BancFirst Corporation

Moat: 2/5

Understandability: 1/5

Balance Sheet Health: 4/5

BancFirst Corporation is a financial holding company, primarily operating through its subsidiary, BancFirst, and focuses on providing banking and financial services to individuals and businesses, primarily within Oklahoma.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview

BancFirst Corporation (BANF) operates as a bank holding company, primarily through its subsidiary BancFirst. Headquartered in Oklahoma City, Oklahoma, BancFirst provides a variety of banking and financial services to both individuals and businesses. Their services include commercial, retail, and private banking, wealth management, and insurance.

BancFirst has over 100 locations, including branches in Oklahoma City and Tulsa. They have a strong presence and brand recognition in Oklahoma, which has been developed by having a focus on long-term relationships with clients in this area.

  • Revenue Distribution:
    • BancFirst’s main income drivers are:
      • Net Interest Income (NII): The difference between interest earned on assets like loans and interest paid on deposits and borrowings is the main source of revenue.
      • Fee and Commission Income: Revenue from services like investment advisory and wealth management, trust and brokerage.
      • Other Income: Mostly from equity investments.
  • Industry Trends:
    • The banking sector is affected by interest rate fluctuations and economic conditions. Banks are highly sensitive to these factors, as well as the regulatory landscape, as described below.
    • There is a continuous trend of consolidation and growth among banks which can be both an opportunity or risk for BancFirst
    • Technological advancements have led to changes in how banks operate, with the rise of digital banking and increased reliance on automation
  • Competitive Landscape:
    • The banking industry is intensely competitive, with many players including national and regional banks, credit unions, non-bank financial service providers, and online-only fintech companies. It faces competition on loan rates, services, branches, and technology.
    • BancFirst primarily operates in Oklahoma, where regional banks and local credit unions pose the biggest threat. They try to retain their customers with strong personal relationships and client service, unlike online-only banks.
  • What Makes BancFirst Different:
    • Local Focus: BancFirst has a hyper-localized business focus, with a strong presence within Oklahoma. They have deep connections to their local markets.
    • High-Touch Customer Service: They emphasize in-person relationships and community involvement, differentiating themselves from online-only banks.
    • Conservative Approach: They tend to have a more cautious and conservative approach to lending, which results in less fluctuations through various economic times.
    • Risk management: the bank takes a risk-adverse and cautious approach to lending and acquisitions.

Financials

The following is based on BancFirst’s (BANF) latest reports and filings (December 31, 2021, and September 30, 2023).

  • Profitability and Margins:
    • BancFirst’s net interest margin for the first three quarters of 2023 was 3.73%, a slight increase from 3.71% for the same time period in 2022. The bank has been actively managing deposit costs in response to the higher interest rate environment. This is an indication of management working to keep their income sources relatively high.
    • The net income for the first three quarters of 2023 was $218.7 million, showing a good ability to generate profits during an increase in rates environment.
    • While earnings are relatively volatile between time periods, there is a visible trend of consistent increase over a few years.
  • Balance Sheet:
    • The company has a strong capital base with significant amounts in loans and other interest-bearing assets.
    • Total assets were $15.2 billion at December 31, 2023. They had $12.4 billion in loans and $2.9 billion in investment securities. This shows a healthy investment and lending profile for the company.
    • Shareholders’ equity was $1.3 billion as of December 31, 2023, and $1.22 billion as of September 30, 2023. This shows that the firm has good backing to cover its liabilities.
    • The bank has a conservative approach to financing as most of their assets are financed by deposits, indicating lower risk.
  • Debt:
    • Long-term debt is almost negligible. This is something that is generally common with banks, which heavily rely on deposits. This shows low long-term financial obligations.
  • Other Considerations:
    • The company’s total equity was around 8.5-9% of total assets, showing moderate leverage and a stable financial structure.
    • They have an efficient use of capital and resources to generate profits for the business.

The bank has been under scrutiny for accounting changes in their unrealized investment securities and also the decline in non-interest-bearing deposits. However, the management has stated that its strong capital position is adequate to handle these issues.

Moat Rating: 2/5

BancFirst does have a slight moat, but it’s not a strong one. The reasons for this are:

  • Local Brand Recognition: The company has a solid brand recognition and strong customer loyalty within Oklahoma. This can help them retain existing customers and attract new ones in their local markets.
  • Customer Relationships: They emphasize on personal relationships with their clients and community engagement. This enhances customer loyalty and creates a barrier to entry for new banks.
  • Branch Network: Having a large number of local branches is important to BancFirst’s brand. This network requires significant investments and thus acts as a hurdle for smaller firms.
  • Switching Costs: Banks generally have decent switching costs, and it makes it annoying to transfer everything, giving them a minor competitive advantage.
  • However, these advantages are not strong enough to create a huge and long-lasting advantage over other competitors.
  • They operate in a highly competitive industry with low barriers to entry, meaning they are likely to face challenges from other banks and digital disruptors.

Legitimate Risks to the Moat and Business Resilience

  • Rising Interest Rate Environment: BancFirst is sensitive to changes in interest rate, and rising rates may increase the cost of deposits more than they increase earnings from loans, thus hurting profitability. They are trying to mitigate this by using their investment portfolio and adjusting rates of their products, but this is still a risk.
  • Increased Competition: Banks are facing intense competition, both from national and other local banks and from new online companies. It will be a challenge to maintain the market share and their revenue growth if their moat is eroded due to these factors.
  • Regulatory Risks: Being a financial institution, they are also subjected to ever-changing rules and regulations by the government and the Federal Reserve. These create extra compliance costs, and also could impose risks and limits on their operations and profitability.
  • Economic Downturn in Oklahoma: Due to having a hyper-focused approach in Oklahoma, if an economic downturn occurs in Oklahoma, their revenues may suffer.
  • Customer Preference: Due to changes in the preferences of customers, specifically younger individuals, the customers may choose digital banking over brick and mortar banks in the future. This could hurt the company’s revenue if they are not able to adapt.
  • Accounting Changes: Changes in accounting, such as unrealized losses on securities or how tax benefits of stock compensation are accounted for, could affect the financials of the business. They will likely have to adapt over time, and it does add a minor amount of uncertainty.

Understandability: 1/5

BancFirst’s core business model of collecting deposits and making loans is relatively easy to grasp, but they also engage in other businesses such as investment management and private banking services. The sheer number of moving parts involved and their complex financials, as well as the regulations to which the bank is subjected, make them difficult to fully analyze and understand the business.

Banks are generally notoriously hard to understand and follow, so they are inherently complex. This is no fault of the bank’s structure, but their industry.

Balance Sheet Health: 4/5

BancFirst exhibits strong balance sheet health overall with good management of its balance sheet, and they seem prepared to handle most potential downturns in business.

  • Capital Adequacy: The company has strong capital ratios, which is a sign of low risk and good ability to deal with financial stress.
  • Liability Structure: Their financing is heavily reliant on deposits which are cheaper and more stable than debt financing. This suggests they are less dependent on market conditions and are likely to have more stable financials.
  • Conservative Lending: They have a good loan portfolio with a large amount of it being made up of mortgages, which are more stable and secured. This reduces risk compared to those with a large portion of risky lending activities.

Despite having a strong financial position, it is still susceptible to changes in the economy, rising interest rates, and regulatory burdens, like most banks. Because of this, it is not a 5/5, but a very strong 4.

Additional Notes

  • While there were minor concerns about management issues related to accounting changes, these were adequately addressed in their public releases.

Overall, BancFirst appears to be a stable and well-managed financial institution, but it doesn’t necessarily have strong sources of competitive advantage, and it will face pressures of intense competition. However, their local focus and strong financial health are strong points. They need to make continuous efforts in technological innovation, customer service, and operational efficiency to retain market share and maintain profitability. Their business model is also not the easiest to understand due to the complexity of the financial services industry. The management seems to be conservative and is actively working to retain its market position through its existing relationships.