Business First Bancshares (BFST) Q2 2023: Loan Repricing Drives 90bps Yield Expansion Opportunity

July 27, 2023 | By EarningsIQ Research

BFST’s second quarter highlights a strategic shift toward earnings durability, with disciplined loan growth, deposit stabilization, and a clear path to margin improvement as $2.2 billion of loans reprice at rates nearly 90 basis points higher. Management’s focus on selective expansion and operational efficiency is evident, positioning the bank to weather competitive funding markets and capture upside from asset repricing in coming quarters.

Summary

• Loan Book Repricing: $2.2 billion set to reprice, supporting higher interest income.
• Deposit Stabilization: Non-interest-bearing outflows are moderating, aiding funding cost control.
• Selective Growth Mode: Leadership is prioritizing core profitability over rapid expansion.

Business Overview

Business First Bancshares (BFST) is a regional commercial bank operating primarily in Texas and Louisiana, generating revenue from net interest income on loans, fees, and a growing mix of non-interest income. Major segments include commercial and industrial (C&I) lending, commercial real estate (CRE), and a developing Small Business Administration (SBA) business. The bank’s funding base is a mix of core deposits and brokered deposits, with a strategic focus on geographic and product diversification to manage risk and sustain earnings.

Performance Analysis

BFST delivered stable core earnings, underpinned by solid loan yields, disciplined expense control, and resilient asset quality. Loan growth annualized at 8%, with the Dallas region contributing over half of net increases and C&I loans accounting for two-thirds of growth. This shift continues the bank’s strategy of diversifying away from construction lending toward more granular, recurring business banking relationships.

Deposit trends reflect a challenging but improving funding environment. Total deposits rose, though much of the increase came from brokered sources. Core branch deposit balances were flat when adjusted for seasonal tax outflows, and non-interest-bearing deposits now comprise 28% of total deposits, down from prior quarters but showing signs of stabilization. The bank’s margin compressed by five basis points, in line with expectations, as deposit betas (the rate at which deposit costs rise with market rates) continue to climb, but loan repricing is beginning to offset funding cost pressures.

• Yield Expansion Opportunity: $2.2 billion in loans set to reprice at rates nearly 90 basis points higher, representing 45% of the loan book and a potential $20 million annualized revenue uplift.
• Expense Discipline: Core non-interest expense run rate is tracking to mid-$39 million, reflecting a 5% annualized increase, with one-time items stripped out.
• Capital and Book Value: Tangible book value ex-AOCI grew 13.5% in the quarter, underlining strong retained earnings and prudent capital management.

Credit quality remains pristine, with no signs of deterioration and management expressing high confidence in the portfolio’s resilience. The strategic slowdown in loan growth (now targeting 4% to 6% annualized) is both a risk control and capital optimization lever, ensuring growth remains within retained earnings capacity.

Executive Commentary

Strategic Positioning

1. Loan Portfolio Repricing as a Margin Lever

Management is leveraging the rising rate environment to reprice nearly half the loan book at materially higher yields. With $2.2 billion maturing or floating over the next 12 months, the average yield pickup of 90 basis points is expected to deliver a meaningful boost to net interest income, partially offsetting rising deposit costs.

2. Disciplined Growth and Capital Allocation

Growth is intentionally moderated to 4% to 6% annualized, allowing the bank to remain capital accretive and avoid expensive funding sources. This approach prioritizes core profitability and asset quality over top-line expansion, with Dallas and North Louisiana leading the way in new business generation.

3. Funding Mix and Deposit Strategy

Deposit competition remains intense, but outflows are slowing and core deposit generation is stabilizing. Management expects the non-interest-bearing deposit mix to bottom near 26% by year-end, with modest monthly growth in new accounts. Brokered deposits are used opportunistically, but the focus remains on core client relationships and pricing discipline.

4. Non-Interest Income Diversification

SBIC investment returns and a growing SBA business are providing incremental non-interest income, though these are not yet needle-movers. Management is building optionality for future revenue diversification as these lines scale.

5. M&A and Geographic Expansion Optionality

While management is open to M&A, the bar for deals is high. The focus is on cultural fit, in-market density, and short payback periods, with organic “lift-out” team expansions in Dallas and New Orleans serving as the preferred model for entering new markets. No urgency is expressed for transformative deals, reflecting confidence in organic growth capacity.

Key Considerations

BFST’s quarter underscores a measured, risk-aware approach to growth and profitability, with a clear emphasis on sustainable earnings and margin protection as the industry navigates a late-cycle environment.

Key Considerations:

• Loan Yield Repricing: The 90 basis point uplift on $2.2 billion of loans is a significant future income driver, especially as deposit costs rise.
• Deposit Mix Stability: Stabilizing non-interest-bearing balances signal improving funding cost visibility, though further declines are expected before a bottom is reached.
• Expense Management: Tight control on expenses and one-off items supports earnings consistency, with a clear run-rate established for investors.
• Credit and Asset Quality: No emerging credit issues were cited, a critical differentiator as sector peers report normalization and isolated stress.
• Strategic Patience on M&A: Expansion will be incremental and accretive, not driven by growth for its own sake, reducing integration and capital risks.

Risks

Deposit cost escalation remains the primary risk, as industry competition and rising betas could outpace asset yield improvements if loan repricing lags or deposit mix shifts further toward interest-bearing. Loan demand is softening, with management noting a shift from self-imposed growth moderation to demand-driven deceleration, raising questions about future pipeline strength. Margin expansion is not guaranteed, as competitive deposit pricing and uncertain rate paths could pressure NIM despite repricing tailwinds.

Forward Outlook

For Q3, BFST expects:

• Net interest margin to remain flat, with potential for slight improvement as loan repricing accelerates.
• Loan growth annualized in the 4% to 6% range, with C&I as the primary driver.

For full-year 2023, management maintained guidance:

• Core ROA of at least 1%, with upside potential if credit and repricing trends persist.

Management highlighted several factors that will shape results:

• Deposit betas expected to rise about five percentage points per quarter, ending the year near 40% for total deposits.
• Non-interest-bearing deposit mix bottoming near 26% by year-end, then stabilizing.

Takeaways

BFST is executing a conservative, margin-centric playbook, balancing growth with capital and funding discipline as the cycle matures.

• Repricing Leverage: The bank’s ability to reprice nearly half its loan book at materially higher rates provides a visible path to earnings expansion, even as deposit costs rise.
• Deposit Stabilization: Core deposit outflows are slowing, and management is successfully balancing pricing discipline with funding needs, reducing the risk of margin compression.
• Investor Watchpoint: Monitor the pace and success of loan repricing versus deposit beta increases, as well as any signs of credit normalization or demand-driven loan growth slowdown in the second half.

Conclusion

BFST’s Q2 results reflect a disciplined approach to late-cycle banking, with management prioritizing sustainable profitability, risk diversification, and operational efficiency. The bank is well positioned to capture margin upside from loan repricing, provided deposit competition remains manageable and credit quality holds.

Industry Read-Through

BFST’s experience mirrors broader regional bank trends: intense competition for deposits is easing slightly, but funding costs are still rising and margin protection depends on effective loan repricing. Loan demand is softening across the sector, prompting banks to slow growth and focus on profitability over scale. Credit quality remains a key differentiator, as many peers are now reporting normalization or isolated stress that BFST has so far avoided. Organic expansion and team lift-outs are increasingly favored over large M&A, reflecting a risk-aware stance across the industry as capital and integration risks remain elevated.

BFST Financials Banking Commercial Lending Deposit Competition Margin Loan Repricing Capital