BancFirst Corporation: Margin Outlook Remains Bright, However, Stock Appears Costly
Summary
- The margin will likely continue to grow this year due to the deployment of excess cash as well as the rise in market interest rates.
- Loan growth will likely be below average due to economic headwinds.
- Provisioning will likely also be below average. BANF currently appears to have an excessively high reserve for loan losses.
- The December 2023 target price suggests a small downside from the current market price. Further, BANF is offering a low and unattractive dividend yield.
Oleksii Liskonih
Earnings of BancFirst Corporation (NASDAQ: NASDAQ:BANF) will most probably increase this year on the back of an asset mix improvement and higher interest rates, both of which will boost the margin. Further, subdued loan growth and below-average provisioning will support earnings. Overall, I'm expecting BancFirst to report earnings of $6.01 per share for 2023, up 4% year-over-year. The year-end target price suggests a small downside from the current market price. Therefore, I’m adopting a hold rating on BancFirst Corporation.
Excess Cash Presents an Opportunity for Further Topline Growth
BancFirst Corporation’s net interest margin grew by an impressive 35 basis points during the fourth quarter, as compared to 43 basis points in the third quarter and 27 basis points in the second quarter of the year. The margin growth is likely to decelerate in 2023 as the up-rate cycle is nearing its end. The balance sheet is slightly asset sensitive. According to details given in the 10-K filing, around $6.2 billion worth of interest-sensitive assets and $5.9 billion worth of interest-sensitive liabilities will mature in 2023. This asset-liability gap is around 5% of total assets, which isn't too bad. The margin is likely to be moderately rate-sensitive due to this gap.
Unlike most other banks, BancFirst still has a large amount of excess cash on its books. While the cash is currently dragging the margin, it is also providing an opportunity to improve the asset mix in the future and thus raise the margin. The following table shows the trend of interest-bearing deposits with other banks, which is a cash component.
SEC Filings
There's currently a large difference between the rates earned on cash and loans (see below). Therefore, even a small deployment of cash can have a magnified impact on the margin.
| Assets | Asset Yield |
| Loans | 5.7% |
| Debt Securities - Taxable | 2.3% |
| Debt Securities - Tax Exempt | 3.3% |
| Interest-Bearing Deposits with Banks and FFS (Cash) | 3.8% |
| Total Earning Assets | 4.7% |
Apart from the margin expansion, loan growth will also boost the top line. However, growth for 2023 is likely to be lower than last year. Loan growth slowed down to 1.7% in the fourth quarter of 2022 from 3.2% in the third quarter. A further slowdown is likely due to certain economic factors, especially the high interest-rate environment. Moreover, a recession can drag loan growth. BancFirst mostly operates in Oklahoma with some presence in Texas through subsidiaries, Pegasus and Worthington. While Oklahoma has an unemployment rate that's at par with the national average, Texas’ unemployment rate is much worse.
The loan portfolio has grown at a compounded annual growth rate of 8% over the last five years. Considering the factors mentioned above, I'm expecting the loan growth to be lower than the historical growth rate in 2023. I'm expecting the portfolio to grow by 6% during this year. Further, I'm expecting deposits to grow in line with loans, but the growth of other earning assets to trail loan growth. The following table shows my balance sheet estimates.
| Financial Position | FY18 | FY19 | FY20 | FY21 | FY22 | FY23E |
| Net Loans | 4,925 | 5,608 | 6,303 | 6,086 | 6,851 | 7,271 |
| Growth of Net Loans | 5.4% | 13.9% | 12.4% | (3.5)% | 12.6% | 6.1% |
| Other Earning Assets | 1,976 | 2,150 | 1,945 | 2,381 | 4,460 | 4,641 |
| Deposits | 6,605 | 7,484 | 8,065 | 8,092 | 10,974 | 11,648 |
| Total Liabilities | 6,671 | 7,561 | 8,144 | 8,234 | 11,137 | 11,814 |
| Common equity | 903 | 1,005 | 1,068 | 1,172 | 1,251 | 1,417 |
| Book Value Per Share ($) | 27.0 | 30.2 | 32.2 | 35.3 | 37.4 | 42.3 |
| Tangible BVPS ($) | 24.1 | 25.0 | 27.1 | 30.3 | 31.4 | 36.3 |
| Source: SEC Filings, Author's Estimates(In USD million unless otherwise specified) | ||||||
Provisioning is Likely to Remain Subdued
BancFirst Corporation maintains an excessively high reserve for expected loan losses. The allowance to non-accrual loan ratio was a whopping 606.1% at the end of December 2022. As a result, I'm confident that the company will easily ride out any recessionary period without a significant jump in provisioning expenses. Further, I'm expecting provisioning to be below the historical average because I'm expecting loan additions to be below average as well (as discussed above). Overall, I'm expecting the net provision expense to make up 0.17% of total loans in 2023, which is below the last five-year average of 0.24%.
Expecting Earnings to Grow by 4%
As discussed above, the anticipated margin expansion, loan growth, and below-average provisioning will likely support earnings this year. Overall, I'm expecting BancFirst to report earnings of $6.01 per share for 2023, up 4% year-over-year. The following table shows my income statement estimates.
| Income Statement | FY18 | FY19 | FY20 | FY21 | FY22 | FY23E |
| Net interest income | 260 | 282 | 307 | 316 | 374 | 472 |
| Provision for loan losses | 4 | 8 | 63 | (9) | 10 | 12 |
| Non-interest income | 125 | 137 | 137 | 170 | 184 | 155 |
| Non-interest expense | 222 | 241 | 258 | 286 | 310 | 363 |
| Net income - Common Sh. | 126 | 135 | 100 | 168 | 193 | 201 |
| EPS - Diluted ($) | 3.76 | 4.05 | 3.00 | 5.03 | 5.77 | 6.01 |
| Source: SEC Filings, Author's Estimates(In USD million unless otherwise specified) | ||||||
My estimates are based on certain macroeconomic assumptions that may not come to fruition. Therefore, actual earnings can differ materially from my estimates.
Market Price is Above the Year-End Target Price
BancFirst Corporation has been increasing its dividend in the third quarter of the year, every year since 2003. Given the earnings outlook, it’s likely that the company will maintain the dividend trend this year. Therefore, I’m expecting the company to increase its dividend by $0.02 per share to $0.42 per share in the first quarter of 2023. The earnings and dividend estimates suggest a payout ratio of 27% for 2023, which is close to the five-year average of 31%. Based on my dividend estimate, BancFirst Corporation is offering a forward dividend yield of 1.8%.
I’m using the historical price-to-tangible book (“P/TB”) and price-to-earnings (“P/E”) multiples to value BancFirst Corporation. The stock has traded at an average P/TB ratio of 2.27 in the past, as shown below.
| FY18 | FY19 | FY20 | FY21 | FY22 | Average | |
| T. Book Value per Share ($) | 24.1 | 25.0 | 27.1 | 30.3 | 31.4 | |
| Average Market Price ($) | 57.9 | 56.0 | 45.5 | 64.5 | 90.6 | |
| Historical P/TB | 2.40x | 2.24x | 1.68x | 2.13x | 2.89x | 2.27x |
| Source: Company Financials, Yahoo Finance, Author's Estimates | ||||||
Multiplying the average P/TB multiple with the forecast tangible book value per share of $36.30 gives a target price of $82.30 for the end of 2023. This price target implies a 9.2% downside from the February 27 closing price. The following table shows the sensitivity of the target price to the P/TB ratio.
| P/TB Multiple | 2.07x | 2.17x | 2.27x | 2.37x | 2.47x |
| TBVPS - Dec 2023 ($) | 36.3 | 36.3 | 36.3 | 36.3 | 36.3 |
| Target Price ($) | 75.0 | 78.6 | 82.3 | 85.9 | 89.5 |
| Market Price ($) | 90.6 | 90.6 | 90.6 | 90.6 | 90.6 |
| Upside/(Downside) | (17.2)% | (13.2)% | (9.2)% | (5.2)% | (1.1)% |
| Source: Author's Estimates |
The stock has traded at an average P/E ratio of around 14.5x in the past, as shown below.
| FY18 | FY19 | FY20 | FY21 | FY22 | Average | |
| Earnings per Share ($) | 3.8 | 4.0 | 3.0 | 5.0 | 6.0 | |
| Average Market Price ($) | 57.9 | 56.0 | 45.5 | 64.5 | 90.6 | |
| Historical P/E | 15.4x | 13.8x | 15.2x | 12.8x | 15.1x | 14.5x |
| Source: Company Financials, Yahoo Finance, Author's Estimates | ||||||
Multiplying the average P/E multiple with the forecast earnings per share of $6.01 gives a target price of $86.90 for the end of 2023. This price target implies a 4.0% downside from the February 27 closing price. The following table shows the sensitivity of the target price to the P/E ratio.
| P/E Multiple | 12.5x | 13.5x | 14.5x | 15.5x | 16.5x |
| EPS 2023 ($) | 6.01 | 6.01 | 6.01 | 6.01 | 6.01 |
| Target Price ($) | 74.9 | 80.9 | 86.9 | 92.9 | 98.9 |
| Market Price ($) | 90.6 | 90.6 | 90.6 | 90.6 | 90.6 |
| Upside/(Downside) | (17.3)% | (10.7)% | (4.0)% | 2.6% | 9.2% |
| Source: Author's Estimates |
Equally weighting the target prices from the two valuation methods gives a combined target price of $84.60, which implies a 6.6% downside from the current market price. Adding the forward dividend yield gives a total expected return of negative 4.8%. Hence, I’m adopting a hold rating on BancFirst Corporation.
This article was written by
Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Disclaimer: This article is not financial advice. Investors are expected to consider their investment objectives and constraints before investing in the stock(s) mentioned in the article.
Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.