Business First Bancshares: Forging Growth Through Disciplined Expansion and Tech-Driven Efficiency (NASDAQ:BFST) - BFST Stock Research Report

## Executive Summary / Key Takeaways * Strategic Transformation and Operational Excellence: Business First Bancshares (BFST) is executing a disciplined strategy of profitable growth, driven by strategic acquisitions like Oakwood and the upcoming Progressive Bank merger, alongside significant operational efficiency gains from its core system upgrade to IPS, the FIS (TICKER:FIS) large bank platform. * Robust Financial Performance and Capital Accretion: The company has demonstrated consistent profitability, with a core Return on Average Assets (ROAA) exceeding 1% and a Net Interest Margin (NIM) showing steady expansion. Strong capital accretion has led to improved Tangible Common Equity (TCE) and Total Risk-Based Capital (TRBC) ratios, providing optionality for future capital deployment. * Diversified Revenue Streams and Expense Control: BFST is actively diversifying its revenue beyond traditional lending, with significant growth in non-interest income from its correspondent banking unit, SBA lending, and interest rate swap offerings. This is complemented by a strong focus on expense management, leading to improved efficiency ratios. * Balanced Growth and Asset Quality Management: While prioritizing net interest margin over loan volume, BFST aims for mid-single-digit loan growth, carefully managing portfolio concentrations (e.g., reducing C&D and energy exposure). Despite some credit migration, management believes issues are isolated and the portfolio remains sound, with adequate reserves. * Outlook for Enhanced Profitability: With key integrations nearing completion and a strategic focus on operating leverage, BFST projects a core ROAA run rate of approximately 1.2% by the end of the fourth quarter of 2026, signaling sustained profitability and tangible book value increases. ## Setting the Scene: A Regional Powerhouse in the Making Business First Bancshares, Inc. (BFST), headquartered in Baton Rouge, Louisiana, has steadily built an attractive commercial banking franchise across Louisiana and the burgeoning markets of the Dallas-Fort Worth metroplex and Houston, Texas. Founded in 2006, the company's core business revolves around providing a comprehensive suite of financial services tailored for small-to-midsized businesses and professionals. This includes diverse deposit products, commercial and industrial (C&I) loans, real estate loans, consumer loans, wealth management, and specialized financial services. BFST's overarching strategy centers on creating shareholder value through disciplined growth, operational efficiency, and strategic diversification, a narrative that has consistently unfolded since its public debut in February 2018. The banking industry in the Southern U.S. is characterized by intense competition from both regional and national institutions, as well as emerging non-bank competitors. BFST positions itself as a community-focused bank, leveraging strong local networks and personalized service to differentiate itself. This localized agility and deep understanding of its markets allow BFST to compete effectively against larger, more technologically advanced rivals like JPMorgan Chase (TICKER:JPM), which excels in digital innovation and scale, and regional giants such as Regions Financial (TICKER:RF) and Hancock Whitney (TICKER:HWC), known for their broader market reach and established presence. While BFST may not match the sheer scale or aggressive digital initiatives of a national player like JPM, its strength lies in fostering robust client relationships and adapting to specific regional economic dynamics. Historically, BFST has proactively addressed concentration risks, notably reducing its energy loan exposure from a high of 20% to less than 2% by late 2024. Similarly, it strategically downshifted its construction and development (C&D) loan concentration from approximately 120% of capital in Q1 2023 to about 78% by Q4 2024. These actions underscore a foundational commitment to a diversified and resilient balance sheet, providing greater flexibility for future growth. The company's strategic responses to competitive forces also include a disciplined approach to pricing and a focus on relationship banking, ensuring that growth is profitable and sustainable. ## Technological Edge and Operational Transformation BFST's strategic investments in technology are foundational to its competitive positioning and future growth. The company successfully upgraded its core processing system to IPS, the FIS (TICKER:FIS) large bank platform, by the end of May 2025. This significant operational undertaking, initiated two years prior, is designed to enhance "more efficient organic and inorganic operational effectiveness" and better prepare the company for responsible growth towards $10 billion in assets. The IPS platform is expected to provide a scalable and robust infrastructure, enabling BFST to contemplate future mergers and acquisitions with "a little more aggression" due to improved integration capabilities. The tangible benefits of this technological upgrade are multifaceted. Operationally, it promises "future operational savings approaching $750,000 a year" through initiatives like branch footprint optimization, as demonstrated by the sale of the Kaplan, Louisiana branch in April 2025. Furthermore, the new system enhances internal auditing capabilities, particularly for C&I loans, and provides real-time visibility into overall relationship profitability. This allows bankers to price loans more rationally, considering the holistic value of a client relationship rather than just the isolated loan type. For investors, this translates into a stronger competitive moat through improved operational efficiency, lower operating costs, and enhanced client service, all contributing to better margins and diversified revenue streams.

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Beyond the core system, BFST is leveraging technology to build out its correspondent banking network and derivatives business. The correspondent banking unit, which partners with approximately 175 banks, is expected to generate over $17 million in revenue and contribute roughly $5 million to net income in 2025. Management anticipates doubling this unit's impact within 12-24 months, driven by a unified sales effort and the offering of more sophisticated products like SBA lending services (through Waterstone, acquired in January 2024) and interest rate swaps. The derivatives business, which provides interest rate swaps to clients and other banks, has seen an 80% increase in swap fee income for the nine months ended September 30, 2025, compared to the prior year, reflecting a "greater pace of swap victories." These technological and service-based differentiators are crucial for BFST to maintain its competitive edge against rivals who may have greater scale but potentially less specialized or integrated offerings for community bank partners. ## Financial Performance and Strategic Momentum BFST's financial performance in the first nine months of 2025 reflects a company executing its strategy with discipline. Net income available to common shareholders increased by a substantial 37.9% to $61.5 million, while net interest income grew 25.1% to $202.3 million, largely driven by the acquisition of Oakwood Bancshares in October 2024. This acquisition significantly bolstered BFST's presence in the Dallas region, adding approximately $863.60 million in total assets, $700.20 million in loans, and $741.30 million in deposits. The company's core Return on Average Assets (ROAA) improved to 1.05% for the nine months ended September 30, 2025, up from 0.89% in the prior year period, demonstrating consistent profitability. The core efficiency ratio also saw material improvement, falling to 60.45% in the third quarter of 2025.

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The Net Interest Margin (NIM) has shown resilience, with the GAAP reported NIM holding steady at 3.68% in Q3 2025. Management's disciplined pricing on new and renewed loans, which averaged 7.46% in Q3 2025 and 7.71% in Q1 2025, coupled with effective management of funding costs, has been instrumental. The weighted average total cost of deposits for Q3 2025 was 2.67%, with a spot rate of 2.65% in September, reflecting a downward trend. This is further supported by a strong core CD balance retention rate of 83% in September 2025. Total assets grew to $8 billion by September 30, 2025, a 1.2% increase from December 31, 2024. Total loans held for investment reached $6 billion, a modest 0.7% increase over the same period, reflecting BFST's bias towards margin over volume. While total deposits remained relatively flat at $6.50 billion, the company strategically managed its funding mix, increasing interest-bearing deposits by $131.4 million in Q3 2025 and maintaining noninterest-bearing deposits at 21.0% of the total. This included a deliberate reduction of $125.5 million in Federal Home Loan Bank (FHLB) borrowings, a move aimed at optimizing funding costs.

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Noninterest income has emerged as a significant growth driver, increasing 21.6% to $39.3 million for the nine months ended September 30, 2025. This growth was fueled by a $3.4 million gain from the sale of the Kaplan banking center, an 80% increase in swap fee income, and a $630,000 gain on debt extinguishment. The correspondent banking unit and SBA loan sales continue to be strong contributors, with the former projected to generate over $17 million in revenue in 2025. ## Capital Strength and Risk Management BFST has prioritized capital accretion, with total shareholders' equity increasing 9.9% to $878.4 million by September 30, 2025. This was driven by strong net income and a $26.6 million after-tax effect of unrealized gains in the investment securities portfolio. The company's capital ratios are robust, with Tier 1 Leverage at 10%, Common Equity Tier 1 at 10.06%, Tier 1 Risk-based at 11.16%, and Total Risk-based Capital at 13.22%, all showing improvement from December 31, 2024. Tangible book value per common share also increased to $22.63 from $19.92 over the same period. Management aims for a Total Risk-Based Capital ratio approaching 14% and a Tangible Common Equity ratio in the low 9% range, providing maximum optionality for capital deployment, including potential share buybacks. The Board of Directors recently approved a $30 million stock repurchase program, signaling confidence in the company's valuation and capital position. [cite: Stock News] Credit quality, while experiencing some normalization, remains actively managed. The allowance for credit losses increased to 1.03% of total loans held for investment as of September 30, 2025, from 0.98% at year-end 2024. Nonperforming loans to total loans held for investment increased to 0.82%, primarily due to a handful of identified commercial real estate and commercial lending relationships. Management emphasizes that these are isolated issues, not indicative of systemic problems, and are being actively worked towards resolution. The company's conservative lending approach and focused management of nonperforming assets have historically resulted in sound asset quality and timely resolution of problem assets. ## Outlook and Strategic Trajectory BFST's outlook is characterized by a clear strategic roadmap focused on optimizing its current footprint and leveraging recent investments. The company anticipates achieving "much more of the all-in economic benefit from the Oakwood transaction" by the first quarter of 2026, following its system conversion at the end of Q3 2025. The acquisition of Progressive Bancorp, Inc. is on track to close in early Q1 2026, with its system conversion slated for August 2026, aiming for "unified post-integration financials in full for the fourth quarter of '26." Management projects continued "low to mid-single-digit" loan growth, balancing volume with margin discipline. They expect Net Interest Margin to expand by "a couple of bps in the fourth quarter" and continue a "low to mid-single digit margin expansion throughout the year," assuming a flat interest rate environment. A 25 basis point rate cut could further boost NIM by 1-2 basis points. Noninterest income is expected to maintain an upward trend, with the correspondent banking unit's impact potentially doubling within 12-24 months. While core noninterest expenses are expected to increase modestly in Q4 2025 due to investment timing, the long-term focus remains on generating operating leverage. BFST is targeting a "roughly 1.2% core ROAA run rate by the end of the fourth quarter" of 2026, underscoring its commitment to enhanced profitability.

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## Conclusion Business First Bancshares is in a transformative phase, strategically expanding its footprint and capabilities while rigorously optimizing its operations. The company's disciplined approach to growth, evidenced by its successful M&A integrations and proactive management of loan concentrations, is complemented by significant technological investments that promise enhanced efficiency and diversified revenue streams. With a strong capital base, a consistent track record of profitability, and a clear strategic vision, BFST is well-positioned to deliver sustained shareholder value. The ongoing integration of acquisitions, coupled with the realization of operational efficiencies from its core system upgrade and the continued growth of its non-interest income businesses, provides a compelling narrative for investors seeking a regional bank with a clear path to increased profitability and capital accretion in the coming years.