2023-09-12 05:03:23 ET
Summary
- Loan growth will likely be the key driver of earnings growth this year.
- The margin will likely remain stable for the remainder of the year due to conflicting factors.
- The year-end target price is below the current market price. Further, BANF is offering a low and unattractive dividend yield.
- Risks associated with BANF are low.
Earnings of BancFirst Corporation ( BANF ) will most probably increase this year on the back of sufficiently good loan growth. I'm expecting the company to report earnings of $6.17 per share, up 7% year-over-year. Compared to my last report on the company, I haven't changed my earnings estimate much. The year-end target price is close to the current market price. Further, BancFirst is offering a low dividend yield. Hence, I'm maintaining a hold rating on BancFirst Corporation.
Deposit Mix Deterioration Likely to keep the Margin Rangebound
As expected, the net interest margin remained rangebound during the first half of 2023. In my last report, I mentioned that BancFirst has a good opportunity to improve its margin by deploying the excess cash on its books. Although the company has run down some of the excess cash during the first half of the year (see below), the resultant asset mix improvement hasn't done much to push up the margin. This is because the funding mix has deteriorated in tandem with the asset mix change.
SEC Filings SEC Filings
Further deterioration of the deposit mix cannot be ruled out because rising interest rates will increase the incentive for depositors to shift their funds away from non-interest-bearing accounts towards high-rate accounts. I'm expecting a 25-basis points rate hike in the remainder of this year. Moreover, the current proportion of non-interest-bearing deposits in total deposits is still above the March 2020 level (see chart above), so it's apparent that a lower proportion of non-interest-bearing deposits is acceptable to the management.
While the anticipated deposit mix deterioration will hurt the margin, higher interest rates will lift the average yield and consequently the margin. Overall, I'm expecting the margin to remain almost unchanged in the second half of 2023 from the second quarter of the year.
Regional Economic Activity to Sustain Loan Growth
Loan growth beat my expectations during the first half of the year. The loan portfolio grew by an impressive 5% during the first half (or 10.2% annualized), which is higher than the historical average. I'm expecting a further 25-basis points hike in the fed funds rate in the remainder of this year, which should dampen the appetite for credit products.
However, the economic activity in most of BancFirst's markets gives me hope that loan growth can continue to remain at a good level despite the high-interest-rate environment. The unemployment rate is a good indicator of economic activity. BancFirst mostly operates in Oklahoma with some presence in Texas through subsidiaries, Pegasus and Worthington. Oklahoma's unemployment rate has dipped in the last few months, and it's currently much below the national average, as shown below. This shows that the state's business activity is much better than average, which is a positive signal for loan growth in most of BancFirst's markets. Unfortunately, the environment in Texas doesn't appear as conducive to loan growth.
As a result, I'm expecting the loan portfolio to grow by 1.50% in each of the last two quarters of 2023. I'm expecting deposits to grow in line with loans. 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 | 7,419 |
Growth of Net Loans | 5.4% | 13.9% | 12.4% | (3.5)% | 12.6% | 8.3% |
Other Earning Assets | 1,976 | 2,150 | 1,945 | 2,381 | 4,460 | 3,848 |
Deposits | 6,605 | 7,484 | 8,065 | 8,092 | 10,974 | 10,792 |
Total Liabilities | 6,671 | 7,561 | 8,144 | 8,234 | 11,137 | 10,998 |
Common equity | 903 | 1,005 | 1,068 | 1,172 | 1,251 | 1,406 |
Book Value Per Share ($) | 27.0 | 30.2 | 32.2 | 35.3 | 37.4 | 42.0 |
Tangible BVPS ($) | 24.1 | 25.0 | 27.1 | 30.3 | 31.4 | 36.0 |
Source: SEC Filings, Author's Estimates (In USD million unless otherwise specified) |
Earnings Uptrend Likely to Continue in 2023
The anticipated loan growth will boost the net interest income, and consequently the earnings for this year. I'm expecting other income statement line items to grow at a normal rate. Overall, I'm expecting BancFirst Corporation to report earnings of $6.17 per share for 2023, up 7% year-over-year. The following table shows my income statement estimates.
Income Statement | FY18 | FY19 | FY20 | FY21 | FY22 | FY23E |
Net interest income | 260 | 282 | 307 | 316 | 374 | 427 |
Provision for loan losses | 4 | 8 | 63 | (9) | 10 | 11 |
Non-interest income | 125 | 137 | 137 | 170 | 184 | 187 |
Non-interest expense | 222 | 241 | 258 | 286 | 310 | 341 |
Net income - Common Sh. | 126 | 135 | 100 | 168 | 193 | 206 |
EPS - Diluted ($) | 3.76 | 4.05 | 3.00 | 5.03 | 5.77 | 6.17 |
Source: SEC Filings, Author's Estimates (In USD million unless otherwise specified) |
My updated earnings estimate isn't much different from my previous estimate of $6.01 per share given in my last report on the company.
Risks Appear Subdued
BancFirst Corporation's risk level appears comfortable to me. Gross unrealized losses on the Available-for-Sale securities portfolio totaled $93 million at the end of June 2023, which is just 7% of the total equity book value. The loan book's credit risk also appears manageable. Non-accrual loans were just 0.25% of total loans at the end of June, as mentioned in the 10-Q filing . The portfolio is also well-diversified among loan segments, from residential real-estate loans to commercial oil and gas loans. However, loans are concentrated geographically.
Maintaining a Hold Rating
BancFirst Corporation is offering a dividend yield of 1.9% at the current quarterly dividend rate of $0.43 per share. The earnings and dividend estimates suggest a payout ratio of 27% for 2023, which is in line with the five-year average of 31%. Therefore, the dividend appears safe.
I'm using the historical price-to-tangible book ("P/TB") and price-to-earnings ("P/E") multiples to value BancFirst Corporation. The stock has traded at an average P/TB ratio of 2.27 in the past, as shown below.
FY18 | FY19 | FY20 | FY21 | FY22 | Average | |
T. Book Value per Share ($) | 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 $36.0 gives a target price of $81.7 for the end of 2023. This price target implies an 8.2% downside from the September 8 closing price. The following table shows the sensitivity of the target price to the P/TB ratio.
P/TB Multiple | 2.07x | 2.17x | 2.27x | 2.37x | 2.47x |
TBVPS - Dec 2023 ($) | 36.0 | 36.0 | 36.0 | 36.0 | 36.0 |
Target Price ($) | 74.5 | 78.1 | 81.7 | 85.3 | 88.9 |
Market Price ($) | 89.0 | 89.0 | 89.0 | 89.0 | 89.0 |
Upside/(Downside) | (16.3)% | (12.2)% | (8.2)% | (4.1)% | (0.1)% |
Source: Author's Estimates |
The stock has traded at an average P/E ratio of around 14.4x in the past, as shown below.
FY18 | FY19 | FY20 | FY21 | FY22 | Average | |
Earnings per Share ($) | 3.8 | 4.0 | 3.0 | 5.0 | 6.2 | |
Average Market Price ($) | 57.9 | 56.0 | 45.5 | 64.5 | 90.6 | |
Historical P/E | 15.4x | 13.8x | 15.2x | 12.8x | 14.7x | 14.4x |
Source: Company Financials, Yahoo Finance, Author's Estimates |
Multiplying the average P/E multiple with the forecast earnings per share of $6.17 gives a target price of $88.7 for the end of 2023. This price target implies a 0.3% downside from the September 8 closing price. The following table shows the sensitivity of the target price to the P/E ratio.
P/E Multiple | 12.4x | 13.4x | 14.4x | 15.4x | 16.4x |
EPS 2023 ($) | 6.17 | 6.17 | 6.17 | 6.17 | 6.17 |
Target Price ($) | 76.4 | 82.6 | 88.7 | 94.9 | 101.1 |
Market Price ($) | 89.0 | 89.0 | 89.0 | 89.0 | 89.0 |
Upside/(Downside) | (14.2)% | (7.2)% | (0.3)% | 6.7% | 13.6% |
Source: Author's Estimates |
Equally weighting the target prices from the two valuation methods gives a combined target price of $85.2 , which implies a 4.2% downside from the current market price. Adding the forward dividend yield gives a total expected return of negative 2.3%. Hence, I'm maintaining a hold rating on BancFirst Corporation.
For further details see:
BancFirst Corp.: Rosy Earnings Outlook But Stock Price Is High