UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
For the quarterly period ended September 30, 2012
OR
For the transition period from to
Commission File Number 0-14384
BancFirst Corporation
(Exact name of registrant as specified in charter)
(State or other Jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
(405) 270-1086
(Registrant’s telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨.
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (sec. 232-405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act). Yes ¨ No x
As of October 31, 2012 there were 15,224,808 shares of the registrant’s Common Stock outstanding.
PART I – FINANCIAL INFORMATION
Item 1. Financial Statements.
BANCFIRST CORPORATION
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share data)
ASSETS
Cash and due from banks
Interest-bearing deposits with banks
Federal funds sold
Securities (market value: $540,786, $615,458, and $607,626, respectively)
Loans:
Total loans (net of unearned interest)
Allowance for loan losses
Loans, net
Premises and equipment, net
Other real estate owned
Intangible assets, net
Goodwill
Accrued interest receivable
Other assets
Total assets
LIABILITIES AND STOCKHOLDERS’ EQUITY
Deposits:
Noninterest-bearing
Interest-bearing
Total deposits
Short-term borrowings
Accrued interest payable
Long-term borrowings
Other liabilities
Junior subordinated debentures
Total liabilities
Commitments and contingent liabilities
Stockholders’ equity:
Senior preferred stock, $1.00 par; 10,000,000 shares authorized; none issued
Cumulative preferred stock, $5.00 par; 900,000 shares authorized; none issued
Common stock, $1.00 par, 20,000,000 shares authorized; shares issued and outstanding: 15,200,468, 15,117,430 and 15,125,541, respectively
Capital surplus
Retained earnings
Accumulated other comprehensive income, net of income tax of $3,609, $5,084 and $5,484, respectively
Total stockholders’ equity
Total liabilities and stockholders’ equity
The accompanying Notes are an integral part of these consolidated financial statements.
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CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
INTEREST INCOME
Loans, including fees
Securities:
Taxable
Tax-exempt
Total interest income
INTEREST EXPENSE
Deposits
Total interest expense
Net interest income
Provision for loan losses
Net interest income after provision for loan losses
NONINTEREST INCOME
Trust revenue
Service charges on deposits
Securities transactions
Income from sales of loans
Insurance commissions
Cash management
Gain on sale of other assets
Other
Total noninterest income
NONINTEREST EXPENSE
Salaries and employee benefits
Occupancy and fixed assets expense, net
Depreciation
Amortization of intangible assets
Data processing services
Net expense from other real estate owned
Marketing and business promotion
Deposit insurance
Total noninterest expense
Income before taxes
Income tax expense
Net income
NET INCOME PER COMMON SHARE
Basic
Diluted
OTHER COMPREHENSIVE INCOME
Unrealized gains (losses) on securities, net of tax of $44, $(273), $654 and $(1,232), respectively
Reclassification adjustment for gains (losses) included in net income, net of tax of $93, $6, $821 and $299, respectively
Other comprehensive income (loss), net of tax of $137, $(267), $1,475 and $(933), respectively
Comprehensive income
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CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
COMMON STOCK
Issued at beginning of period
Shares issued
Shares acquired and canceled
Issued at end of period
CAPITAL SURPLUS
Balance at beginning of period
Common stock issued
Tax effect of stock options
Stock-based compensation arrangements
Balance at end of period
RETAINED EARNINGS
Dividends on common stock
Common stock acquired and canceled
ACCUMULATED OTHER COMPREHENSIVE INCOME
Unrealized gains (losses) on securities:
Net change
Total stockholder’s equity
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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
(Dollars in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Adjustments to reconcile to net cash provided by operating activities:
Depreciation and amortization
Net amortization of securities premiums and discounts
Realized securities gains
Gain on sales of loans
Cash receipts from the sale of loans originated for sale
Cash disbursements for loans originated for sale
Deferred income tax provision (benefit)
Gains on other assets
Decrease in interest receivable
Increase in interest payable
Amortization of stock-based compensation arrangements
Other, net
Net cash provided by operating activities
INVESTING ACTIVITIES
Net cash and due from banks provided by acquisitions
Net decrease in Federal funds sold
Purchases of securities:
Held for investment
Available for sale
Maturities of securities:
Proceeds from sales and calls of securities:
Purchases of loans
Proceeds from sales of loans
Net other increase in loans
Purchases of premises, equipment and computer software
Proceeds from the sale of other assets
Net cash (used in) provided by investing activities
FINANCING ACTIVITIES
Net increase in demand, transaction and savings deposits
Net decrease in time deposits
Net decrease in short-term borrowings
Paydown of long-term borrowings
Redemption of junior subordinated debentures
Issuance of common stock
Common stock acquired
Cash dividends paid
Net cash provided by financing activities
Net increase in cash, due from banks and interest-bearing deposits
Cash, due from banks and interest-bearing deposits at the beginning of the period
Cash, due from banks and interest-bearing deposits at the end of the period
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for interest
Cash paid during the period for income taxes
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The accounting and reporting policies of BancFirst Corporation and its subsidiaries (the “Company”) conform to generally accepted accounting principles and general practice within the banking industry. A summary of significant accounting policies can be found in Footnote (1) to the Company’s Annual Report on Form 10-K for the year ended December 31, 2011.
Basis of Presentation
The accompanying consolidated financial statements include the accounts of BancFirst Corporation, Council Oak Partners, LLC, BancFirst Insurance Services, Inc., and BancFirst and its subsidiaries. The principal operating subsidiaries of BancFirst are Council Oak Investment Corporation, Council Oak Real Estate, Inc., BancFirst Agency, Inc. and BancFirst Community Development Corporation. All significant intercompany accounts and transactions have been eliminated. Assets held in a fiduciary or agency capacity are not assets of the Company and, accordingly, are not included in the consolidated financial statements.
The accompanying consolidated financial statements and notes are presented in accordance with the instructions for Form 10-Q. The information contained in the financial statements and footnotes included in BancFirst Corporation’s Annual Report on Form 10-K for the year ended December 31, 2011, should be referred to in connection with these unaudited interim consolidated financial statements.
The unaudited interim consolidated financial statements contained herein reflect all adjustments which are, in the opinion of management, necessary to provide a fair statement of the financial position and results of operations of the Company for the interim periods presented. All such adjustments are of a normal and recurring nature. There have been no significant changes in the accounting policies of the Company since December 31, 2011, the date of the most recent annual report.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with accounting principles generally accepted in the United States inherently involves the use of estimates and assumptions that affect the amounts reported in the financial statements and the related disclosures. These estimates relate principally to the determination of the allowance for loan losses, income taxes, the fair value of financial instruments and the valuation of intangibles. Such estimates and assumptions may change over time and actual amounts realized may differ from those reported.
Recent Accounting Pronouncements
In July 2012, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2012-02, “Intangibles (Topic 350)—Goodwill and Other.” ASU 2012-02 simplifies the impairment test for indefinite-lived intangible assets other than goodwill. The new guidance gives the option to first assess qualitative factors to determine if it is more likely than not that the fair value of an indefinite-lived intangible asset is less than its carrying amount as a basis for determining whether it is necessary to perform a quantitative valuation test. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning on or after September 15, 2012. The Company opted to continue to perform quantitative tests for indefinite-lived intangible assets other than goodwill and not to perform qualitative tests for impairment under ASU 2012-02 as of September 15, 2012. Adoption of ASU 2012-02 did not have a significant effect on the Company’s financial statements.
In December 2011, the FASB issued ASU No. 2011-12, “Comprehensive Income (Topic 220)—Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05.” ASU 2011-12 defers changes in ASU 2011-05 that relate to the presentation of reclassification adjustments to allow the FASB time to re-deliberate whether to require presentation of such adjustments on the face of the financial statements to show the effects of reclassifications out of accumulated other comprehensive income on the components of net income and other comprehensive income. ASU 2011-12 allows entities to continue to report reclassifications out of accumulated other
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comprehensive income consistent with the presentation requirements in effect before ASU 2011-05. All other requirements in ASU 2011-05 are not affected by ASU 2011-12. ASU 2011-12 was effective for annual and interim periods beginning after December 15, 2011. Adoption of ASU 2011-12 did not have a significant effect on the Company’s financial statements.
In November 2011, the FASB issued ASU No. 2011-11, “Balance Sheet (Topic 210)—Disclosure about Offsetting Assets and Liabilities.” ASU 2011-11 is an amendment to require an entity to disclose both net and gross information about offsetting assets and liabilities to enable users of its financial statements to understand the effect of those arrangements. Arrangements include derivatives, sale and repurchase agreements and transactions, securities borrowing and securities lending arrangements. ASU 2011-11 is effective for annual and interim periods beginning on January 1, 2013 and is not expected to have a significant effect on the Company’s financial statements.
In September 2011, the FASB issued ASU No. 2011-08, “Intangibles (Topic 350)—Goodwill and Other.” ASU 2011-08 is an update to simplify how entities test for goodwill impairment. The amendments in the update permit the Company to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If these factors determined that the fair value exceeds the carrying amount then the Company is not required to calculate the fair value of the reporting unit. The Company opted to continue to perform quantitative tests for goodwill impairment and not to perform qualitative tests for goodwill impairment under ASU 2011-08 as of September 30, 2011. Adoption of ASU 2011-08 did not have a significant effect on the Company’s financial statements.
In June 2011, the FASB issued ASU No. 2011-05, “Comprehensive Income (Topic 220)—Presentation of Comprehensive Income.” ASU 2011-05 is an update to improve the comparability, consistency, and transparency of financial reporting, to increase the prominence of items reported in other comprehensive income, and to facilitate convergence of GAAP and IFRS. The Company adopted ASU 2011-05 as of September 30, 2011, and the standard was applied retrospectively. The adoption of ASU 2011-05 did not have a significant effect on the Company’s financial statements.
In May 2011, the FASB issued ASU No. 2011-04, “Fair Value Measurement (Topic 820)—Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. Generally Accepted Accounting Principles (“GAAP”) and International Financial Reporting Standards (“IFRS”).” ASU 2011-04 is an update to explain how to measure fair value. This amendment does not require additional fair value measurements and is not intended to establish valuation standards or affect valuation practices outside of financial reporting. This amendment was put forth in order to describe many of the requirements in GAAP for measuring fair value and for disclosing information about fair value measurements consistent with IFRS. ASU 2011-04 was effective for the Company on January 1, 2012, and was applied prospectively. Adoption of ASU 2011-04 did not have a significant effect on the Company’s financial statements.
In April 2011, the FASB issued ASU No. 2011-02, “Receivables (Topic 310)—A Creditor’s Determination of Whether a Restructuring is a Troubled Debt Restructuring.” ASU 2011-02 clarifies which loan modifications constitute troubled debt restructurings and is intended to assist creditors in determining whether a modification of the terms of a receivable meets the criteria to be considered a troubled debt restructuring, both for purposes of recording an impairment loss and for disclosure of troubled debt restructurings. In evaluating whether a restructuring constitutes a troubled debt restructuring, a creditor must separately conclude, under the guidance clarified by ASU 2011-02, that both of the following exist: (a) the restructuring constitutes a concession; and (b) the debtor is experiencing financial difficulties. ASU 2011-02 was effective for the Company on July 1, 2011, and was applied retrospectively to restructurings occurring on or after January 1, 2011. Adoption of ASU 2011-02 did not have a significant effect on the Company’s financial statements.
On January 19, 2012, Council Oak Investment Corporation, a wholly-owned subsidiary of BancFirst, completed the sale of one of its investments that resulted in a pretax gain of approximately $4.5 million. After related expenses and income taxes, the increase in net income approximated $2.6 million or $0.17 per common share on a fully diluted basis. The gain was included in first quarter 2012 earnings.
On July 12, 2011, the Company completed the acquisition of FBC Financial Corporation and its subsidiary bank, 1st Bank Oklahoma with banking locations in Claremore, Verdigris, and Inola, Oklahoma. The Company paid a premium of $1.5 million above the equity capital of FBC Financial Corporation. At acquisition, 1st Bank
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Oklahoma had approximately $217 million in total assets, $116 million in loans, $178 million in deposits and $18 million in equity capital. 1st Bank Oklahoma operated as a subsidiary of BancFirst Corporation until it was merged into BancFirst on February 17, 2012. The acquisition did not have a material effect on the Company’s consolidated financial statements.
The Federal Reserve enacted a final rule on June 29, 2011 establishing the debit card interchange rate at $0.21 per transaction and five basis points multiplied by the value of the transaction that was effective on October 1, 2011 for banks exceeding $10 billion in assets. Although the rule does not apply directly to the Company, the possible competitive response may have an impact on the Company’s pricing of these services.
The following table summarizes securities held for investment and securities available for sale:
Held for investment, at cost (market value: $17,080)
Available for sale, at market value
Total
The following table summarizes the amortized cost and estimated market values of securities held for investment:
U.S. treasury and other Federal agencies
States and political subdivisions
The following table summarizes the amortized cost and estimated market values of securities available for sale:
U.S. Federal agencies (1)
Mortgage backed securities
Other securities (2)
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The maturities of securities held for investment and available for sale are summarized in the following table using contractual maturities. Actual maturities may differ from contractual maturities due to obligations that are called or prepaid. For purposes of the maturity table, mortgage-backed securities, which are not due at a single maturity date, have been presented at their contractual maturity.
Held for Investment
Contractual maturity of debt securities:
Within one year
After one year but within five years
After five years but within ten years
After ten years
Available for Sale
Total debt securities
Equity securities
The following table is a summary of the Company’s book value of securities that were pledged as collateral for public funds on deposit, repurchase agreements and for other purposes as required or permitted by law:
Book value of pledged securities
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The following is a schedule of loans outstanding by category:
Commercial and industrial
Oil & gas production & equipment
Agriculture
State and political subdivisions:
Real estate:
Construction
Farmland
One to four family residences
Multifamily residential properties
Commercial
Consumer
Other (not classified above)
Total loans
Loans held for sale (included above).
The Company’s loans are mostly to customers within Oklahoma and over 60% of the loans are secured by real estate. Credit risk on loans is managed through limits on amounts loaned to individual borrowers, underwriting standards and loan monitoring procedures. The amounts and types of collateral obtained, if any, to secure loans are based upon the Company’s underwriting standards and management’s credit evaluation. Collateral varies, but may include real estate, equipment, accounts receivable, inventory, livestock and securities. The Company’s interest in collateral is secured through filing mortgages and liens, and in some cases, by possession of the collateral.
Accounting policies related to appraisals, nonaccruals and charge-offs are disclosed in Footnote (5) to the Company’s Annual Report on Form 10-K for the year ended December 31, 2011.
Nonperforming and Restructured Assets
Nonaccrual loans, accruing loans past due 90 days or more, and restructured loans are shown in the table below. Had nonaccrual loans performed in accordance with their original contract terms, the Company would have recognized additional interest income of approximately $953,000 for the nine months ended September 30, 2012 and approximately $860,000 for the nine months ended September 30, 2011.
At September 30, 2012, troubled debt restructurings were primarily due to the principal deferral restructuring from one customer. This loan was evaluated by management and determined to be well collateralized. Additionally, none of the concessions granted involved a principal reduction or a change from the current market rate of interest. Collateral value will be monitored periodically to evaluate possible impairment. The Company charges interest on principal balances outstanding during deferral periods. As a result, the current and future financial effects of the recorded balance of loans considered to be restructured were not considered to be material.
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The following is a summary of nonperforming and restructured assets:
Past due 90 days or more and still accruing
Nonaccrual
Other acquired loans covered by escrow
Restructured
Total nonperforming and restructured loans
Other real estate owned and repossessed assets
Total nonperforming and restructured assets
Nonperforming and restructured loans to total loans
Nonperforming and restructured assets to total assets
The other acquired loans covered by escrow listed above were a part of the loan portfolio of 1st Bank Oklahoma that were acquired in the third quarter of 2011 and were covered by an escrow agreement whereby a portion of the purchase price was set aside to reimburse the Company for potential future losses. These loans were recorded at fair value at the acquisition date and were classified as nonperforming loans at September 30, 2011. As of December 31, 2011, these loans were reclassified to performing status. The loan escrow was terminated effective June 30, 2012 pursuant to a negotiated settlement.
Loans are segregated into classes based upon the nature of the collateral and the borrower. These classes are used to estimate the credit risk component in the allowance for loan losses.
The following table is a summary of amounts included in nonaccrual loans, segregated by class of loans. Residential real estate refers to one-to-four family real estate.
Non-residential real estate
Residential real estate
Non-consumer non-real estate
Consumer non-real estate
Other loans
Acquired loans
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The following table presents an age analysis of past due loans, segregated by class of loans:
As of September 30, 2012
As of September 30, 2011
Impaired Loans
Loans are considered impaired when, based on current information and events, it is probable the Company will be unable to collect the full amount of scheduled principal and interest payments in accordance with the original contractual terms of the loan agreement. If a loan is impaired, a specific valuation allowance may be allocated if necessary so that the loan is reported net at the present value of future cash flows using the loan’s existing rate or the fair value of collateral if repayment is expected solely from the collateral. When it is not deemed necessary to allocate a specific valuation allowance to an impaired loan, the loan nevertheless will have an allowance based on a historically adequate percentage determined for the class of loans.
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The following table presents impaired loans, segregated by class of loans. No material amount of interest income was recognized on impaired loans subsequent to their classification as impaired.
Credit Risk Monitoring and Loan Grading
The Company employs several means to monitor the risk in the loan portfolio including volume and severity of loan delinquencies, nonaccrual loans, internal grading of loans, historical loan loss experience, and economic conditions.
Loans are subject to an internal risk grading system which indicates the risk and acceptability of that loan. The loan grades used by the Company are for internal risk identification purposes and do not directly correlate to regulatory classification categories or any financial reporting definitions.
The general characteristics of the risk grades are as follows:
Grade 1—Acceptable—Loans graded 1 represent reasonable and satisfactory credit risk which requires normal attention and supervision. Capacity to repay through primary and/or secondary sources is not questioned.
Grade 2—Acceptable—Increased Attention—This category consists of loans that have credit characteristics deserving management’s close attention. These potential weaknesses could result in deterioration of the repayment prospects for the loan or the Bank’s credit position at some future date. Such credit characteristics include loans to highly leveraged borrowers in cyclical industries, adverse financial trends which could potentially weaken repayment capacity, loans that have fundamental structure deficiencies, loans lacking secondary sources of repayment where prudent, and loans with deficiencies in essential documentation, including financial information.
Grade 3—Loans with Problem Potential—This category consists of performing loans which are considered to exhibit problem potential. Loans in this category would generally include, but not be limited to, borrowers with a weakened financial condition or poor performance history, past dues, loans restructured to reduce payments to an amount that is below market standards and/or loans with severe documentation problems. In general, these loans have no identifiable loss potential in the near future, however; the possibility of a loss developing is heightened.
Grade 4—Problem Loans/Assets—Nonperforming—This category consists of nonperforming loans/assets which are considered to be problems. Nonperforming loans are described as being 90 days and over past due and still accruing, and loans that are nonaccrual. The government guaranteed portion of SBA loans is excluded.
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Grade 5—Loss Potential—This category consists of loans/assets which are considered to possess loss potential. While the loss may not occur in the current year, management expects that loans/assets in this category will ultimately result in a loss, unless substantial improvement occurs.
Grade 6—Charge Off—This category consists of loans that are considered uncollectible and other assets with little or no value.
The following table presents internal loan grading by class of loans:
Allowance for Loan Losses Methodology
The allowance for loan losses (“ALLL”) is determined by a calculation based on segmenting the loans into the following categories: (1) adversely graded loans [Grades 3, 4, and 5] that have a specific reserve allocation; (2) loans without a specific reserve segmented by loans secured by real estate other than 1-4 family residential property, loans secured by 1-4 family residential property, commercial, industrial, and agricultural loans not secured by real estate, consumer purpose loans not secured by real estate, and loans over 60 days past due that are not otherwise Grade 3, 4, or 5; (3) Grade 2 loans; (4) Grade 1 loans; and (5) loans held for sale which are excluded.
The ALLL is calculated as the sum of the following: (1) the total dollar amount of specific reserve allocations; (2) the dollar amount derived by multiplying each segment of adversely graded loans without a specific reserve allocation times its respective reserve factor; (3) the dollar amount derived by multiplying Grade 2 loans and Grade 1 loans (less exclusions) times the respective reserve factor; and (4) other adjustments as deemed appropriate and documented by the Senior Loan Committee or Board of Directors.
The amount of the ALLL is an estimate based upon factors which are subject to rapid change due to changing economic conditions and the economic prospects of borrowers. It is reasonably possible that a material change could occur in the estimated ALLL in the near term.
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The following table details activity in the ALLL by class of loans for the period presented. Allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other categories.
Three Months Ended September 30, 2012
Allowance for credit losses:
Balance at June 30, 2012
Charge-offs
Recoveries
Net charge-offs
Provisions charged to operations
Balance at September 30, 2012
Nine Months Ended September 30, 2012
Balance at December 31, 2011
Allowance for credit losses-ending balances:
Individually evaluated for impairment
Collectively evaluated for impairment
Loans-ending balances:
Loans acquired with deteriorated credit quality
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Three Months Ended September 30, 2011
Balance at June 30, 2011
Balance at September 30, 2011
Nine Months Ended September 30, 2011
Balance at December 31, 2010
Transfers from Loans
Transfers from loans to other real estate owned and repossessed assets are non-cash transactions, and are not included in the statements of cash flow.
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Transfers from loans to other real estate owned and repossessed assets during the periods presented are summarized as follows:
Repossessed assets
The following is a summary of intangible assets:
Core deposit intangibles
Customer relationship intangibles
Mortgage servicing intangibles
The following is a summary of the Junior Subordinated Debentures:
Issue
BFC II
UNST I
FBCST I
Refer to Note (11) in BancFirst Corporation’s Annual Report on Form 10-K for the year ended December 31, 2011, for further disclosures related to Junior Subordinated Debentures.
On June 15, 2012, BancFirst Corporation redeemed the Union National Statutory Trust I (“UNST I”) Junior Subordinated Debentures at par value.
On June 18, 2012, BancFirst Corporation redeemed the FBC Financial Corp. Statutory Trust I (“FBCST I”) Junior Subordinated Debentures at par value.
The Company adopted a nonqualified incentive stock option plan (the “BancFirst ISOP”) in May 1986. The Company amended the BancFirst ISOP to increase the number of shares to be issued under the plan to 2,800,000 shares in May 2011. At September 30, 2012, 64,860 shares were available for future grants. The BancFirst ISOP will terminate on December 31, 2014. The options are exercisable beginning four years from the date of grant at the rate of 25% per year for four years. Options expire at the end of fifteen years from the date of grant. Options outstanding as of September 30, 2012 will become exercisable through the year 2018. The option price must be no less than 100% of the fair value of the stock relating to such option at the date of grant.
In June 1999, the Company adopted the BancFirst Corporation Non-Employee Directors’ Stock Option Plan (the “BancFirst Directors’ Stock Option Plan”). Each non-employee director is granted an option for 10,000 shares. The Company amended the BancFirst Directors’ Stock Option Plan to increase the number of shares to be issued under the plan to 205,000 shares in May 2009. At September 30, 2012, 30,000 shares were available for future grants. The options are exercisable beginning one year from the date of grant at the rate of 25% per year for four
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years, and expire at the end of fifteen years from the date of grant. Options outstanding as of September 30, 2012 will become exercisable through the year 2015. The option price must be no less than 100% of the fair value of the stock relating to such option at the date of grant.
The Company currently uses newly issued stock to satisfy stock-based exercises, but reserves the right to use treasury stock purchased under the Company’s Stock Repurchase Program (the “SRP”) in the future.
The following table is a summary of the activity under both the BancFirst ISOP and the BancFirst Directors’ Stock Option Plan:
Outstanding at December 31, 2011
Options granted
Options exercised
Options canceled, forfeited or expired
Outstanding at September 30, 2012
Exercisable at September 30, 2012
The following table is a summary of the Company’s non-vested options as of September 30, 2012, and any changes during the nine months ended September 30, 2012:
Non-vested at December 31, 2011
Options vested
Options forfeited
Non-vested at September 30, 2012
The following table has additional information regarding options granted and options exercised under both the BancFirst ISOP and the BancFirst Directors’ Stock Option Plan:
Weighted average grant-date fair value per share of options granted
Total intrinsic value of options exercised
Cash received from options exercised
Tax benefit realized from options exercised
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model and is based on certain assumptions including risk-free rate of return, dividend yield, stock price volatility, and the expected term. The fair value of each option is expensed over its vesting period.
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The following table is a summary of the Company’s recorded stock-based compensation expense:
Stock-based compensation expense
Tax
Stock-based compensation expense, net of tax
The Company will continue to amortize the remaining fair value of stock options, over the remaining vesting period of approximately seven years. The following table shows the remaining fair value of stock options:
Fair value of stock options
The following table shows the assumptions used for computing stock-based compensation expense under the fair value method:
Risk-free interest rate
Dividend yield
Stock price volatility
Expected term
The risk-free interest rate is determined by reference to the spot zero-coupon rate for the U.S. Treasury security with a maturity similar to the expected term of the options. The dividend yield is the expected yield for the expected term. The stock price volatility is estimated from the recent historical volatility of the Company’s stock. The expected term is estimated from the historical option exercise experience.
In November 1999, the Company adopted a Stock Repurchase Program (the “SRP”). The SRP may be used as a means to increase earnings per share and return on equity, to purchase treasury stock for the exercise of stock options or for distributions under the Deferred Stock Compensation Plan, to provide liquidity for optionees to dispose of stock from exercises of their stock options, and to provide liquidity for stockholders wishing to sell their stock. All shares repurchased under the SRP have been retired and not held as treasury stock. The timing, price and amount of stock repurchases under the SRP may be determined by management and approved by the Company’s Executive Committee.
The following table is a summary of the shares under the program:
Number of shares repurchased
Average price of shares repurchased
Shares remaining to be repurchased
The Company and BancFirst are subject to risk-based capital guidelines issued by the Board of Governors of the Federal Reserve System and FDIC. These guidelines are used to evaluate capital adequacy and involve both quantitative and qualitative evaluations of the Company’s and BancFirst’s assets, liabilities, and certain off-balance-sheet items calculated under regulatory practices. Failure to meet the minimum capital requirements can initiate certain mandatory or discretionary actions by the regulatory agencies that could have a direct material effect on the
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Company’s financial statements. Management believes, as of September 30, 2012, that the Company and BancFirst met all capital adequacy requirements to which they are subject. The required capital amounts and the Company’s and BancFirst’s respective ratios are shown in the following table:
As of September 30, 2012:
Total Capital
(to Risk Weighted Assets)-
BancFirst
Tier 1 Capital
(to Total Assets)-
As of September 30, 2012, BancFirst was considered to be “well capitalized” and there are no conditions or events since the most recent notification of BancFirst’s capital category that management believes would materially change its category under capital requirements existing as of the report date. To be well capitalized under Federal bank regulatory agency definitions, a depository institution must have a Tier 1 Ratio of at least 6%, a combined Tier 1 and Tier 2 Ratio of at least 10%, and a Leverage Ratio of at least 5%. The Company’s trust preferred securities have continued to be included in Tier 1 capital as the Company’s total assets do not exceed $10 billion.
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Basic and diluted net income per common share are calculated as follows:
Income available to common stockholders
Effect of stock options
Income available to common stockholders plus assumed exercises of stock options
The following table shows the number and average exercise price of options that were excluded from the computation of diluted net income per common share for each period because the options’ exercise prices were greater than the average market price of the common shares:
Accounting standards define fair value as the price that would be received to sell an asset or the price paid to transfer a liability in the principal or most advantageous market available to the entity in an orderly transaction between market participants on the measurement date.
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FASB ASC Topic 820 establishes a fair value hierarchy for valuation inputs that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The fair value hierarchy is as follows:
Financial Assets and Financial Liabilities Measured at Fair Value on a Recurring Basis
A description of the valuation methodologies and key inputs used to measure financial assets and financial liabilities at fair value on a recurring basis, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth below. These valuation methodologies were applied to the following categories of the Company’s financial assets and financial liabilities.
Securities Available for Sale
Securities classified as available for sale are reported at fair value. U.S. Treasuries are valued using Level 1 inputs. Other securities available for sale including U.S. Federal agencies, mortgage backed securities, and states and political subdivisions are valued using prices from an independent pricing service utilizing Level 2 data. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the bond’s terms and conditions, among other things. The Company also invests in equity securities classified as available for sale for which observable information is not readily available. These securities are reported at fair value utilizing Level 3 inputs. For these securities, management determines the fair value based on replacement cost, the income approach or information provided by outside consultants or lead investors.
The Company reviews the prices for Level 1 and Level 2 securities supplied by the independent pricing service for reasonableness and to ensure such prices are aligned with traditional pricing matrices. In general, the Company does not purchase investment portfolio securities that are esoteric or that have complicated structures. The Company’s entire portfolio consists of traditional investments including U.S. Treasury obligations, Federal agency mortgage pass-through securities, general obligation municipal bonds and a small amount of municipal revenue bonds. Pricing for such instruments is fairly generic and is easily obtained. For in-state bond issues that have relatively low issue sizes and liquidity, the Company utilizes the same parameters adjusted for the specific issue. From time to time, the Company will validate, on a sample basis, prices supplied by the independent pricing service by comparison to prices obtained from third party sources.
Derivatives
Derivatives are reported at fair value utilizing Level 2 inputs. The Company obtains dealer and market quotations to value its oil and gas swaps and options. The Company utilizes dealer quotes and observable market data inputs to substantiate internal valuation models.
Loans Held For Sale
The Company originates mortgage loans to be sold. At the time of origination, the acquiring bank has already been determined and the terms of the loan, including interest rate, have already been set by the acquiring bank, allowing the Company to originate the loan at fair value. Mortgage loans are generally sold within 30 days of origination. Loans held for sale are valued using Level 2 inputs. Gains or losses recognized upon the sale of the loans are determined on a specific identification basis.
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Mortgage Servicing Intangibles
The Company acquired these Mortgage Servicing Intangibles with the acquisition of 1st Bank Oklahoma on July 12, 2011. The Company estimates the fair value of the Mortgage Servicing Intangibles with its carrying amount, based on the present value of future cash flows over several interest rate scenarios, which are then discounted at risk-adjusted rates. The Company considers portfolio characteristics, contractually specified servicing fees, prepayment assumptions, delinquency rates, late charges, other ancillary revenue, costs to service and other economic factors. When available, fair value estimates and assumptions are compared to observable market data and the recent market activity and actual portfolio experience.
The following table summarizes financial assets and financial liabilities measured at fair value on a recurring basis as of September 30, 2012 and 2011, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:
September 30, 2012
Securities available for sale
Derivative assets
Derivative liabilities
Loans held for sale
September 30, 2011
The changes in Level 3 assets measured at estimated fair value on a recurring basis during the nine months ended September 30, 2012 and 2011 were as follows:
Balance at the beginning of the year
Purchases, issuances and settlements
Sales
Losses included in earnings
Total unrealized (losses) gains
Balance at the end of the period
The Company’s policy is to recognize transfers in and transfers out of Levels 1, 2 and 3 as of the end of the reporting period. During the nine months ended September 30, 2012 and 2011, the Company did not transfer any securities between levels in the fair value hierarchy.
Financial Assets and Financial Liabilities Measured at Fair Value on a Nonrecurring Basis
Certain financial assets and financial liabilities are measured at fair value on a nonrecurring basis; that is, the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment). These financial assets and financial liabilities are reported at fair value utilizing Level 3 inputs.
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Impaired loans are reported at the fair value of the underlying collateral if repayment is dependent on liquidation of the collateral. The impaired loans are adjusted to fair value through a specific allocation of the allowance for loan losses.
Foreclosed assets, upon initial recognition, are measured and adjusted to fair value through a charge-off to the allowance for possible loan losses based upon the fair value of the foreclosed asset.
Other real estate owned is revalued at fair value subsequent to initial recognition, with any losses recognized in net expense from other real estate owned.
The following table summarizes assets measured at fair value on a nonrecurring basis and the related gains or losses recognized during the period:
Impaired loans
Foreclosed assets
Estimated Fair Value of Financial Instruments
The Company is required under current authoritative accounting guidance to disclose the estimated fair value of their financial instruments that are not recorded at fair value. For the Company, as for most financial institutions, substantially all of its assets and liabilities are considered financial instruments. A financial instrument is defined as cash, evidence of an ownership interest in an entity or a contract that creates a contractual obligation or right to deliver or receive cash or another financial instrument from a second entity. The following methods and assumptions were used to estimate the fair value of each class of financial instruments:
Cash and Cash Equivalents Include: Cash and Due from Banks, Federal Funds Sold and Interest-Bearing
The carrying amount of these short-term instruments is a reasonable estimate of fair value.
Securities Held for Investment
For securities held for investment, which are generally traded in secondary markets, fair values are based on quoted market prices or dealer quotes, if available. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities making adjustments for credit or liquidity if applicable.
Loans
For certain homogeneous categories of loans, such as some residential mortgages, fair values are estimated using the quoted market prices for securities backed by similar loans, adjusted for differences in loan characteristics. The fair values of other types of loans are estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities.
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The fair values of transaction and savings accounts are the amounts payable on demand at the reporting date. The fair values of fixed-maturity certificates of deposit are estimated using the rates currently offered for deposits of similar remaining maturities.
Short-term Borrowings
The amounts payable on these short-term instruments are reasonable estimates of fair value.
Long-term Borrowings
The fair values of fixed-rate long-term borrowings are estimated using the rates that would be charged for borrowings of similar remaining maturities.
Junior Subordinated Debentures
The fair values of junior subordinated debentures are estimated using the rates that would be charged for junior subordinated debentures of similar remaining maturities.
Loan Commitments and Letters of Credit
The fair values of commitments are estimated using the fees currently charged to enter into similar agreements, taking into account the terms of the agreements. The fair values of letters of credit are based on fees currently charged for similar agreements.
The estimated fair values of the Company’s financial instruments are as follows:
FINANCIAL ASSETS
Cash and cash equivalents
Securities held for investment
Loans (net of unearned interest)
FINANCIAL LIABILITIES
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS
Loan commitments
Letters of credit
Non-financial Assets and Non-financial Liabilities Measured at Fair Value
The Company has no non-financial assets or non-financial liabilities measured at fair value on a recurring basis. Certain non-financial assets and non-financial liabilities measured at fair value on a nonrecurring basis include intangible assets (excluding mortgage service rights which are valued quarterly) and other non-financial long-lived assets measured at fair value and adjusted for impairment. These items are evaluated at least annually for impairment. The overall levels of non-financial assets and non-financial liabilities were not considered to be significant to the Company at September 30, 2012 or 2011.
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The Company enters into oil and gas swaps and options contracts to accommodate the business needs of its customers. Upon the origination of an oil or gas swap or option contract with a customer, the Company simultaneously enters into an offsetting contract with a counterparty to mitigate the exposure to fluctuations in oil and gas prices. These derivatives are not designated as hedged instruments and are recorded on the Company’s consolidated balance sheet at fair value.
The Company utilizes dealer quotations and observable market data inputs to substantiate internal valuation models. The notional amounts and estimated fair values of oil and gas derivative positions outstanding are presented in the following table:
Oil and Natural Gas Swaps and Options
Oil
Natural Gas
Total Fair Value
The following table is a summary of the Company’s recognized income related to the activity, which was included in other noninterest income:
Derivative income
The Company’s credit exposure on oil and gas swaps and options varies based on the current market prices of oil and natural gas. Other than credit risk, changes in the fair value of customer positions will be offset by equal and opposite changes in the counterparty positions. The net positive fair value of the contracts is the profit derived from the activity and is unaffected by market price movements.
Customer credit exposure is managed by strict position limits and is primarily offset by first liens on production while the remainder is offset by cash. Counterparty credit exposure is managed by selecting highly rated counterparties (rated A- or better by Standard and Poor’s) and monitoring market information.
The following table is a summary of the Company’s net credit exposure relating to oil and gas swaps and options with bank counterparties:
Credit exposure
The Company entered into a $30 million five year guaranty with a counterparty on June 4, 2008 for the timely payment of the obligations of its subsidiary Bank related to the settlement of oil and gas positions.
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The Company evaluates its performance with an internal profitability measurement system that measures the profitability of its business units on a pre-tax basis. The four principal business units are metropolitan banks, community banks, other financial services, and executive, operations and support. Metropolitan and community banks offer traditional banking products such as commercial and retail lending, and a full line of deposit accounts. Metropolitan banks consist of banking locations in the metropolitan Oklahoma City and Tulsa areas. Community banks consist of banking locations in communities throughout Oklahoma. Other financial services are specialty product business units including guaranteed small business lending, residential mortgage lending, trust services, securities brokerage, electronic banking and insurance. The executive, operations and support groups represent executive management, operational support and corporate functions that are not allocated to the other business units.
The results of operations and selected financial information for the four business units are as follows:
Net interest income (expense)
Noninterest income
Total Assets:
December 31, 2011
The financial information for each business unit is presented on the basis used internally by management to evaluate performance and allocate resources. The Company utilizes a transfer pricing system to allocate the benefit or cost of funds provided or used by the various business units. Certain services provided by the support group to other business units, such as item processing, are allocated at rates approximating the cost of providing the services. Eliminations are adjustments to consolidate the business units and companies. Capital expenditures are generally charged to the business unit using the asset.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis presents factors that the Company believes are relevant to an assessment and understanding of the Company’s consolidated financial position and results of operations. This discussion and analysis should be read in conjunction with the Company’s December 31, 2011 consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011 and the Company’s consolidated financial statements and the related Notes included in Item 1.
FORWARD LOOKING STATEMENTS
The Company may make forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 with respect to earnings, credit quality, corporate objectives, interest rates and other financial and business matters. Forward-looking statements include estimates and give management’s current expectations or forecasts of future events. The Company cautions readers that these forward-looking statements are subject to numerous assumptions, risks and uncertainties, including economic conditions, the performance of financial markets and interest rates; legislative and regulatory actions and reforms; competition; as well as other factors, all of which change over time. Actual results may differ materially from forward-looking statements.
SUMMARY
BancFirst Corporation’s net income for the third quarter of 2012 was $13.9 million compared to $12.6 million for the third quarter of 2011. Diluted net income per common share was $0.90 and $0.81 for the third quarter of 2012 and 2011, respectively. For the first nine months of 2012, net income was $39.6 million compared to $34.0 million for the first nine months of 2011. Diluted net income per share for the first nine months of 2012 was $2.57 compared to $2.18 for the first nine months of 2011.
Net interest income for the third quarter of 2012 was $40.8 million, up slightly from the same period in 2011. The Company’s average earning assets grew $280 million from a year ago to $5.3 billion. The Company’s net interest margin for the third quarter of 2012 was 3.06% versus 3.20% a year ago as interest rates remain at historically low levels. The Company’s loan loss provision for the quarter was $233,000, down from $885,000 for the third quarter of 2011. At September 30, 2012, nonperforming assets were 0.86% of total assets compared to 0.88% at September 30, 2011. For the third quarter of 2012, net charge-offs were 0.05% compared to 0.07% for the same period a year ago. Noninterest income for the quarter totaled $22.1 million, a $2.0 million increase over the same period in 2011. The increases in revenues resulted primarily from growth in trust services, commercial deposit revenues, insurance commissions, treasury management services and income on mortgage loan sales. Noninterest expense for the third quarter was $42.5 million compared to $41.3 million a year ago, up 2.9%. In light of the additional tax credits realized in the quarter, the Company made a one-time contribution of $500,000 to its foundation which will help defray future contributions to community organizations. The Company’s effective tax rate was 31.6% for the third quarter of 2012 due largely to nonrecurring tax benefits realized from tax credit investments made in 2011 and 2012.
At September 30, 2012, the Company’s total assets were $5.8 billion, up $227.9 million or 4.1% over December 31, 2011. Total loans outstanding were $3.1 billion, up $102.6 million over December 31, 2011. Total deposits were $5.3 billion, up $215.8 million from December 31, 2011. Stockholders’ equity was $510.4 million, an increase of $27.3 million or 5.7% over December 31, 2011.
On January 19, 2012, Council Oak Investment Corporation, a wholly-owned subsidiary of BancFirst, completed the sale of one of its investments that resulted in a pretax gain of approximately $4.5 million.
On July 12, 2011, the Company completed the acquisition of FBC Financial Corporation and its subsidiary bank, 1st Bank Oklahoma with banking locations in Claremore, Verdigris and Inola, Oklahoma. The Company paid a premium of $1.5 million above the equity capital of FBC Financial Corporation. At acquisition, 1st Bank Oklahoma had approximately $217 million in total assets, $116 million in loans, $178 million in deposits and $18 million in equity capital. 1st Bank Oklahoma operated as a subsidiary of BancFirst Corporation until it was merged into BancFirst on February 17, 2012. The acquisition did not have a material effect on the Company’s consolidated financial statements.
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FUTURE APPLICATION OF ACCOUNTING STANDARDS
See Note (1) of the Notes to Consolidated Financial Statements for a discussion of recently issued accounting pronouncements.
SEGMENT INFORMATION
See Note (12) of the Notes to Consolidated Financial Statements for disclosures regarding business segments.
RESULTS OF OPERATIONS
Selected income statement data and other selected data for the comparable periods were as follows:
SELECTED CONSOLIDATED FINANCIAL DATA
Income Statement Data
Per Common Share Data
Net income – basic
Net income – diluted
Cash dividends
Performance Data
Return on average assets
Return on average stockholders’ equity
Cash dividend payout ratio
Net interest spread
Net interest margin
Efficiency ratio
Net charge-offs to average loans
Net Interest Income
For the three months ended September 30, 2012, net interest income, which is the Company’s principal source of operating revenue, increased slightly by 1.5% compared to the three months ended September 30, 2011. Interest expense decreased due to interest rates remaining at historically low levels. Net interest margin is the ratio of taxable-equivalent net interest income to average earning assets for the period. The Company’s net interest margin decreased for the three months ended September 30, 2012 compared to the three months ended September 30, 2011, as shown in the preceding table, which was due to continued low interest rates, the rolloff of higher yielding earning assets and an increase in earning assets at relatively low rates. If interest rates and/or loan volume do not increase, management expects continued compression of its net interest margin for the remainder of 2012 as higher yielding loans and securities mature and are replaced at current market rates.
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Net interest income for the nine months ended September 30, 2012 increased $7.0 million, or 6.1% compared to the nine months ended September 30, 2011. The increase was largely due to the increase in the Company’s average loans and approximately $3.3 million related to the ongoing operations of the Company’s July 2011 acquisition. The net interest margin for the nine months ended September 30, 2012 decreased compared to the nine months ended September 30, 2011 as shown in the preceding table due to the factors stated in the preceding paragraph.
Provision for Loan Losses
For the three months ended September 30, 2012, the Company’s provision for loan losses was $233,000, a decrease of $652,000 compared to the same period a year ago. The decrease in the provision for loan losses during the third quarter of 2012 compared to the same quarter in 2011 is reflective of the decreasing trend in classified loans and a decrease in net charge-offs. Management believes the recorded amount of the allowance for loan losses is appropriate based upon management’s best estimate of probable losses that have been incurred within the existing loan portfolio. Should any of the factors considered by management in evaluating the appropriate level of the allowance for loan losses change, the Company’s estimate of probable loan losses could also change, which could affect the level of future provisions for loan losses. Net loan charge-offs were $411,000 for the third quarter of 2012, compared to $521,000 for the third quarter of 2011. The rate of net charge-offs to average total loans is presented in the preceding table.
For the nine months ended September 30, 2012, the Company’s provision for loan losses was $654,000, a decrease of $3.0 million compared to the same period of 2011. Net loan charge-offs were $1.1 million for the nine months ended September 30, 2012, compared to $2.0 million for the nine months ended September 30, 2011.
Noninterest Income
Noninterest income increased $2.0 million or 9.9% for the three months ended September 30, 2012 compared to the same period in 2011. The increase in noninterest income revenues resulted primarily from growth in trust services, commercial deposit revenues, insurance commissions, treasury management services and income on mortgage loan sales.
Noninterest income for the nine months ended September 30, 2012, increased $8.4 million or 14.6% compared to the same period in 2011. The increases in revenues were primarily from a $4.5 million pretax securities gain from the sale of an investment by Council Oak Investment Corporation, a wholly-owned subsidiary of BancFirst. In addition, the ongoing operations of the Company’s July 2011 acquisition added approximately $1.4 million, along with increased revenues from trust services, commercial deposit revenues, insurance commissions and treasury management services.
The Company had income from debit card usage totaling $12.3 million and $11.3 million during the nine months ended September 30, 2012 and 2011, respectively. The Dodd-Frank Act has given the Federal Reserve the authority to establish rules regarding debit card interchange fees charged for electronic debit transactions by payment card issuers. Because of the uncertainty as to any future rulemaking by the Federal Reserve and the inability to forecast competitive responses, the Company cannot provide any assurance as to the ultimate impact of the Dodd-Frank Act on the amount of income from debit card usage reported in future periods.
Noninterest Expense
For the three months ended September 30, 2012, noninterest expense increased $1.2 million or 2.9%, compared to the three months ended September 30, 2011. The increase in noninterest expense was related to an increase in salaries and benefits of approximately $795,000, and a one-time contribution of $500,000 the Company made to its foundation, which will help defray future contributions to community organizations.
Noninterest expense included deposit insurance expense which totaled $745,000 for the three months ended September 30, 2012, compared to $786,000 for the three months ended September 30, 2011. The decrease in deposit insurance expense during the third quarter of 2012 compared to the same quarter of 2011 was primarily related to the change in the deposit insurance assessment base and a change in the method by which the assessment rate is determined, which became effective in 2011 and is more fully discussed in the Company’s 2011 Form 10-K.
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For the nine months ended September 30, 2012, noninterest expense increased $9.8 million or 8.4% compared to the nine months ended September 30, 2011. Included in the 2012 noninterest expense was $1.6 million in merger related costs and approximately $500,000 of expenses related to the sale of the previously mentioned contribution. Additionally, the nine months ended September 30, 2012 included approximately $4.2 million of ongoing operating expenses related to the July 2011 bank acquisition, net expense on other real estate of $1.2 million, an increase in salaries and benefits and the contribution mentioned above.
Noninterest expense included deposit insurance expense which totaled $2.2 million for the nine months ended September 30, 2012, compared to $3.0 million for the nine months ended September 30, 2011. The decrease in deposit insurance expense during the third quarter of 2012 compared to the same quarter of 2011 was primarily related to the change in the deposit insurance assessment base and a change in the method by which the assessment rate is determined, which became effective in 2011.
Income Taxes
The Company’s effective tax rate on income before taxes was 31.6% for the third quarter of 2012, compared to 31.0% for the third quarter of 2011.
The Company’s effective tax rate on income before taxes was 34.8% for the first nine months of 2012, compared to 34.7% for the first nine months of 2011.
FINANCIAL POSITION
Balance Sheet Data
Securities
Stockholders’ equity
Book value per share
Tangible book value per share
Average loans to deposits (year-to-date)
Average earning assets to total assets (year-to-date)
Average stockholders’ equity to average assets (year-to-date)
Asset Quality Ratios
Allowance for loan losses to total loans
Allowance for loan losses to nonperforming and restructured loan
Cash, Federal Funds Sold and Interest-Bearing Deposits with Banks
The aggregate of cash and due from banks, interest-bearing deposits with banks, and Federal funds sold as of September 30, 2012 increased $204.5 million from December 31, 2011 and increased $302.3 million from September 30, 2011. The increase was primarily due to increased deposits. Federal funds sold consist of overnight investments of excess funds with other financial institutions. Due to the high degree of counterparty instability in the Federal funds market and near zero overnight Federal funds rates, the Company has continued to maintain the majority of its excess funds with the Federal Reserve Bank. The Federal Reserve Bank pays interest on these funds based upon the lowest target rate for the maintenance period.
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At September 30, 2012, total securities decreased $74.5 million compared to December 31, 2011 and decreased $66.6 million compared to September 30, 2011. The size of the Company’s securities portfolio is a function of liquidity management and excess funds available for investment. The Company has maintained a very liquid securities portfolio to provide funds for loan growth. The net unrealized gain on securities available for sale, before taxes, was $10.3 million at September 30, 2012, compared to an unrealized gain of $14.6 million at December 31, 2011, and an unrealized gain of $15.6 million at September 30, 2011. These unrealized gains are included in the Company’s stockholders’ equity as accumulated other comprehensive income, net of income tax, in the amounts of $6.7 million, $9.4 million and $10.2 million respectively. With interest rates remaining at historically low levels, the Company has purchased more floating rate securities, which now comprise approximately 67% of the securities portfolio.
Loans (Including Acquired Loans)
At September 30, 2012, total loans were up $102.6 million or 3.4% from December 31, 2011 and $132.0 million or 4.4% from September 30, 2011 due primarily to the acquisition made in July 2011 and internal growth.
Allowance for Loan Losses/Fair Value Adjustments on Acquired Loans
At September 30, 2012, the allowance for loan losses decreased $398,000 or 1.1% from December 31, 2011, and $198,000 or 0.5% from September 30, 2011. The allowance for loan losses as a percentage of total loans and the allowance to nonperforming and restructured loans are shown in the preceding table.
The fair value adjustment on acquired loans contains a market component to adjust the rates on the loans to fair value and a credit component to absorb potential and identified credit exposures in the acquired loans. The credit component was $3.1 million at September 30, 2012, $3.7 million at December 31, 2011, and $3.7 million at September 30, 2011 while the acquired loans outstanding were $136.6 million, $193.4 million and $206.0 million, respectively. The decrease in the credit component as of September 30, 2012, was due to improved asset quality, lower loan volumes and the early settlement of the loan escrow agreement.
Nonperforming Loans, Restructured Loans and Other Real Estate Owned
Nonperforming and restructured loans totaled $40.6 million at September 30, 2012, compared to $23.0 million at December 31, 2011 and $31.5 million at September 30, 2011. The increase in restructured loans in 2012 was due primarily to the principal deferral of one real estate credit valued at approximately $18.0 million. This loan was evaluated by management and determined to be well collateralized. Additionally, none of the concessions granted involved a principal reduction or a change from the current market rate of interest. Collateral value will be monitored periodically to evaluate possible impairment. The Company charges interest on principal balances outstanding during deferral periods. As a result, the current and future financial effects of the recorded balance of loans considered to be troubled debt restructurings whose terms were modified during the period were not considered to be material. The level of nonperforming loans and loan losses may rise over time as a result of economic conditions. Nonperforming and restructured assets, as a percentage of total loans, is shown in the preceding table.
Other real estate owned and repossessed assets totaled $9.8 million at September 30, 2012, compared to $16.6 million at December 31, 2011 and $16.7 million at September 30, 2011. The decrease was due to the sale of a commercial real estate property in the first quarter of 2012.
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Potential problem loans are performing loans to borrowers with a weakened financial condition, or which are experiencing unfavorable trends in their financial condition, which causes management to have concerns as to the ability of such borrowers to comply with the existing repayment terms. The Company had approximately $5.2 million of these loans at September 30, 2012 compared to $26.3 million at December 31, 2011 and $6.4 million at September 30, 2011. These loans are not included in nonperforming and restructured loans. In general, these loans are adequately collateralized and have no specific identifiable probable loss. Loans which are considered to have identifiable probable loss potential are placed on nonaccrual status, are allocated a specific allowance for loss or are directly charged-down, and are reported as nonperforming. The Company’s nonaccrual loans are primarily commercial and real estate loans.
Liquidity and Funding
At September 30, 2012, total deposits increased $215.8 million compared to December 31, 2011 and $366.2 million compared to September 30, 2011. The increase was due to internal deposit growth due in part to FDIC coverage on noninterest-bearing accounts and low yields on alternative investments. The Company’s core deposits provide it with a stable, low-cost funding source. The Company’s deposit base continues to be comprised substantially of core deposits, with certificates of deposit exceeding $100,000 being only 7.4% of total deposits at September 30, 2012, compared to 8.2% at December 31, 2011 and 10.0% at September 30, 2011. Noninterest-bearing deposits to total deposits were 36.7% at September 30, 2012, compared to 33.8% at December 31, 2011 and 33.2% at September 30, 2011.
The Company has recognized that it received depository funds due to the low interest rate environment and extended FDIC deposit insurance coverage provided by the U.S. Treasury under the Transaction Account Guaranty Program (“TAGP”). If interest rates increase or if the TAGP fails to be extended after December 31, 2012, the Company could lose deposits of an estimated $600 to $800 million over a short period of time. The Company maintains excess liquidity to absorb the potential loss of funds.
Short-Term Borrowings
Short-term borrowings, consisting primarily of Federal funds purchased and repurchase agreements are another source of funds for the Company. The level of these borrowings is determined by various factors, including customer demand and the Company’s ability to earn a favorable spread on the funds obtained. As of September 30, 2012, short-term borrowings were $5.7 million, a decrease of $2.6 million from December 31, 2011, and a decrease of $6.6 million from September 30, 2011.
Long-Term Borrowings
The Company has a line of credit from the Federal Home Loan Bank (“FHLB”) of Topeka, Kansas to use for liquidity or to match-fund certain long-term fixed rate loans. The Company’s assets, including residential first mortgages of $525.0 million, are pledged as collateral for the borrowings under the line of credit. As of September 30, 2012 the Company had approximately $11.3 million in advances outstanding due to acquisitions. The advances mature at varying dates through 2014.
In December 2010, the Company borrowed $14.5 million from a commercial bank to fund a portion of the Company’s acquisitions. The Company made a payment of $6.0 million in July 2011 and paid the remaining balance of $8.5 million in October 2011.
There have not been material changes from the liquidity and funding discussion included in Management’s Discussion and Analysis in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011.
Capital Resources
At September 30, 2012, stockholders’ equity increased $27.3 million from December 31, 2011 and $36.0 million from September 30, 2011. In addition to net income of $39.6 million, other changes in stockholders’ equity during the nine months ended September 30, 2012 included $2.2 million related to stock option exercises, $1.2 million related to stock-based compensation partially offset by $12.6 million in dividends and a $2.7 million
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decrease in other comprehensive income. Stockholders’ equity has continued to increase due to net earnings retained, stock option exercises and unrealized gains on securities, partially offset by common stock repurchases, dividends and unrealized losses on securities. The ratios of average stockholders’ equity to average assets are in the preceding table. The Company redeemed $9.3 million of trust preferred securities and related debentures in June 2012. The Company’s leverage ratio and total risk-based capital ratio were 8.19% and 14.74%, respectively, at September 30, 2012, well in excess of the regulatory minimums.
See Note (8) of the Notes to Consolidated Financial Statements for a discussion of capital ratio requirements.
CONTRACTUAL OBLIGATIONS
There have not been any material changes in the resources required for scheduled repayments of contractual obligations from the table of Contractual Cash Obligations included in Management’s Discussion and Analysis, which was included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011, other than the redemption of $9.3 million of trust preferred securities and related debentures in June 2012.
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CONSOLIDATED AVERAGE BALANCE SHEETS AND INTEREST MARGIN ANALYSIS
Taxable Equivalent Basis (Dollars in thousands)
Earning assets:
Loans (1)
Securities – taxable
Securities – tax exempt
Interest-bearing deposits w/ banks & FFS
Total earning assets
Nonearning assets:
Interest receivable and other assets
Total nonearning assets
Interest-bearing liabilities:
Transaction deposits
Savings deposits
Time deposits
Total interest-bearing liabilities
Interest-free funds:
Noninterest-bearing deposits
Interest payable and other liabilities
Total interest free funds
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Item 3. Quantitative and Qualitative Disclosures About Market Risk.
There have been no significant changes in the Registrant’s disclosures regarding market risk since December 31, 2011, the date of its most recent annual report to stockholders.
Item 4. Controls and Procedures.
The Company’s Chief Executive Officer, Chief Financial Officer and Disclosure Committee, which includes the Company’s Chief Risk Officer, Chief Asset Quality Officer, Chief Internal Auditor, Senior Vice President of Corporate Finance and Treasurer, Controller and General Counsel have evaluated, as of the last day of the period covered by this report, the Company’s disclosure controls and procedures. Based on their evaluation they concluded that the disclosure controls and procedures of the Company are effective to ensure that information required to be disclosed by the Company in the reports filed or submitted by it under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported, within the time periods specified in the applicable rules and forms.
No changes were made to the Company’s internal control over financial reporting during the period covered by this report that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
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PART II – OTHER INFORMATION
Item 1. Legal Proceedings.
The Company has been named as a defendant in various legal actions arising from the conduct of its normal business activities. Although the amount of any liability that could arise with respect to these actions cannot be accurately predicted, in the opinion of the Company, any such liability will not have a material adverse effect on the consolidated financial statements of the Company.
Item 1A. Risk Factors.
Except as set forth below, as of September 30, 2012, there have been no material changes from the risk factors previously disclosed in Part I, Item 1A, of the Company’s Annual Report on Form 10-K for the year ended December 31, 2011.
Regulatory reforms under consideration could have a significant impact on our business, financial condition and results of operations.
Recently proposed changes in the laws and regulations affecting financial institutions could cause us to report capital under new methodologies or incur increased costs as we evaluate the implications of new rules and respond to new requirements. Compliance with the proposed rules under Basel III and some of the provisions of the Dodd-Frank Act related to the capital treatment of junior subordinated debentures may increase our operating costs, require us to hold higher levels of regulatory capital or liquidity or both or otherwise adversely affect our business or financial results in the future. Our management is actively reviewing the provisions of Basel III and certain provisions of the Dodd-Frank Act and assessing its probable impact on our business, financial condition, and results of operations. However, because many aspects of Basel III and the Dodd-Frank Act are in the comment phase or subject to future rulemaking, it is difficult to precisely anticipate its overall financial impact on us at this time.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
None.
Item 3. Defaults Upon Senior Securities.
Item 4. Mine Safety Disclosures.
Item 5. Other Information.
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Item 6. Exhibits.
Exhibit
Number
39
40
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
(Registrant)
/s/ Joe T. Shockley, Jr.
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