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BancFirst Corporation (BANF) is a bank holding company for BancFirst, a community bank that is headquartered in Oklahoma. The bank’s footprint is just over 100 locations throughout Oklahoma, as well as three in Dallas, Texas. The corporation was founded in 1984, generates about $470 million in annual revenue, and trades with a market cap of about $2.1 billion.

In the third quarter, BancFirst greatly improved its business performance over last year's pandemic-impacted third quarter. Thanks to the ongoing recovery of the economy from the pandemic, the bank reduced its provisions for loan losses by 92%, from $18.7 million in last year’s quarter to just $1.5 million.

Moreover, its net interest margin dipped from 3.4% to 3.1% amid suppressed interest rates but its net interest income grew 6% thanks to an increase in fee income from Paycheck Protection Program loan forgiveness. As a result, the bank grew its earnings-per-share 25%, from $1.16 to $1.45.

Total assets at the end of the quarter stood at $11.3 billion, up $1.7 billion over last year’s quarter. Not only is BancFirst recovering from the pandemic, but it is also on track to post record earnings this year.

We forecast earnings-per-share of $4.96 for the full year, which would mark 65% annual growth. BancFirst also raised its quarterly dividend by 5.9%, from $0.34 to $0.36, thus extending its dividend growth streak to 28 consecutive years.

Safety & Dividend Risk Analysis

Like other banks, BancFirst is susceptible to recessions. However, in BancFirst’s case, prudent credit writing and a strong balance sheet combine to produce a level of recession resilience that most banks cannot match.

Indeed, most banks are highly leveraged and thus they are vulnerable to recessions. Consequently, they cut their dividends during severe economic downturns. On the contrary, BancFirst has been able to grow its dividend for more than a quarter of a century because its earnings hold up well during recessions, and we don’t expect that to change.

With a payout ratio of just 29% for this year, the dividend has a wide margin of safety and is likely to keep rising for many more years.

Growth, Value, & Expected Total Return Analysis

BancFirst has averaged 8% earnings-per-share growth in the past decade, and 15% in the past five years. However, over longer-terms that include recessions, we expect 6% earnings-per-share growth per year, in line with the 15-year average of the bank.

Strong margins and asset growth are likely to be the primary growth drivers, offset by interest rate headwinds, which are beyond the control of the bank. We forecast 10.3% total annual returns driven by a 2.3% annualized expansion of price-to-earnings ratio, the 2.2% dividend yield, and 6% average annual earnings growth.