bancfirst (banf) initiation report

7/30/2019 BancFirst (BANF) Initiation Report

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BancFirst Corporation

Ticker: BANF | Price: $41.06

Recommendation : Buy

Price Target (12 Months): $44.00 Initiating Coverage

April 3rd, 2013

Geoffrey Horton

Consistent and Growing, But Fairly Valued

• I am initiating coverage of BancFirst Corporation with a Buy rating

and a 12 month price target of $44. My rating reflects a slightly

below-consensus view of the growth potential for regional banks

that primarily operate in the state of Oklahoma.

• My investment thesis is most optimistic on the growing market

share of deposits for BancFirst in Oklahoma, and the subsequent

growth of loan revenue. Furthermore, the company’s 2012 Tier 1

ratio of 13.29%, combined Tier 1 and Tier 2 of 14.36% and leverage

of 8.1% are much greater than capital requirements required by the

FDIC, leaving greater flexibility on when to employ capital.

• Though BancFirst contributes most of its growth to internal factors,

management is not afraid to look for growth opportunities through

acquisitions. Since 2010, the company has acquired four Oklahoma banks, adding $588mm in total assets, $285mm in loans and

$473mm in deposits to its books.

•My 12 month price target of $44 implies a 7% upside for shares and

assumes BancFirst will trade at 12.7x my $3.29 EPS estimate for

2014, in line with the 2 year historical multiple of 12.7x. My price

target also includes a small premium to account for the company’s

unique decentralized management approach, as well as an increase

in local and national economic conditions.

F i n

a n c i a l s –

S o u t h w

e s t R e g i o n a l B a n

k s

2011A 2012A 2013E 2014E 2015E

Revenue 234$ 253$ 257$ 266$ 273$

Net Income 45.6$ 51.9$ 50.8$ 52.6$ 54.3$

EPS 2.93$ 3.36$ 3.29$ 3.41$ 3.53$

P/E 12.8x 12.7x 12.5x 12.0x 11.6xTotal Assets 5,609$ 6,022$ 6,444$ 6,766$ 7,003$

Dividend 1.04$ 1.12$ 1.20$ 1.29$ 1.39$

Market Profile

52-Week High 44.90$

52-Week Low 36.49$

Avg. Daily Vol. 13,658

Beta 1.03

Dividend Yield 2.83%

Shares Outstanding 15.25 mm

Market Cap 626.2 mm

Insitutional Owned 33%

P/E 12.2x

Performance

BANF S&P 50

1 Month 1.18% 3.10%

6 Month -5.74% 8.53%

1 Year -5.72% 11.44%

3 Year -2.89% 33.12%

5 Year -8.74% 19.20%

Competitors

ViewPoint Financial | VPFG

Price: $19.52

Market Cap: 768.5 mm

Dividend Yield: 2.05%

P/E: 20.0x

Southwest Bancorp. | OKSB

Price: $12.50

Market Cap: 244.1 mmDividend Yield: N/A

P/E: 19.5x

BOK Financial | BOKF

Price: $62.22

Market Cap: 4,250 mm

Dividend Yield: 2.44%

P/E: 12.1x

Source: Bloomberg



Background

From its original incorporation as United Community Corporation in 1984, BancFirst has grown

internally and through acquisitions to become one of Oklahoma’s largest banks by assets.

Headquarters based in Oklahoma City, BancFirst Corporation also owns 100% stakes in a

Delaware business trusts, an Oklahoma LLC engaging in investing activities and an independent

Oklahoma insurance agency. Today, BancFirst employees over 1,600 people and has

approximately 93 banking locations that serve over 51 communities throughout Oklahoma. The

company operates as a “super community bank” where the presidents of each market control

funding and pricing based on the surrounding area’s needs. This is part of BancFirst’s primary

strategy of reaching out to customers not currently being served by larger institutions. The

company had its Initial Public Offering on March 31 st, 1993 at a split-adjusted $7.50 a share.

Oklahoma Economy

The state of Oklahoma avoided much of the downturn caused by the deep recession in 2008. With

a current unemployment rate of 5%, the lowest since December 2008, Oklahoma has the 6th lowest

unemployment rate in the nation. The major industry that helped suppress much of the contraction

was the oil and gas industry, especially as shale-fracking in oil and gas has become more

profitable. As the natural rebound in the economy occurred, the oil and gas industry helped

stabilize and regain a majority of the jobs lost, especially in the manufacturing industry. The state

is also ranked in the top ten for business creation, having a 1.4% annualized growth rate over the

past six years.

April 3rd, 2013

F i n

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k s

Exhibit 1

Unemployment rate, 2003-2013

Source: U.S. Bureau of Labor Statistics

141.3147.7 151.1

120.8

132.8

135.1

Source: U.S. Bureau of Labor Statistics

Exhibit 2

Oklahoma manufacturing jobs

(thousands), 2003-2013

0%

2%

4%

6%

8%

10%

12%Oklahoma

U.S.



F i n

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April 3rd, 2013

$-

$200,000.00

$400,000.00

$600,000.00

$800,000.00

$1,000,000.00

$1,200,000.00

$1,400,000.00

$1,600,000.00

Commercial,financial, and other

Real estate-construction

Real estate-farmland,

multifamily and

commercial

Loans with fixedinterest rates

Loans withadjustable interest

rates

>5 Years 1-5 Years <1 Year

Exhibit 4

Loan maturity, excluding family residential and consumer loans

Source: Company Reports

Business Overview

The company provides a number of commercial banking services to retail customers and small to

medium-sized businesses all throughout Oklahoma. In terms of lending activity, which comprises

nearly 70% of total revenue, the majority of commercial loans were provided to companiesengaged in light manufacturing, retail and service industries. The typical consumer loans were

financing for automobiles, residential mortgage loans, home equity loans and other personal loans.

As Exhibit 3 shows, nearly 66% of BancFirst’s loan portfolio is secured by some form of real

estate. The total portfolio has a 5-year CAGR of 5.4%.

Exhibit 4 divides the loans (less real-estate family and consumer loans) by maturity. Roughly 40%

of the commercial loans have maturities of one year or less. A majority of these loans, though, will

be renewed at existing/similar terms. Also shown is the breakdown of loans with fixed and

adjustable rates. A majority of the adjustable rate loans had rate floors set in 2009. Due to the

current historically-low interest rate environment, 78% of those adjustable rate loans are at their

floor rate. Short-term rates would need to increase 100 basis points before the rates on theses loans

would increase.

$-

$500,000.00

$1,000,000.00

$1,500,000.00

$2,000,000.00$2,500,000.00

$3,000,000.00

$3,500,000.00

2008 2009 2010 2011 2012

Consumer

Real estate-farmland,

multifamily and commercial

Real estate-one to four family

Real estate-construction

Commercial, financial, andother

Exhibit 3

Loans by category, 2008-2012

Source: Company Reports



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April 3rd, 2013

Competitors

The top two competitors by deposits to BancFirst are BOK Financial Corporation (BOKF) and

MidFirst bank. MidFirst is a private company that has suffered a serious loss of market share sincethe 2008 crisis and though BOKF is a $6bn market cap national institution, its largest operating

division by deposits and loans, Bank of Oklahoma, serves as a direct competitor to BancFirst.

Though BOKF is very well capitalized, has several different income streams and generates 42%

greater income from interest on loans than BancFirst, their net interest revenue has decreased at a

3-year CAGR of -2.23% compared with BancFirst’s increase of 7.45%. Furthermore, BOKF net

interest revenue after loan charge-offs has increased at a 3-year CAGR of 3.77% while BancFirst

has increased 7.55%.

Exhibit 5

Actual & estimated total deposits, loans and assets, 2005-2015

$-

$1,000

$2,000

$3,000

$4,000

$5,000

$6,000

$7,000

$8,000

2 0 0 5 A

2 0 0 6 A

2 0 0 7 A

2 0 0 8 A

2 0 0 9 A

2 0 1 0 A

2 0 1 1 A

2 0 1 2 A

2 0 1 3 E

2 0 1 4 E

2 0 1 5 E

Total DepositsTotal LoansTotal Assets

Source: Company Reports and My Estimates

BancFirst also offers a number of standard deposit services such as checking accounts, savings

accounts, money market accounts, IRA’s and CD’s. The 5-year CAGR of deposits is 10.6% and

due to increasing economic conditions in Oklahoma, I expect deposits to grow 6.4%, 5.1%, and

4.1% in 2013, 2014 and 2015, respectively. As long as the company has deposits of $10bn or less,they are not required to perform formal stress tests as required by the FDIC. I do not see this as an

issue until at least 2020.

BancFirst had a 2012 loan to deposit ratio of 60.27%, well under the 82.63% in 2005. The 2012

Oklahoma state average of loans to deposits was 64.88%, providing the bank greater stability for

uncertain economic times than its competitors. My projections assume the 2013 ratio will be the

same as 2012, but 2014 and 2015 will slightly increase (100 to 300 basis points) due to the

increased demand for loans outpacing deposits.



Valuation Methodology

I believe the market is currently pricing the stock at its fair value. My analysis leads me to expect

earnings-per-share to be $3.29 for 2013 and $3.41 for the next year. Using a 2 year historic price-to-

earnings ratio of 12.75x and accounting for continued local and national economic growth, I expect

shares to appreciate between 7% to 10%. This represents a valuation range of $44 per share to $45

per share; a range that I expect to be reached in the next 12 months. My price target comes from the

lower end of this range and the earnings multiple I have used falls in line with a list of comparablecompanies.

The FDIC has formal and informal policies that state dividends should generally only be paid out of

current operating earnings. At the start of 2013, though, BancFirst had approximately $61mm in

equity available for dividends, though it only paid out $19.4mm in 2012. I expect the dividend to be

raised to $1.20 in 2013 and $1.29 in 2014. Finally, the 1999 stock repurchase program is still in

effect with 234,964 shares left to be repurchased. Management has purchased shares in the last three

years at an average price of $36.70. I do not expect any repurchases unless the stock recedes close to

that level.

Risks

The greatest downside risks for BancFirst not reaching my price target is an unexpected decline in the

economy in Oklahoma. There is also the possibility for loss of market share in deposits and loans

against one of the hundreds of banking competitors in the state.

The historically-low interest rate environment could also continue to cause margins to compress.

Finally, real estate is a significant portion of BancFirst’s loan portfolio. If there is a decline in

commercial property values or a drop in tenant occupancy for multi-family properties, significant

losses could be incurred. F i n

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April 3rd, 2013

0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%

14.00% BOKF, National

AssociationBancFirst

MidFirst Bank

Arvest Bank

Bank of America, National Association

Exhibit 6

Market share of deposits in Oklahoma, 2002-2012

Source: FDIC

bancfirst (banf) initiation report

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