Conclusion
Business First Bancshares delivered a margin recovery and deposit mix improvement in Q2, buoyed by outsized one-time gains but underpinned by disciplined execution. The bank’s strategic repositioning toward core funding and C&I lending, along with prudent capital allocation, positions it for resilience as the Oakwood acquisition nears and rate environments shift.
Industry Read-Through
BFST’s quarter underscores several sector-wide themes for regional banks: deposit cost relief is emerging as funding mix improves and brokered/CD maturities allow for downward repricing, especially if the Fed cuts rates. The strategic pivot away from CRE and construction toward C&I lending is gaining traction across the sector as banks seek to lower risk and align with capital constraints. Asset management fee businesses linked to bank portfolios may face continued AUM pressure until rate cuts spur portfolio rebuilding. Investors should watch for further normalization of one-time gains and the durability of margin expansion as rate cycles turn.