BancFirst: stability first, but share price remains high

Pravinrus Khumpangtip

BancFirst Company (NASDAQ: BANF) maintains strong and intact fundamentals amid economic fluctuations. Although revenues and margins are a little sluggish, growth prospects remain optimistic. Moreover, its strong liquidity position makes it flexible to generate higher returns over the long term. It could reaping the rewards once again productive assets mature this year. The thing is, it can sustain its rebound soon after interest rate hikes. Investors may consider it ideal not only for its fundamentals but also for its consistent dividends. But they need to be more cautious as the stock price appears overvalued.

Business performance

The last two years have been a challenge for the banking sector. But near-zero interest rates have become an opportunity to attract more willing borrowers and incur lower interest charges. The same was true for BancFirst Corporation, which led to a drop in interest income and expenses. But his efficient and prudent portfolio management and expansion have helped him stay stable.

This year, the company has a greater operating capacity. But only a few drastic short-term changes are currently visible in operations. Interest income amounts to $91.5 million, an 8% year-over-year increase. It is also a rebound of 17% compared to the continuous decline from 3Q 2021 to 1Q 2022. Thanks to its acquisition of Worthington National Bank. He now has more productive assets that bear interest. Its interest-bearing loans and deposits are the main drivers of interest income growth.

Likewise, interest expense is on an upward trend, increasing by 21% compared to the comparative quarter. The value is not a surprise, given the substantial increase in deposits. This quarter, deposit growth outpaced loan growth, driving the increase. As such, net interest expense is down 95% from 97% in 2Q 2021. Even so, its efficiency is helping it stabilize its non-interest segment in greater operating capacity. The operating margin is 61%. While this is a massive year-over-year decrease, it is a rebound from the first quarter of 2022. We also need to be careful about provisions for credit losses. In 2021 it was more of a turnaround, but this year provision losses may normalize given rising interest rates.

Interest income and interest expense

Interest income and interest expense (MarketWatch)

Operating margin

Operating margin (MarketWatch)

Honestly, there’s nothing special about its short-term trading even after the merger and acquisition. But, once productive assets mature, the tables can turn. These assets are more sensitive to interest rates, which can boost their interest income. Moreover, its stable and intact fundamentals in an environment of high inflation make it a long-lasting bank. I will discuss its asset-sensitive balance sheet more in the following parts.

Potential risks and opportunities

BancFirst Corporation is seeing a strong rebound from its sluggish performance in recent quarters. He has a strong quarter with his strong portfolio. But, external forces may have a mixed impact on its performance as the economy reopens. Today, inflation remains elevated although it appears to be easing to 8.5% from 9.1% in June. But the inflation rate could rise again, given pent-up demand and the slow recovery of port congestion. Low inventory levels coupled with potential shortages are driving up prices. This is why I estimate that inflation will peak at 9.8%. In the long term, it could stabilize and drop to 5-7%.

In turn, increases in interest rates and mortgage rates persist to stabilize inflation. They could both rise further, given the recent hike in Fed Funds rates. Interest and mortgage rates could peak at 3-3.4% and 6.8-7%, respectively. But like inflation, they can stabilize and begin to cool in subsequent years.

Inflation rate, interest rate and mortgage rate

Inflation rate, interest rate and mortgage rate (MarketWatch)

These pose risks to BANF. Note that in the first half of the year, deposit growth exceeded loan growth. Organic loan growth was only 7%, while customer deposit growth was 37%. This is perhaps the main reason for the relative increase in interest charges. Continuously rising interest rates may lead to more spending if the trend continues. Also note that loan growth could be slower as there are no mergers and acquisitions planned soon. Reversals of provisions on loans can no longer be recognised. He may reduce his income as the interest rate continues to soar.

Nevertheless, BANF is still well positioned in a high inflation environment. Its capitalization on mergers and acquisitions could pay off despite interest rate hikes. For example, its interest-bearing deposits with banks amount to more than $3 billion. They represent 28% of total assets compared to 19% in the 4th quarter of 2021, which makes the company more liquid. Higher interest rates may lead to increased interest income on their deposits with other banks.

BancFirst Corporation may not be exciting, but its fundamental stability is a force to be reckoned with. Its liquidity position is one of its key attributes. As mentioned, customer deposit growth outpaced loan growth in the first half. But the components of its loan and deposit mix match the current scenario of the economy. The quality of loans could have a better impact this year. In fact, 42% of loans are expected to mature this year, which could lead to a potential increase in loans. More earning assets will mature this year, giving it an edge in the high interest rate environment. Also, 47% of deposits are non-interest bearing, so only 53% will increase interest charges. The percentage is slightly higher than the comparative quarter.

But the loan-to-deposit ratio is low at 59%. That’s way more than the ideal 80-90%. This means that the company is not maximizing its operating capacity. This is a conservative and safe way to manage loans, given the expected maturity of loans this year. It will provide more reserves, should there be any faults. Of course, a low ratio can cause interest expense to grow faster than income. This is why the company has not yet optimized its growth potential.

Loans, deposits and loan-to-deposit ratio

Loans, deposits and loan-to-deposit ratio (MarketWatch)

In addition, its cash levels are stable and sufficient to make a single payment for borrowings. The total amount of $288 million is more than triple its borrowing of $97 million. This excess cash makes the company liquid and flexible to make adjustments to its operations. Its impact could become more visible once interest and mortgage rates become more stable. He can either use it to grow further even without borrowing or deposit it to generate more returns.

Cash and cash equivalents and borrowings

Cash and cash equivalents and borrowings (MarketWatch)

Stock price valuation

The BancFirst Corporation share price remains in an upward trend. But, there seems to be a slight downtrend in the past week. To $113.94, it is already 59% higher than the starting price and 3% lower than the recent peak. It appears attractive, but investors should beware of potential overvaluation. The PE ratio of $24.09, the PTBV ratio of 3.81 and the price/cash flow ratio of 21.75 adhere to this. The trend of the PTBV ratio is upwards when comparing the historical TBV to the average stock price. From 2.1 to 2.2x in 2021, it is now 3.81x. It is also higher than the historical five-year multiples of 2.15x. Indeed, the share price adheres to the fundamentals, but it appears higher than it is worth.

Meanwhile, its dividend payments are consistent. But, its dividend yield of 1.26% adheres to the assumption that the stock price is not cheap. The dividend yield is below the average of the S&P 600 of 1.41% and the NASDAQ composite of 1.51%. The fundamentals can prove that the security is safe and ideal but does not match the price. To better assess the stock price, we can use the dividend discount model.

Share price $113.86

Average dividend growth -0.001623617905

Estimated dividend per share $1.24

Cost of capital Equity 0.01402349258

Derived value $91.88035014 or $91.88

The derived value shows that the stock price is overvalued. There could be a 19% decline over the next 12-18 months. Thus, investors should pay attention to its slight downtrend over the past week.

At the end of the line

BancFirst Corporation is already a sustainable bank in Oklahoma. Its fundamentals are still strong and intact, making it a safe investment. It is well positioned against inflation. But the stock price is too high for its real value, allowing investors to earn returns now. The recommendation, for now, is that BancFirst Corporation is on hold.

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