Business First Bancshares (BFST) Q3 2023: Deposit Growth Surges 14%, Capital Discipline Sets Stage for 2024 Expansion
Business First Bancshares delivered a quarter defined by robust deposit growth, disciplined capital management, and margin stability, even as loan growth moderated amid selective underwriting and elevated payoffs. Management’s focus on organic deposit generation and operational efficiency positions BFST to sustain healthy loan expansion and profitability into 2024, while branch moves and portfolio optimization continue to diversify risk and support regional momentum.
Summary
- Deposit Campaigns Drive Funding Shift: Organic deposit growth outpaced expectations, enabling payoff of higher-cost borrowings.
- Margin Stability Amid Liquidity Build: Net interest margin remained resilient despite excess liquidity and funding cost headwinds.
- Efficiency and Capital Accretion: Strategic expense discipline and capital build support a foundation for continued profitable growth.
Business Overview
Business First Bancshares (BFST) operates as a regional bank with a primary focus on commercial and retail banking services across Louisiana and Texas. The company generates revenue through net interest income (the spread between loan yields and deposit/funding costs), non-interest income (including fees, service charges, and gains on branch sales), and prudent expense management. Its major segments include commercial lending, deposit gathering, and a diversified real estate loan portfolio, with recent expansion into high-growth Texas markets and ongoing optimization of its branch footprint.
Performance Analysis
BFST’s third quarter was defined by a 14% annualized increase in organic deposits, which enabled the bank to pay down $152 million in higher-cost overnight borrowings and bolster liquidity. This funding shift was achieved through targeted certificate of deposit (CD) and money market campaigns, resulting in $157 million of new deposits and $43 million in non-interest-bearing deposit account openings, keeping non-interest-bearing deposits at a resilient 27% of total deposits.
Loan growth slowed to 1.7% annualized due to deliberate selectivity and an outsized volume of payoffs, yet management reaffirmed its full-year 2023 loan growth target of 7% to 8%. Net interest margin (NIM) remained stable, contracting only three basis points to 3.46% on a core basis, despite the drag from excess liquidity and funding cost pressures. Credit quality improved further, with non-performing loans declining to 0.33% of total loans, driven by resolution of previously reserved loans. Tangible book value per share rose at a 20% annualized rate, and capital ratios strengthened, supporting continued dividend growth.
- Deposit Mix Resilience: Non-interest-bearing deposits held steady despite industry-wide runoff, supporting funding cost control and margin defense.
- Expense Management: Core non-interest expense normalized to $39.5 million, with disciplined hiring and ongoing branch rationalization offsetting inflationary pressures.
- Credit Quality and Loan Yields: New and renewed loans booked at 8.6% yields, while asset quality trends remained favorable, underpinning future earnings stability.
Operational results reflect a bank balancing growth and risk, with a measured approach to capital allocation and a clear focus on profitable expansion within its target footprint.
Executive Commentary
"Our third quarter was highlighted by balance sheet management, which yielded another quarter of solid capital accretion, strong deposit generation, margin stability, expense management, and continued healthy credit quality trends, all of which put us in position to be able to increase our dividend by two cents per share for the quarter, something we've been able to do for five years in a row now."
Jude Melville, Chairman, President and Chief Executive Officer
"Deposits increased, as Jude mentioned, $176 million. If we include the Leesville deposits that we sold in that branch, that number would be closer to $200 million in deposit and gross deposit growth for the quarter. The $157 million in the new deposits that we generated through a couple of different CD and money market specials during the quarter were very well received by the customers, and our production staff did a really good job of pushing those through."
Greg Robertson, Chief Financial Officer
Strategic Positioning
1. Deposit-Led Funding Model
BFST is prioritizing organic deposit growth as its primary funding source, leveraging targeted campaigns and new branch openings in high-growth Texas markets. This strategy is enabling the bank to systematically reduce reliance on wholesale and higher-cost FHLB borrowings, supporting both margin stability and liquidity management.
2. Selective Loan Growth and Portfolio Optimization
Loan origination remains disciplined, with management intentionally slowing growth in construction and development (C&D) loans to rebalance portfolio concentrations. The bank expects C&D exposure to trend below 100% of capital, with maturing loans transitioning to owner-occupied or income-producing real estate, reducing risk and supporting normalized growth in 2024.
3. Capital Accretion and Dividend Growth
Capital ratios and tangible book value per share continue to rise, reflecting retained earnings and prudent balance sheet management. This capital build enables ongoing dividend increases and provides capacity for both organic growth and opportunistic M&A, though management emphasizes organic expansion as the top priority.
4. Efficiency and Branch Network Rationalization
Ongoing branch optimization and expense discipline are central to BFST’s strategy. The bank continues to relocate or divest underperforming branches while investing in growth markets, supporting an improving efficiency ratio and scalable cost structure.
5. Geographic Diversification within Core Footprint
Expansion into Dallas-Fort Worth and other fast-growing Texas communities is increasing BFST’s exposure to attractive markets. Management remains open to new geographies if the right talent is identified, but sees ample opportunity for growth within its current Louisiana and Texas footprint.
Key Considerations
BFST’s third quarter demonstrates a bank executing on a strategy of funding discipline, operational efficiency, and measured growth, while navigating an environment of deposit competition and shifting loan demand.
Key Considerations:
- Deposit Gathering as Margin Lever: Sustained success in organic deposit growth is critical for reducing funding costs and supporting loan growth without margin erosion.
- Expense Control and Efficiency Focus: Management’s real-time approach to infrastructure and hiring decisions is keeping expense growth in check, supporting operating leverage.
- Credit Quality Monitoring: Asset quality trends remain favorable, but continued vigilance is needed as economic uncertainty persists.
- Portfolio Rebalancing: Intentional reduction in C&D loan concentration mitigates risk and supports a more balanced growth profile.
- Capital Allocation Flexibility: Capital build provides optionality for organic growth, potential bond portfolio restructuring, and select M&A if strategic fit is clear.
Risks
Deposit competition remains intense across the industry, and maintaining non-interest-bearing deposit balances near 25% will be challenging if rates remain elevated or if competitive pressures intensify. Loan growth is subject to both borrower demand and internal selectivity, with unexpected payoffs or economic softening potentially dampening expansion. Margin compression risk persists if funding costs rise faster than loan yields or if excess liquidity persists longer than expected. Regulatory and macroeconomic uncertainties, including potential credit cycle shifts, could also impact performance.
Forward Outlook
For Q4 2023, BFST guided to:
- Net interest margin expected to remain flat to slightly down, reflecting modest liquidity build and funding pressures.
- Continued focus on organic deposit growth and disciplined loan origination, with loan growth expected to accelerate to meet full-year 7%–8% target.
For full-year 2024, management indicated:
- Mid to high single-digit increase in non-interest expense from the Q3 run rate ($39.5 million baseline).
- Efficiency ratio targeted to move below 60% in the back half of 2024, contingent on deposit cost control and operating leverage.
Management highlighted several factors that will influence results:
- Deposit growth and funding mix as key drivers of margin and growth capacity.
- Seasonal municipal deposit inflows of $150–$200 million, which may temporarily pressure margin but support liquidity.
Takeaways
BFST’s Q3 underscores a franchise focused on sustainable, profitable growth through disciplined deposit gathering, capital management, and operational efficiency.
- Deposit-Driven Funding Shift: Organic deposit growth is enabling a transition away from costly wholesale funding, supporting future margin stability and growth optionality.
- Balanced Growth and Risk Management: Selective loan origination, portfolio rebalancing, and capital build strengthen resilience and position BFST for continued expansion in core markets.
- 2024 Watchpoints: Investors should monitor deposit mix trends, margin performance amid funding cost pressures, and the pace of loan and expense growth as key determinants of operating leverage and profitability.
Conclusion
Business First Bancshares delivered a quarter of strong deposit momentum, prudent capital allocation, and operational discipline, providing a solid foundation for continued profitable expansion. The bank’s focus on organic growth, efficiency, and risk diversification positions it well to navigate industry headwinds and capitalize on opportunities within its core footprint.
Industry Read-Through
BFST’s experience highlights the critical importance of organic deposit growth and funding mix management for regional banks in a competitive, high-rate environment. Success in maintaining non-interest-bearing deposit balances and reducing reliance on wholesale funding is increasingly a differentiator for margin defense and growth capacity. The shift toward more selective loan growth and portfolio rebalancing reflects broader industry caution amid credit and economic uncertainty. Branch optimization and expense discipline are emerging as key levers for operating leverage, while capital build provides optionality for both organic and inorganic growth. Regional banks with similar strategies may see improved resilience and flexibility, though funding pressures and expense inflation remain persistent sector-wide challenges.