Oakwood Bank Conversion Will Enable Operational Synergies And Diversification

Key Takeaways

• Expanding net interest margins and optimizing branches are set to improve efficiency and boost future net margins.
  
• Emphasis on noninterest revenue and capital accumulation positions the company for growth and potential acquisitions.
  
• Ongoing credit issues, deposit contractions, and macro uncertainties could pressure net interest margins and impact earnings, amid integration risks and competitive deposit rate offers.

Catalysts

Operates as the bank holding company for b1BANK that provides various banking products and services in Louisiana and Texas.

• Business First Bancshares is experiencing core net interest margin expansion, driven by declining funding costs and stable loan yields, which could positively impact future net interest income.
  
• The integration of Oakwood Bank in Dallas is on track, and with full conversion set for September 2025, this could lead to operational efficiencies and potentially higher net margins once synergies are realized.
  
• Branch optimization and sales, such as the recent sale of the Kaplan, Louisiana branch, are expected to improve efficiency ratios and reduce operational expenses, positively impacting future net margins.
  
• The company is focusing on noninterest revenue sources, with strong performances in swap fees, SBA loan gains, and contributions from SBIC investments, which could enhance overall revenue growth.
  
• Business First Bancshares has been accumulating capital, with TCE exceeding 8% and a TRBC ratio over 13%, positioning the company for potential future growth opportunities and acquisitions, which could drive earnings growth.

Business First Bancshares Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Business First Bancshares's revenue will grow by 13.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from 24.1% today to 26.7% in 3 years time.
• Analysts expect earnings to reach $106.6 million (and earnings per share of $3.25) by about May 2028, up from $66.7 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 12.1x on those 2028 earnings, up from 10.4x today. This future PE is greater than the current PE for the US Banks industry at 11.0x.
• Analysts expect the number of shares outstanding to grow by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.23%, as per the Simply Wall St company report.

Business First Bancshares Future Earnings Per Share Growth

Risks

• The company experienced modest negative credit migration during the quarter, primarily due to issues with two C&I relationships, which could impact future earnings if these or similar credit issues are not resolved swiftly.
  
• Deposit balances contracted by $53 million in the quarter, attributed to seasonal runoff, customer withdrawals, and the sale of a branch; ongoing deposit attrition could challenge net interest margins and earnings.
  
• The integration of Oakwood Bank is still underway with conversion set for September, which may involve execution risk and potential disruptions that could temporarily impact operational efficiencies and profitability.
  
• There is macro uncertainty and a competitive environment with heightened deposit rate offers in the market, which may pressure net interest margins if these conditions persist.
  
• The balance of loan growth versus interest margin management suggests a cautious stance in a potentially unstable market environment, affecting revenue if loan volumes do not increase as anticipated.

Valuation

• The analysts have a consensus price target of $29.9 for Business First Bancshares based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $399.0 million, earnings will come to $106.6 million, and it would be trading on a PE ratio of 12.1x, assuming you use a discount rate of 6.2%.
  
• Given the current share price of $23.45, the analyst price target of $29.9 is 21.6% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.