Business First Bancshares (BFST) Q4 2023: Texas Loans Now 37% of Portfolio as Repricing Tailwinds Build
Business First Bancshares closed 2023 with stable core profitability, a marked expansion in Texas lending, and visible asset repricing tailwinds for 2024. Management emphasized deliberate expense control and a shift toward more rate-sensitive funding, positioning the bank to benefit from loan repricing even in a lower-rate scenario. Guidance signals confidence in margin stability and incremental expansion, with loan growth and deposit mix management at the center of the playbook.
Summary
- Texas Lending Leverage: Nearly 40% of loans are now Texas-based, driving geographic diversification and new origination yields.
- Margin Expansion Setup: Repricing of $446 million in fixed-rate loans at higher yields offsets deposit cost pressures.
- Expense Discipline Focus: Core expenses are managed tightly, with only selective hiring and targeted tech investments for scale.
Business Overview
Business First Bancshares is a regional bank operating primarily in Louisiana and Texas, generating revenue through commercial and consumer lending, deposit products, and fee-based services. Its two major segments are commercial banking—including commercial and industrial (C&I), commercial real estate (CRE), and construction and development (C&D) lending—and wealth management, with a growing focus on Texas metropolitan markets and fee income from swaps and investment services.
Performance Analysis
Core profitability metrics exceeded consensus, with return on average assets (ROAA) and return on average equity (ROAE) above 1% and 12% respectively, reflecting disciplined expense management and robust credit quality. Loan growth accelerated in Q4, led by Dallas, and Texas now represents 37% of total loans, a sharp increase from prior years. The portfolio mix shifted away from C&D toward higher-yielding C&I and CRE, supporting both growth and risk diversification.
Asset repricing is a central theme, as $446 million in fixed-rate loans (average 5.93%) are set to reprice at new yields in the mid-8% range, providing a substantial pickup even if the Fed cuts rates. Deposit growth was healthy, supported by a targeted money market special, though non-interest-bearing deposits remain a persistent challenge, projected to settle near 23% of total deposits in 2024. The bank executed a $71.5 million securities repositioning, absorbing a $2.5 million loss but locking in higher yields and a rapid 1.1-year earn-back.
- Texas Market Expansion: Texas loan exposure has grown nearly eightfold in five years, now approaching 40% of the portfolio.
- Funding Mix Shift: Money market specials replaced maturing CDs, increasing funding flexibility in a changing rate environment.
- Efficiency Gains: A five-year, 500 basis point improvement in efficiency ratio demonstrates operational leverage from scale.
Credit quality remained stable, with net charge-offs well below long-term averages and no significant uptick in criticized assets, supporting management’s confidence in continued loan growth and capital deployment.
Executive Commentary
"We finished the year in a strengthened capital position with solid asset quality, ample, diverse, and granular liquidity, and arguably most important, an employee base that's been through and grown from the challenges of 2023."
Jude Melville, President and CEO
"We feel the outlook for core NIM to be flat in Q1 and expand modestly for the full year of 2024 is reasonable, even conservative considering the repricing tailwinds and new origination yields we have conservatively assumed is largely offset by continued funding pressure."
Greg Robertson, Chief Financial Officer
Strategic Positioning
1. Texas Market Penetration
The bank’s strategic expansion in Texas, particularly Dallas and Houston, has transformed its geographic risk profile and growth prospects. Texas now accounts for 37% of loans, up from single digits five years ago, and is a core driver of origination volume and yield uplift.
2. Repricing Leverage and Margin Management
Management has positioned the balance sheet for asset sensitivity neutrality, allowing for margin stability regardless of rate cuts. Fixed-rate loan repricing at higher yields is expected to offset any funding cost headwinds, with a conservative 13% deposit beta assumption for 2024, down from 24% in 2023.
3. Funding and Deposit Strategy
Shift from CDs to money market accounts provides flexibility to manage deposit costs as rates move. Non-interest-bearing deposits are expected to continue drifting lower, but the funding mix is actively managed to support growth while maintaining liquidity and flexibility.
4. Expense and Technology Discipline
Expense growth is tightly controlled, with a 6% to 8% increase guided for 2024, largely reflecting full-year impact of prior hires, healthcare, and insurance costs. Investments in CRM and production-based software are designed to support scale as the bank approaches the $10 billion asset threshold, but large-scale hiring is not anticipated.
5. Capital and Optionality
Capital build remains a priority, with incremental dividend increases and a focus on maintaining flexibility for opportunistic M&A or team lift-outs. Tangible book value per share has grown 36% over three years, supporting both organic and inorganic growth ambitions.
Key Considerations
This quarter’s results reflect a bank balancing growth, risk, and operational discipline amid a volatile rate and funding environment. Management’s playbook emphasizes:
- Texas Lending as a Growth Engine: The outsized contribution from Texas markets is shifting the bank’s earnings base and risk profile.
- Repricing Opportunity as Margin Buffer: The upcoming repricing of fixed-rate loans is central to maintaining and expanding NIM, even if rates fall.
- Deposit Mix Management: Ongoing shift to money market specials and active management of non-interest-bearing balances is critical for funding cost control.
- Expense Growth Tightly Controlled: Only modest personnel additions and targeted tech investments are planned, with no major hiring waves expected.
- Capital Flexibility for M&A or Dividends: Continued capital build supports both incremental dividend growth and optionality for future transactions.
Risks
Deposit mix headwinds remain, with non-interest-bearing balances projected to decline further, risking incremental funding cost pressure if rate cuts materialize more quickly than anticipated. Loan-to-deposit ratio remains elevated, and any mismatch between loan and deposit growth could constrain flexibility. Expense pressures from healthcare and insurance persist, and margin expansion is contingent on successful asset repricing and funding cost containment. Industry-wide credit normalization could emerge if macro conditions deteriorate, though current credit metrics remain solid.
Forward Outlook
For Q1 2024, BFST guided to:
- Stable to modestly increasing core net interest margin (NIM), supported by loan repricing
- 6% to 8% increase in non-interest expense versus Q4, reflecting accrual resets and salary adjustments
For full-year 2024, management maintained guidance:
- 6% to 8% annual expense growth
- Loan growth in the high single digits, with a focus on matching deposit growth to reduce the loan-to-deposit ratio toward 90%
Management highlighted several factors that will drive 2024 results:
- Repricing of $446 million in fixed-rate loans at higher yields
- Active management of deposit mix and funding costs to support margin expansion
Takeaways
BFST’s Q4 results show a bank with visible margin levers, strong credit, and a disciplined approach to growth and expenses.
- Geographic Diversification Paying Off: Texas’s rising share of the loan book is driving growth and yield improvement, while portfolio mix shifts reduce risk concentration.
- Margin and Funding Strategy in Focus: Loan repricing and funding mix management are central to the margin expansion narrative, with a neutral asset sensitivity stance hedging against rate volatility.
- Expense Growth and Capital Optionality: Tight expense discipline and incremental capital build support both operational stability and future M&A or dividend increases.
Conclusion
Business First Bancshares is executing a deliberate strategy focused on Texas-led growth, margin resilience through asset repricing, and disciplined expense management. The bank’s positioning for 2024 emphasizes operational flexibility, capital strength, and a measured approach to risk, with visible levers to sustain profitability even in a shifting rate environment.
Industry Read-Through
BFST’s results highlight several broader industry themes: Regional banks with diversified geographic footprints and proactive balance sheet management are best positioned to weather funding and rate volatility. Repricing opportunities in fixed-rate loan portfolios will be a key margin lever across the sector, especially as funding costs plateau. Expense discipline and targeted technology investments are increasingly necessary as banks approach regulatory thresholds or scale targets. Deposit mix management remains a competitive differentiator, with money market and non-interest-bearing balances under close scrutiny. For peers, the ability to balance loan growth with matched funding and to deploy capital for both organic and inorganic opportunities will define winners in 2024.