Executive Summary / Key Takeaways

• The Correspondent Banking Inflection: Business First Bancshares has quietly built a correspondent banking unit serving 175 banks that will generate over $17 million in revenue in 2025, up from roughly 40-45 banks when the capability was acquired. This capital-light business is on track to double its impact within 12-24 months, creating a durable non-interest income stream that fundamentally changes the bank's earnings quality and reduces reliance on spread income.

• M&A Execution as a Competitive Moat: The bank's disciplined approach to acquisitions—Waterstone (SBA platform), Oakwood ($864M assets), and pending Progressive ($755M assets)—demonstrates an ability to integrate operations while maintaining asset quality. The Oakwood conversion completed in Q3 2025 and Progressive's Q1 2026 close positions BFST to demonstrate unified financials by Q4 2026, with management targeting a 1.2% core ROAA run rate.

• Margin Expansion Through Deposit Discipline: BFST's funding strategy—actively shedding high-cost deposits (4.45% weighted average cost) while growing non-interest bearing accounts—has maintained core NIM at 3.64% despite flat loan growth. This "margin over volume" stance, combined with a core efficiency ratio of 60.45%, shows management prioritizing profitability over growth for growth's sake.

• Concentration Risk Successfully Remediated: The bank's strategic reduction of energy exposure from 20% to below 2% and C&D concentration from 120% to 78% of capital over the past 18 months removes historical overhangs. This diversification, achieved while maintaining credit quality (0.01% net charge-offs), provides flexibility to pursue higher-yielding C&I opportunities in Texas and Louisiana.

• Capital Build Creates Optionality: With tangible common equity approaching 8.5% and total risk-based capital near 13.3% by year-end 2025, BFST has built capital ratios higher than when it last raised equity in 2022, despite adding over $2 billion in assets through M&A. This positions the bank to consider buybacks or opportunistic acquisitions, though management indicates further capital build is needed before pulling that lever.

Setting the Scene: From Louisiana Concentration to Regional Diversification

Business First Bancshares, founded in 2006 in Baton Rouge, Louisiana, spent its first decade building a commercial banking franchise that became dangerously concentrated. Energy sector loans reached 20% of the portfolio, exposing the bank to commodity price volatility. Construction and development (C&D) lending ballooned to 120% of capital by Q1 2023, creating regulatory scrutiny and credit concentration risk. These weren't just portfolio tilts—they represented an existential threat to the bank's stability and growth prospects.

The transformation began in 2024. Management embarked on a deliberate strategy to diversify while simultaneously expanding the geographic footprint. The January 2024 acquisition of Waterstone, a Katy, Texas-based SBA lending services provider, for $3.3 million in cash signaled a new direction: building fee-generating, capital-efficient businesses. The October 2024 merger with Oakwood Bancshares ($864 million in assets, $700 million in loans, $741 million in deposits) established a meaningful presence in the Dallas-Fort Worth metroplex, Texas's most dynamic banking market. These moves weren't opportunistic—they were strategic steps toward a multi-state franchise with diversified revenue streams.

Today, BFST operates across Louisiana, Dallas-Fort Worth, and Houston, serving small-to-midsized businesses with a relationship banking model that emphasizes local decision-making. The bank's 51 locations represent a focused footprint rather than a sprawling branch network, enabling lower operating costs and deeper community ties than larger regional competitors. This positioning matters because it allows BFST to compete on service and speed rather than price, preserving margins in an increasingly competitive deposit market.

The correspondent banking unit embodies this strategic evolution. What began as the 2022 acquisition of Smith Shellnut Wilson (SSW), serving about 40-45 banks, has grown to 175 partner institutions generating over $17 million in annual revenue. This business leverages BFST's infrastructure to provide investment management, SBA services, and interest rate swaps to community banks that lack scale to build these capabilities internally. The economics are compelling: revenue grows without proportional balance sheet growth, improving capital efficiency and ROE.

Technology, Products, and Strategic Differentiation: The Correspondent Banking Platform

BFST's core technological advantage isn't a cutting-edge mobile app or AI-driven underwriting—it's the integrated platform that serves both its own customers and 175 correspondent bank clients. The Q2 2025 conversion to FIS (FIS)'s large bank platform was a critical infrastructure upgrade that management describes as positioning the bank "for more efficient processing for the foreseeable future." While this $10 billion-asset-ready system didn't deliver immediate cost savings, it enables the unified sales effort now coordinated by a senior executive dedicated to the correspondent banking network.

The SBA lending platform, built around the Waterstone acquisition, demonstrates how BFST creates value through specialization. Waterstone provides end-to-end SBA services—from pre-qualification and packaging to servicing and liquidation—for community banks that want to offer SBA products without building the expertise. Since acquisition, the number of banks using Waterstone has nearly doubled, with four new clients added in Q2 2025 alone. SBA loan sales contribute approximately $1 million per quarter in non-interest income, though management notes this could be delayed by government shutdowns. The pipeline for second-half 2025 is described as "very robust," driven by bipartisan support for small business lending.

The derivatives business offers interest rate swaps to both BFST's commercial clients and correspondent bank customers, generating $1.3 million in revenue in Q4 2024 and contributing to strong Q1 2025 non-interest income. Management expects opportunities to accelerate in 2026-2027 as the rate environment normalizes and bankers become more confident structuring swap transactions. This service line matters because it addresses a critical need for commercial borrowers seeking to manage interest rate risk while creating a sticky, fee-based relationship that deepens customer ties.

Investment management through SSW has more than doubled assets under management since joining BFST, with management "very excited" about continued growth. The correspondent banking unit's total revenue approaching $17 million in 2025 represents a 20%+ increase over prior year, with management confident in similar accelerated growth in 2026. This isn't just diversification—it's building a capital markets-like business within a community banking franchise, fundamentally altering the earnings mix toward higher-multiple fee income.

Financial Performance & Segment Dynamics: Evidence of Strategic Execution

BFST's financial results through Q3 2025 validate the strategic transformation. Net income available to common shareholders for the nine months ended September 30, 2025, increased $16.9 million (37.9%) to $61.5 million, driven primarily by the Oakwood acquisition. The core ROAA of 1.05% and ROACE of 10.74% demonstrate profitable growth, though management's 1.2% ROAA target by Q4 2026 suggests further operational leverage is expected as integrations mature.

Net interest income increased $40.6 million (25.1%) to $202.3 million, largely attributed to Oakwood. However, the more telling story is margin management. The core net interest margin held steady at 3.64% in Q3 2025, down just 1 basis point from Q2, despite flat loan growth and deposit mix shifts. This stability reflects management's disciplined pricing strategy—weighted average new and renewed loan yields increased to 7.33% on floating rate loans while the cost of interest-bearing deposits declined to 3.34%. The bank actively shed $140 million of deposits costing 5%+ in Q2 2025, replacing them with more efficient funding sources. This "margin over volume" approach, while limiting loan growth to low-to-mid single digits, preserves profitability in an uncertain rate environment.

Non-interest income increased $7 million (21.6%) year-over-year, driven by a $3.4 million gain from the Kaplan banking center sale, $1.2 million (80%) increase in swap fee income, and $630,000 gain on subordinated debt extinguishment. The correspondent banking unit's contribution is becoming material, with SBA sales and swap fees providing quarterly variability that management expects to smooth over time. The SBIC pass-through income , while volatile ($700,000 in Q1 2025, negative $246,000 in Q2), represents additional diversification that management expects to normalize.

The efficiency ratio improved to 60.45% in Q3 2025, with core non-interest expense essentially flat for three consecutive quarters at approximately $49.3 million. This expense discipline, achieved while completing the core conversion and Oakwood integration, demonstrates management's commitment to operational leverage. Salaries and benefits increased $9.6 million (12.7%) year-over-year due to acquisitions, but the underlying cost structure remains controlled. Management expects modest Q4 expense increases due to investment timing, but the trend supports the thesis of scalable operations.

Asset quality remains exemplary despite economic uncertainty. Annualized net charge-offs were just 0.01% in Q3 2025, with nonperforming assets at 0.83% of total assets. The increase in NPAs from 0.69% to 0.97% in Q2 2025 was driven by two previously identified C&I relationships and three CRE credits, all of which are being actively worked toward resolution with adequate reserves (34% reserved on one credit, 14% on another). Management emphasizes these are "not surprises" but rather credits "working their way through the system," with borrowers cooperating toward resolution. This matters because it shows the bank's special assets team is effective and that problem credits are being identified early rather than surprising investors later.

The loan portfolio mix shift supports the diversification thesis. Real Estate Construction loans decreased $31.6 million (4.7%) while Commercial loans increased $52.1 million (2.8%) from December 2024 to September 2025. This rotation out of higher-risk construction lending into C&I relationships improves risk-adjusted returns and reduces concentration risk. Energy exposure remains below 2%, a dramatic improvement from the 20% peak six to seven years ago, giving management flexibility to pursue opportunities selectively without portfolio overhang.

Outlook, Management Guidance, and Execution Risk

Management's guidance for Q4 2025 and 2026 reveals both confidence and prudence. The target of 1.2% core ROAA by Q4 2026 implies meaningful operational leverage beyond the current 1.05% level. This isn't aspirational—it's based on tangible drivers: Oakwood cost savings beginning in Q4 2025, Progressive integration in Q1 2026, and continued correspondent banking growth. The guidance assumes successful execution of three major operational milestones: completing Oakwood conversion, closing Progressive, and integrating both onto the FIS platform.

Loan growth expectations remain modest at low-to-mid single digits, reflecting the "margin over volume" philosophy. Management acknowledges that Q1 2025's flat loan growth was due to elevated paydowns ($500 million) matching new production, but notes that Q3 2025 saw early success suggesting a return to low-to-mid single digit growth in Q4. The pipeline is building, but management won't sacrifice pricing for volume. This discipline helps preserve net interest margin (expected to expand 4-6 basis points through year-end) and avoids the credit quality deterioration seen at banks pursuing growth at any cost.

Deposit strategy continues to emphasize quality over quantity. Management expects to carry excess liquidity through Oakwood's conversion, which creates a 2-3 basis point NIM drag but ensures smooth integration. The strategic shedding of high-cost deposits (4.45% weighted average) while growing non-interest bearing accounts demonstrates a sophisticated approach to liability management. The Kaplan branch sale ($50.7 million deposits, $3.4 million gain) exemplifies this optimization—divesting a low-growth location while reinvesting capital in higher-return opportunities.

The correspondent banking unit's trajectory is particularly compelling. Management expects to "double the impact" of this business within 12-24 months, which would imply $34+ million in revenue and $10+ million in net income contribution. The hiring of a senior executive to coordinate unified sales efforts across SSW, Waterstone, and derivatives suggests this is a priority initiative, not a passive investment. The SBA pipeline is "very robust" for second-half 2025, and swap opportunities should accelerate in 2026-2027 as the rate environment normalizes. This growth is capital-efficient—revenue scales without proportional balance sheet growth, directly supporting the ROAA expansion thesis.

Capital allocation priorities remain focused on building optionality. Management has increased the dividend for nine consecutive years and maintains a 50/50 retail/institutional shareholder base, but buybacks are not imminent. Jude Melville notes they "probably have a little more capital build to go" before considering repurchases, targeting TCE in the "low 9% range" and risk-based capital "approaching 14%" as optimal levels. This approach indicates management is building capital for opportunities rather than returning it prematurely, positioning BFST to be "opportunistic and ready to deploy capital the right way."

The Progressive acquisition, expected to close early Q1 2026, adds $755 million in assets, $596 million in loans, and $675 million in deposits. Management projects "meaningful upside earnings accretion" by 2026, with conversion scheduled for August 2026 enabling unified financials by Q4 2026. The deal represents geographic fill-in within Louisiana and Texas, reducing integration risk while adding scale. The fact that Progressive's team "will fit in day 1 with the B1 culture" suggests cultural compatibility, a critical but often overlooked factor in bank M&A success.

Risks and Asymmetries: What Could Break the Thesis

The most material risk is execution failure on the Progressive integration. While Oakwood's conversion proceeded smoothly, Progressive is larger relative to BFST's current size and adds complexity to an already active integration schedule. Any misstep could distract management, increase expenses beyond the expected "modest Q4 increase," and delay the 1.2% ROAA target. The bank's history of successful integrations provides confidence, but the sheer pace of change—core conversion, Oakwood integration, and Progressive acquisition within 12 months—creates operational risk.

Government shutdown risk directly threatens SBA revenue, which contributes approximately $1 million quarterly. Management explicitly warned that a shutdown "greatly impacts the ability to sell the guaranteed portion of SBA loans" and could make Q4 non-interest income "flat" rather than growing. While this is a temporary risk, it highlights the vulnerability of fee income tied to federal programs. The bipartisan support for SBA lending suggests long-term growth, but quarterly volatility could disappoint investors focused on consistent fee growth.

Deposit competition remains intense and could pressure NIM expansion. Management acknowledges "deposit cost is still competitive in the markets" and that they'll "continue to have to be nimble." The strategic shedding of high-cost deposits works until competitors match pricing, potentially limiting the 4-6 basis points of expected margin expansion. The 83% core CD retention rate in September (down from 96% in June) suggests some pressure on deposit stability, though management attributes this to normal seasonality rather than competitive loss.

Credit quality, while currently pristine, faces macroeconomic headwinds. The provision for credit losses increased in Q3 2025 due to "individual reserves for certain commercial lending relationships and a deteriorating macroeconomic forecast." While management is "adequately reserved" and borrowers are "working with us towards resolution," any deterioration in the Texas or Louisiana economies could drive higher charge-offs than the current 0.01% level. The three identified problem credits (two CRE, one C&I) represent manageable exposure, but they foreshadow that the bank isn't immune to regional economic stress.

Technology adoption risk lurks beneath the surface. The FIS core conversion positions BFST for $10 billion in assets, but the transition period creates operational risk and may not deliver immediate cost savings. Management admits they "don't know that we'll see a lot of savings immediately" because they're "making other investments in technology." If the platform doesn't enable the expected efficiency gains or if employees struggle with the new system, the efficiency ratio could stagnate rather than improve.

Valuation Context: Positioning for Premium Execution

At $27.82 per share, BFST trades at 10.6x trailing earnings and 1.02x book value, a modest valuation that reflects its regional bank status but may not fully capture the transformation underway. The price-to-free-cash-flow ratio of 9.1x and price-to-operating-cash-flow of 8.9x suggest the market is pricing BFST as a traditional spread lender rather than a diversified financial services company with growing fee income streams.

Comparative metrics reveal BFST's relative positioning. Hancock Whitney (HWC) trades at 11.8x earnings and 1.25x book with a 1.36% ROA, commanding a premium for its larger scale and geographic diversification. Origin Bancorp (OBK) trades at 20.4x earnings despite a lower 0.61% ROA, reflecting its Texas growth story but also its energy sector risk. Home Bancorp (HBCP) trades at 10.7x earnings and 1.11x book with a 1.28% ROA, similar to BFST but without the correspondent banking upside. Cadence Bank (CADE) trades at 15.6x earnings and 1.38x book, premium multiples for a larger, more diversified franchise.

BFST's 2.07% dividend yield and 21.6% payout ratio reflect a balanced capital return approach, but the real story is the capital build. Having added over $2 billion in assets since the last capital raise while improving capital ratios, BFST has demonstrated accretive M&A execution. The tangible book value growth of nearly 15% year-over-year, driven primarily by retained earnings rather than AOCI adjustments, shows the core franchise is creating organic value.

The valuation gap may close as the correspondent banking unit scales and Progressive's accretion becomes visible. If management achieves the 1.2% ROAA target, that would imply a 14%+ increase in earnings power without requiring additional capital. The market typically awards higher multiples to banks demonstrating consistent ROAA improvement and fee income growth, particularly when driven by scalable platforms rather than spread expansion.

Conclusion: The Path to Premium Valuation

BFST has executed a strategic transformation from a concentrated Louisiana lender to a diversified regional franchise with multiple capital-efficient earnings engines. The correspondent banking unit's growth from 40 to 175 banks, generating $17+ million in revenue, represents a fundamental shift in earnings quality that reduces dependence on spread income and improves capital efficiency. This platform, combined with disciplined M&A execution and a "margin over volume" philosophy, positions BFST to achieve its 1.2% ROAA target by Q4 2026.

The investment thesis hinges on two variables: successful Progressive integration and correspondent banking scale-up. If both execute as planned, BFST will demonstrate a unique combination of community banking relationships and capital markets-like fee income, justifying a valuation premium to traditional regional banks. The modest current valuation (10.6x earnings, 1.02x book) may not reflect this transformation, particularly as Progressive's accretion and correspondent banking growth become visible in 2026 results.

The primary risk is operational—managing three major integrations simultaneously while maintaining asset quality and expense discipline. However, management's track record of reducing concentrations while building capital, combined with exemplary credit metrics (0.01% charge-offs), suggests the team can navigate this complexity. For investors, BFST offers exposure to a regional bank that has solved its historical concentration issues while building scalable fee businesses, creating a compelling risk/reward profile as the market recognizes the earnings power of this transformed franchise.