Business First Bancshares: Forging Growth Through Strategic Evolution and Digital Edge (NASDAQ:BFST) - BFST Stock Research Report

## Executive Summary / Key Takeaways * Strategic Transformation Driving Profitability: Business First Bancshares is executing a multi-faceted strategy of disciplined organic growth, strategic acquisitions, and significant technological upgrades, resulting in consistent profitability with core Return on Average Assets (ROAA) exceeding 1% and Net Interest Margin (NIM) expansion. * Diversified Revenue Engines: Beyond traditional lending, BFST is cultivating robust non-interest income streams through its correspondent banking function, SBA loan services, and interest rate swap offerings, aiming for $40 million to $50 million in non-interest income by year-end 2025. * Fortified Balance Sheet & Capital Discipline: The company maintains a strong capital position, with Tangible Common Equity (TCE) at $639.59 million and a TCE to Tangible Assets ratio of 8.20% as of June 30, 2025, while actively managing credit risk and reducing loan concentrations. * Operational Excellence Through Technology: A recent core system upgrade to the FIS large bank platform enhances operational efficiency, supports future M&A integration, and provides advanced pricing capabilities, creating a foundational advantage for scalable growth. * Outlook for Continued Incremental Improvement: Management projects mid-single-digit loan growth for the remainder of 2025, further NIM expansion of 4-6 basis points, and expects non-performing assets to decline in the latter half of the year as identified credits resolve. ## A Regional Powerhouse's Strategic Evolution Business First Bancshares, Inc. (BFST), operating through its subsidiary b1BANK, has meticulously carved out a niche as a community-focused financial holding company. Headquartered in Baton Rouge, Louisiana, BFST primarily serves small-to-midsized businesses and professionals across Louisiana, the Dallas/Fort Worth metroplex, and Houston. Since its founding in 2006 and becoming publicly traded in February 2018, the company's journey has been one of continuous strategic evolution, marked by a commitment to incremental improvement and disciplined growth. BFST's overarching strategy centers on diversifying its geographic footprint, revenue streams, and loan portfolio while maintaining stringent capital and credit discipline. This approach has allowed the company to navigate various economic cycles and competitive pressures. For instance, BFST successfully reduced its perceived overexposure to the energy sector from a high of 20% of its loan book to below 2% by the second quarter of 2025, a testament to its proactive risk management. ## Technological Edge and Operational Efficiency A cornerstone of BFST's strategic foundation is its investment in advanced technology. The company recently completed a significant upgrade of its core processing system to IPS, the FIS (TICKER:FIS) large bank platform, over Memorial Day weekend in 2025. This transition is not merely an operational overhaul; it is a strategic enabler designed to position BFST for "more efficient organic and inorganic or operational effectiveness," as noted by management. This technological enhancement offers several tangible benefits. It streamlines processing, fostering "more efficient organic growth" and allowing BFST to "contemplate M&A activity with a little more aggression" by providing a robust and reliable core partnership for future acquisitions. The system also bolsters BFST's competitive moat by enabling sophisticated pricing capabilities. New software allows bankers to consider the "entire relationship" when pricing loans, optimizing profitability beyond just the loan type. This real-time visibility into overall relationship profitability, particularly for Commercial and Industrial (C&I) loans that often bring significant deposit opportunities, allows for more aggressive yet rational loan pricing. While specific quantifiable performance metrics for the technology itself are not detailed, the operational benefits are clear, including contributing to an estimated $750,000 in annual operational savings from footprint optimization. This foundational investment in technology is critical for BFST's long-term growth strategy, enhancing its ability to scale operations efficiently and improve financial performance. ## Expanding Footprint and Diversifying Revenue Streams BFST's growth narrative is also deeply intertwined with strategic mergers and acquisitions. The acquisition of Waterstone LSP, LLC in January 2024 bolstered its Small Business Administration (SBA) lending services, a segment management views as having strong bipartisan support and significant growth potential. This was followed by the impactful merger with Oakwood Bancshares, Inc. in Dallas on October 1, 2024, which expanded BFST's asset exposure in the Dallas and Houston markets to the mid-40s as a percentage of its overall loan book. These acquisitions were notably achieved without requiring additional capital, contributing positively to BFST's capital ratios. Further solidifying its regional presence, BFST announced on July 7, 2025, a definitive agreement to acquire Progressive Bancorp, Inc., a $750 million community bank in North Louisiana, with a projected close in early 2026. This move is expected to generate "meaningful upside earnings accretion" and further diversify BFST's geographic reach. Complementing these acquisitions, BFST strategically divested its Kaplan banking center in Louisiana in April 2025, a move that generated a $3.4 million gain and is expected to yield approximately $750,000 in annual operational savings. Beyond traditional interest income, BFST is actively cultivating diversified non-interest revenue streams. Its correspondent banking function, which includes asset management through Smith Shellnut Wilson (SSW) and SBA loan services through Waterstone, now serves approximately 120 bank clients, up from 40-45 previously. SSW has "over doubled its AUM since joining" BFST, and Waterstone added 4 bank clients in Q2 2025. The company's nascent derivatives business, offering interest rate swaps, is also gaining momentum, with 20 trades in Q3 2024, indicating a "good gradual ramp" and increasing "swap victories." Management aims for non-interest income to reach $40 million to $50 million by year-end 2025, an upward trend that, while potentially "bumpy quarter-to-quarter," is supported by a robust infrastructure designed to provide multiple growth opportunities. ## Financial Performance and Outlook BFST's financial performance in Q2 2025 reflects the fruits of its strategic initiatives. The company reported net income available to common shareholders of $20.8 million, or $0.70 per diluted common share. On a non-GAAP core basis, net income was $19.5 million, or $0.66 per diluted common share. The annualized core ROAA exceeded 1%, reaching 1.07% for the quarter.

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Net interest income increased significantly, largely due to the Oakwood acquisition. The GAAP reported Net Interest Margin (NIM) remained unchanged at 3.68% linked-quarter, with the non-GAAP core NIM also holding steady at 3.64%. Management noted that a 2 basis points drag from the Kaplan branch sale and a 3 basis points drag from elevated liquidity (maintained for core conversion and Oakwood integration) offset potential margin expansion. Despite competitive pressures, the weighted average total cost of deposits declined to 2.62% in June 2025, a 4 basis points reduction linked-quarter, demonstrating effective deposit cost management.

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The loan portfolio grew to $6.05 billion as of June 30, 2025, a 4.5% annualized increase linked-quarter. This growth was primarily driven by C&I loans (up $98.8 million) and Commercial Real Estate (CRE) loans (up $61.6 million), partially offset by decreases in construction and residential loans. BFST has strategically reduced its Construction and Development (C&D) concentration from approximately 120% of capital in Q1 2023 to about 78% in Q4 2024, enhancing portfolio diversification.

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Looking forward, management projects mid-single-digit loan growth for the remainder of 2025, likely at the higher end of that range, with a full-year 2025 organic loan growth forecast in the low 4-4.5% range. The NIM is expected to improve by 4-6 basis points for the remainder of 2025, with a flatter trend in Q3 and an uptick in Q4, assuming a flat interest rate environment. Management anticipates a 1-2 basis points NIM pickup for every 25 basis point rate cut, supported by total deposit betas of 45-55% in an easing rate environment. Loan discount accretion is expected to average $750,000 to $800,000 per quarter. Core non-interest expense is projected to be in the low $50 million range per quarter for Q3 2025, with material cost savings from the Oakwood acquisition expected in late Q4 2025 or 2026. ## Competitive Landscape and Positioning BFST operates in a competitive regional banking landscape, facing rivals such as Prosperity Bancshares, Inc. (TICKER:PB), Independent Bank Group, Inc. (TICKER:IBTX), Hancock Whitney Corporation (TICKER:HWC), and Origin Bancorp, Inc. (TICKER:OBNK), as well as indirect competition from fintech companies. While BFST may not match the sheer scale or broad geographic footprint of some larger peers like PB or HWC, it distinguishes itself through a community-focused approach, personalized customer service, and an agile operational structure. BFST's strategic investments in specialized services, such as its correspondent banking network and C&I lending capabilities, provide a competitive moat. Its internal auditing and focus on relationship profitability for C&I loans differentiate it from many community banks that may lack the systems or expertise for such complex offerings. This allows BFST to compete effectively by offering tailored solutions and deeper client relationships, even against competitors like IBTX, which pursue aggressive acquisition strategies. However, BFST faces vulnerabilities from its smaller scale, which can lead to higher operational costs compared to larger rivals, and potential technological gaps against digitally advanced banks like HWC. The company's recent core system upgrade is a direct response to these challenges, aiming to enhance efficiency and scalability to better compete in a rapidly evolving digital banking environment. Despite heightened competition for deposits, BFST's ability to attract and retain lower-cost funding, coupled with disciplined loan pricing, underscores its strategic positioning to drive profitability. ## Credit Quality and Risk Management Asset quality metrics trended negatively in Q2 2025, with nonperforming assets (NPAs) increasing to $60.30 million from $30.50 million at December 31, 2024. This increase was primarily attributable to three commercial lending relationships, accounting for 80.10% of the total rise. Management, however, emphasizes that these were "not surprises" and represent "successful work navigating through the process on a handful of relationships that have been previously identified." The company believes it is "adequately reserved" against these nonperforming relationships, with net charge-offs remaining low at 0.01% for the quarter. The watch list has declined over the past two quarters, indicating a slower pace of new problematic relationships. While much of the watch list increase was previously due to higher debt service requirements from rising rates, management anticipates that a changing rate environment could lead to some credit upgrades. BFST maintains an allowance for credit losses (ACL) of 1.02% of total loans held for investment, and expects to maintain at least this level, reserving at 120% of every new loan produced. The company also successfully remediated a material weakness in its IT general controls by June 30, 2025, demonstrating its commitment to robust internal controls. ## Conclusion Business First Bancshares is executing a compelling investment narrative, transforming from a regional bank into a diversified financial services provider poised for sustained growth. Its strategic blend of disciplined organic expansion, value-accretive acquisitions like Oakwood and the upcoming Progressive Bank merger, and foundational technological investments in its core processing system are enhancing operational efficiency and expanding its competitive reach. By cultivating multiple non-interest income streams and maintaining rigorous capital and credit discipline, BFST is building a resilient and profitable franchise. Despite facing competitive pressures and a temporary uptick in non-performing assets, BFST's proactive management of credit risk, coupled with its ability to expand net interest margin and grow deposits organically, underscores its strength. The company's outlook for continued NIM expansion, mid-single-digit loan growth, and increasing non-interest income, all supported by a robust technological roadmap, positions BFST as a compelling opportunity for discerning investors seeking a regional bank with a clear path to enhanced shareholder value.