BancFirst Corp.: Wait For The Right Time

There are a few factors that make BancFirst Corp. (NASDAQ:BANF) fundamentally attractive as a stock. They include a sustained scale of operations, its position as the market leader in its state, healthy mix of interest and non-interest income, a good base of non-interest-bearing deposits, and a robust dividend-paying history. And there have been terrific points for buying the stock in 2020, but right now, it seems like time to sit back and wait for a better time to transact.

BANF has been able to sustain operations in a tumultuous period in US history, when there has been a tremendous pressure on the economy because of political and COVID-19 related aspects. BANF's net interest income increased at a decent rate, by ~9%, to ~$227 million in YTD FY20, its balance sheet has not deteriorated in the period (the increase in non-performing, restructured and non-accrual loans from 1.6% in Q2 to 2.7% in Q3 2020, while not insignificant, is not alarming). Even though its earnings are hit by the higher provisioning for credit losses, along with the changes in the macro environment, in the current year. YTD Q3 FY20 earnings are down 35% YOY; excluding the effect of the provisioning, the earnings decline is ~20% in the period.

There is still limited clarity on how economic activity will pick up in the US, which will likely lead to continued credit loss provisioning and suppressed earnings through the current FY, and the first quarters of the FY 2021. However, fundamentally the stock is a good bet in the regional banks sector, with wide reach through its 108 banking locations in Oklahoma.

BANF's banking operations have been steady over the last few years: its loan book increased from about $4.2 billion in 2016 to about $7 billion till Q3 2020, while its non-performing and restructured loans as a proportion of total loans has remained under 1% till Q2, crossing the mark for the first time in Q3 2020. It has maintained an average annual increase of about 7% in both its loan book and its deposits over the last 10 years, reflecting well on its ability to maintain operations during varying cycles of the US economy. While its net interest income increased by ~8% in the last FY, its non-interest income (which is roughly ~50% of BANF's net interest income) increased by ~10% in the period; the diversity in the revenue mix will remain a strength to the bank, when loan offtake will probably remain stunted in the near future.

From a long-term investor's point of view, BANF has been a steady dividend payer, which has increased over the last 25 years. While this FY's payout ratio seems high because of lower earnings, it has traditionally been healthy, in the 30-35% range.

The company's stock price has however taken a beating, falling sharply by 29% in the period from January to October 2020, following the momentum of the melting stock markets in 2020. The stock languished in the $30-40 range for nearly a full quarter in the year, providing a great point of entry for the brave and wise, and now it is time to reap the benefit of that foresight, as the stock has finally begun to move beyond the $50 mark. In this first 12 days of this month alone, the stock price has recovered 14%, reflecting the upswing in its trajectory. It is still ~21% away from its 52-week high, and it is unlikely that the current froth in the stock markets will last long enough to propel the stock that far in the near future.

The uncertainty for banking stocks continues to persist, and that should hold the stock from rallying back to its historic highs. Nearly 22% of BANF's loans are given to COVID-sensitive sectors like energy, agriculture, medical and hospitality; the unspooling of the industries' ability to service these loans remains to be seen, and that should remain a peg to hold the stock back in the near term.

The current uptick is most likely triggered by the conclusion of the US elections; the political overhang on financial services stocks does reduce post elections, which should translate to stabilization and upward movement of BANF's price. However, the impact of COVID-19 on the economy is still a developing trend, and unless the pandemic situation is resolved in the very near future, there will likely be a correction in the markets, which will provide a better time to buy and accumulate the stock.

Even from the value aspect, at its current levels, BANF is trading at a TTM PE of 16.8 and price to tangible book value PB of 1.9, which are already higher than peers like BOK Financial (NASDAQ:BOKF), which are trading at much lower levels with PE around 12 and PB of about 1.1. While BANF is operationally better, the premium makes BANF far less attractive at this point.

There are aspects like BANF's exposure to real estate and oil & gas sectors, which will remain a concern in the near term. There are also factors which are still emerging, like alleged breaches in fiduciary duty and the limited visibility of economic recovery in the US in general and Oklahoma in particular. The playout of developments like the latter could also provide better entry points for the stock. There is also regulatory overhang from potential changes to consumer regulations over overdraft fees, which could negatively impact non-interest income for all banks.

Conclusion

BANF derives its strength from being the largest bank in Oklahoma, with deeply entrenched relationships in both the retail and consumer segments. Its strong market position is expected to sustain its earnings over the long term; coupled with its dividend-paying history, its financial strength makes BANF a good investment option. The recent increase in the stock price, however, erodes some of the value proposition to an investor, and it is better to wait out this market exuberance for a better point to buy the stock.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any 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.