UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☒
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OFTHE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2017
OR
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OFTHE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 0-14384
BancFirst Corporation
(Exact name of registrant as specified in charter)
Oklahoma
73-1221379
(State or other Jurisdiction of
(I.R.S. Employer
incorporation or organization)
Identification No.)
101 N. Broadway, Oklahoma City, Oklahoma
73102-8405
(Address of principal executive offices)
(Zip Code)
(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 ☒ 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 ☒ 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.
Large accelerated filer
Accelerated filer
Non-accelerated filer
☐ (Do not check if a smaller reporting company)
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) 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 ☒
As of October 31, 2017 there were 31,870,063 shares of the registrant’s Common Stock outstanding.
PART I – FINANCIAL INFORMATION
Item 1. Financial Statements.
BANCFIRST CORPORATION
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
September 30,
December 31,
2017
2016
(unaudited)
(see Note 1)
ASSETS
Cash and due from banks
$
186,015
183,921
Interest-bearing deposits with banks
1,530,928
1,666,540
Federal funds sold
12,000
700
Securities (fair value: $450,039 and $469,871, respectively)
450,009
469,833
Loans held for sale
11,776
9,318
Loans (net of unearned interest)
4,646,749
4,400,232
Allowance for loan losses
(51,255
)
(48,693
Loans, net of allowance for loan losses
4,595,494
4,351,539
Premises and equipment, net
130,188
126,771
Other real estate owned
3,851
3,526
Intangible assets, net
11,645
13,330
Goodwill
54,042
Accrued interest receivable and other assets
146,220
139,432
Total assets
7,132,168
7,018,952
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Noninterest-bearing
2,582,203
2,526,842
Interest-bearing
3,719,843
3,721,215
Total deposits
6,302,046
6,248,057
Short-term borrowings
2,100
500
Accrued interest payable and other liabilities
31,649
27,342
Junior subordinated debentures
31,959
Total liabilities
6,367,754
6,307,858
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, 40,000,000 shares authorized; shares issued and
outstanding: 31,863,063 and 31,621,870, respectively
31,863
31,622
Capital surplus
106,605
101,730
Retained earnings
625,782
577,648
Accumulated other comprehensive income, net of income tax of $(103)
and $(59), respectively
164
94
Total stockholders' equity
764,414
711,094
Total liabilities and stockholders' equity
The accompanying Notes are an integral part of these consolidated financial statements.
2
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(Dollars in thousands, except per share data)
Three Months Ended
Nine Months Ended
INTEREST INCOME
Loans, including fees
56,090
51,647
164,488
152,888
Securities:
Taxable
1,763
1,242
5,430
3,913
Tax-exempt
187
248
552
746
6
1
7
4,972
1,968
12,837
5,622
Total interest income
63,018
55,106
183,314
163,170
INTEREST EXPENSE
Deposits
5,247
3,149
13,272
9,321
13
5
532
524
1,589
1,569
Total interest expense
5,785
3,675
14,874
10,895
Net interest income
57,233
51,431
168,440
152,275
Provision for loan losses
3,276
2,940
5,189
9,847
Net interest income after provision for loan losses
53,957
48,491
163,251
142,428
NONINTEREST INCOME
Trust revenue
3,083
2,685
8,929
7,752
Service charges on deposits
16,633
16,033
48,859
46,228
Securities transactions (includes accumulated other comprehensive income reclassifications of $0, $(85), $(142) and $15, respectively)
(22
(146
(352
(111
Income from sales of loans
732
863
2,180
2,120
Insurance commissions
4,603
4,372
12,894
11,762
Cash management
2,804
2,853
8,357
7,903
Gain/(loss) on sale of other assets
29
(20
61
Other
1,307
1,265
4,390
3,886
Total noninterest income
29,169
27,927
85,237
79,601
NONINTEREST EXPENSE
Salaries and employee benefits
31,471
30,591
93,672
89,956
Occupancy, net
3,298
3,217
9,264
9,115
Depreciation
2,493
2,556
7,305
7,653
Amortization of intangible assets
547
560
1,641
1,721
Data processing services
1,110
1,178
3,402
3,567
Net expense/(income) from other real estate owned
68
162
320
(944
Marketing and business promotion
1,790
1,779
5,564
5,258
Deposit insurance
553
641
1,683
2,335
9,270
8,520
26,290
24,554
Total noninterest expense
50,600
49,204
149,141
143,215
Income before taxes
32,526
27,214
99,347
78,814
Income tax expense
10,816
9,232
32,405
26,760
Net income
21,710
17,982
66,942
52,054
NET INCOME PER COMMON SHARE
Basic
0.68
0.58
2.11
1.67
Diluted
0.67
0.57
2.06
1.64
OTHER COMPREHENSIVE INCOME
Unrealized (losses)/gains on securities, net of tax of $178, $423, $11 and $(296), respectively
(282
(670
(17
467
Reclassification adjustment for losses/(gains) included in net income, net of tax of $0, $(33), $(55) and $6, respectively
52
87
(9
Other comprehensive (losses)/gains, net of tax of $178, $390, $(44) and $(290), respectively
(618
70
458
Comprehensive income
21,428
17,364
67,012
52,512
3
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
COMMON STOCK
Issued at beginning of period
31,818
31,120
31,194
Shares issued
45
270
241
396
Shares acquired and canceled
(200
Issued at end of period
31,390
CAPITAL SURPLUS
Balance at beginning of period
105,440
90,116
87,268
Common stock issued
811
3,632
4,056
5,536
Tax effect of stock options
1,204
1,247
Stock-based compensation arrangements
354
365
819
1,266
Balance at end of period
95,317
RETAINED EARNINGS
610,758
552,991
535,521
Dividends on common stock ($0.21, $0.19, $0.59 and $0.55 per share, respectively)
(6,686
(5,934
(18,808
(17,113
Common stock acquired and canceled
(5,423
565,039
ACCUMULATED OTHER COMPREHENSIVE INCOME
Unrealized gains on securities:
446
2,603
1,527
Net change
1,985
Total stockholders’ equity
693,731
4
CONSOLIDATED STATEMENTS OF CASH FLOW
CASH FLOWS FROM OPERATING ACTIVITIES
Adjustments to reconcile to net cash provided by operating activities:
Depreciation and amortization
8,946
9,374
Net amortization of securities premiums and discounts
(108
161
Realized securities losses
352
111
Gain on sales of loans
(2,180
(2,120
Cash receipts from the sale of loans originated for sale
163,128
143,044
Cash disbursements for loans originated for sale
(163,460
(136,903
Deferred income tax benefit
(1,690
(3,069
Loss/(gain) on other assets
66
(1,294
(Increase)/decrease in interest receivable
(1,651
73
Increase/(decrease) in interest payable
188
Amortization of stock-based compensation arrangements
Excess tax benefit from stock-based compensation arrangements
(2,229
Other, net
2,513
(1,684
Net cash provided by operating activities
76,825
70,838
INVESTING ACTIVITIES
Net increase in federal funds sold
(11,300
(500
Purchases of held for investment securities
(220
(806
Purchases of available for sale securities
(54,456
(78,592
Proceeds from maturities, calls and paydowns of held for investment securities
1,517
5,039
Proceeds from maturities, calls and paydowns of available for sale securities
72,853
153,620
Proceeds from sales of available for sale securities
426
Net change in loans
(251,883
(82,782
Purchases of premises, equipment and computer software
(11,495
(7,845
Proceeds from the sale of other real estate owned and other assets
2,846
8,740
Net cash used in investing activities
(252,138
(2,700
FINANCING ACTIVITIES
Net change in deposits
53,989
51,591
Net increase in short-term borrowings
1,600
3,500
Issuance of common stock, net
4,297
7,079
Common stock acquired
(5,523
Cash dividends paid
(18,091
(16,806
Net cash provided by financing activities
41,795
39,841
Net (decrease)/increase in cash, due from banks and interest-bearing deposits
(133,518
107,979
Cash, due from banks and interest-bearing deposits at the beginning of the period
1,850,461
1,598,177
Cash, due from banks and interest-bearing deposits at the end of the period
1,716,943
1,706,156
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for interest
14,688
10,919
Cash paid during the period for income taxes
32,051
26,200
Noncash investing and financing activities:
Unpaid common stock dividends declared
6,686
5,922
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1)
DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of BancFirst Corporation and its subsidiaries (the “Company”) conform to accounting principles generally accepted in the United State of America (U.S. GAAP) and general practice within the banking industry. A summary of significant accounting policies can be found in Note (1) to the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.
Basis of Presentation
The accompanying unaudited interim consolidated financial statements include the accounts of BancFirst Corporation, Council Oak Partners, LLC, BancFirst Insurance Services, Inc., BancFirst Risk and Insurance Company, and BancFirst and its subsidiaries. The principal operating subsidiaries of BancFirst are Council Oak Investment Corporation, Council Oak Real Estate, Inc. and BancFirst Agency, Inc. 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 unaudited interim consolidated financial statements.
The accompanying unaudited interim 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, 2016, should be referred to in connection with these unaudited interim consolidated financial statements. Operating results for the interim periods disclosed herein are not necessarily indicative of the results that may be expected for a full year or any future period.
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, 2016, 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
Standards Adopted During Current Period:
In March 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2017-08, “Receivables – Nonrefundable Fees and Other Costs (Topic 310-20): Premium Amortization on Purchased Callable Debt Securities.” ASU 2017-08 shortens the amortization period for certain callable debt securities held at a premium. The Company opted for early adoption of ASU 2017-08, as was permitted, on January 1, 2017. ASU 2017-08 did not have a significant impact on the Company’s financial statements and no prior periods were adjusted.
In October 2016, the FASB issued ASU No. 2016-17, “Consolidation (Topic 810): Interests Held Through Related Parties That Are Under Common Control.” ASU 2016-17 updates ASU No. 2015-02 to amend the consolidation guidance on how a reporting entity that is the single decision maker of a variable interest entity (“VIE”) should treat indirect interests in the entity held through related parties that are under common control with the reporting entity when determining whether it is the primary beneficiary of that VIE. ASU 2016-17 was adopted on January 1, 2017 and did not have a significant impact on the Company’s financial statements and no prior periods were adjusted.
In March 2016, the FASB issued ASU No. 2016-09, “Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting.” Under ASU 2016-09 all excess tax benefits and tax deficiencies related to share-based payment awards should be recognized as income tax expense or benefit in the income statement during the period in which they occur. Previously, such amounts were recorded in the pool of excess tax benefits included in additional paid-in capital, if such pool was
available. Because excess tax benefits are no longer recognized in additional paid-in capital, the assumed proceeds from applying the treasury stock method when computing earnings per share should exclude the amount of excess tax benefits that would have previously been recognized in additional paid-in capital. Additionally, excess tax benefits should be classified along with other income tax cash flows as an operating activity rather than a financing activity, as was previously the case. ASU 2016-09 also allows entities to make an entity-wide accounting policy election to account for forfeitures when they occur, which the Company has elected to do. ASU 2016-09 changes the threshold to qualify for equity classification (rather than as a liability) to permit withholding up to the maximum statutory tax rates (rather than the minimum as was previously the case) in the applicable jurisdictions. ASU 2016-09 was adopted on January 1, 2017 and did not have a significant impact on the Company’s financial statements. In addition, ASU 2016-09 was applied prospectively and no prior periods were adjusted. The excess tax benefit for share-based payment awards that were exercised during the nine months ended September 30, 2017 was approximately $2.2 million.
In August 2014, the FASB issued ASU No. 2014-15, “Presentation of Financial Statements – Going Concern (Topic 205-40).” ASU 2014-15 provides guidance on management’s responsibility in evaluating whether there is substantial doubt about the Company’s ability to continue as a going concern and related footnote disclosures. For each reporting period, management will be required to evaluate whether there are conditions or events that raise substantial doubt about the Company’s ability to continue as a going concern within one year from the date the financial statements are issued. ASU 2014-15 was adopted on January 1, 2017. Adoption of ASU 2014-15 did not have a significant effect on the Company’s financial statements.
Standards Not Yet Adopted:
In May 2017, the FASB issued ASU No. 2017-09, “Compensation – Stock Compensation (Topic 718): Scope of Modification Accounting.” The amendments in this update provide guidance about types of changes to the terms or conditions of share-based payment awards that would require an entity to apply modification accounting under ASC 718. ASU 2017-09 will be effective on January 1, 2018 and is not expected to have a significant impact on the Company’s financial statements. Early adoption is permitted with prospective applications.
In January 2017, the FASB issued ASU No. 2017-04, “Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment.” ASU 2017-04 removes the second step of goodwill testing. ASU 2017-04 will be effective on January 1, 2020 and is not expected to have a significant impact on the Company’s financial statements.
In January 2017, the FASB issued ASU No. 2017-01, “Business Combinations (Topic 805): Clarifying the Definition of a Business.” ASU 2017-01 clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of a business. ASU 2017-01 will be effective on January 1, 2018 and is not expected to have a significant impact on the Company’s financial statements.
In October 2016, the FASB issued ASU No. 2016-16, “Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory.” ASU 2016-16 provides guidance stating that an entity should recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. ASU 2016-16 will be effective on January 1, 2018 and is not expected to have a significant impact on the Company’s financial statements.
In August 2016, the FASB issued ASU No. 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments.” ASU 2016-15 is intended to reduce the diversity in practice around how certain transactions are classified within the statement of cash flows. ASU 2016-15 will be effective on January 1, 2018. Early adoption is permitted with retrospective applications. The Company is currently evaluating the potential impact of ASU 2016-15 on its financial statements.
In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” ASU 2016-13 requires a financial asset measured at amortized cost basis to be presented at the net amount expected to be collected. The measurement of expected credit losses is based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. ASU 2016-13 requires enhanced disclosures related to the significant estimates and judgements used in estimating credit losses, as well as the credit quality and underwriting standards of an organization’s portfolio. In addition, ASU 2016-13 amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. ASU 2016-13 will be effective on January 1, 2020. The Company is currently evaluating the potential impact of ASU 2016-13 on its financial statements.
In February 2016, the FASB issued ASU No. 2016-02, “Leases - (Topic 842).” ASU 2016-02 requires that lessees recognize on the balance sheet the assets and liabilities for the rights and obligations created by leases. The amendments are effective for annual periods, and interim reporting periods within those annual periods, beginning after December 15, 2018. Early adoption is permitted. Adoption of ASU 2016-02 is not expected to have a significant effect on the Company’s financial statements.
In January 2016, the FASB issued ASU No. 2016-01, “Financial Instruments - Overall (Subtopic 825-10).” ASU 2016-01 require all equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in the fair value recognized through net income. In addition, the amendment will require an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments. The amendments are effective for annual periods, and interim reporting periods within those annual periods, beginning after December 15, 2017. Early adoption is not permitted. Adoption of ASU 2016-01 is not expected to have a significant effect on the Company’s financial statements.
In January of 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customer (Topic 606).” ASU 2014-09 implements a comprehensive new revenue recognition standard that will supersede substantially all existing revenue recognition guidance. The new standard’s core principle is that a company will recognize revenue when it transfers promised goods or services to customers in a manner that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. The guidance does not apply to revenue associated with financial instruments, including loans and securities that are accounted for under other GAAP, which comprises a significant portion of the Company’s revenue stream. In August 2015, the FASB issued ASU No. 2015-14, “Revenue from Contracts with Customers (Topic 606).” ASU 2015-14 is an amendment to defer the effective date of ASU 2014-09. The amendments are effective for annual periods, and interim reporting periods within those annual periods, beginning after December 15, 2017. Adoption of ASU 2014-09 may require the Company to amend how it recognizes certain recurring revenue streams related to trust fees, which are recorded in non-interest expense; however, the Company does not expect the adoption of ASU 2014-09 to have a significant impact on the Company’s financial statements.
(2)
RECENT DEVELOPMENTS, INCLUDING MERGERS AND ACQUISITIONS
Effective June 1, 2017, the Company organized a new captive insurance company named BancFirst Risk and Insurance Company ("the Captive"). The Captive is a wholly-owned subsidiary of BancFirst Corporation and is regulated by the Oklahoma Insurance Department. It insures certain risks of the Company and has entered into reinsurance agreements with a risk-sharing pool.
On July 31, 2017, the Company completed a two-for-one stock split of the Company’s outstanding shares of common stock. The stock was payable in the form of a dividend on or about July 31, 2017 to shareholders of record of the outstanding common stock as of the close of business record date of July 17, 2017. Stockholders received one additional share for each share held on that date. This represents the second stock split for the Company since going public. All share and per share amounts in these consolidated financial statements and related notes have been retroactively adjusted to reflect this stock split for all periods presented.
On September 7, 2017, the Company announced it had entered into an agreement to acquire First Wagoner Corp. and its subsidiary bank, First Bank & Trust Company, with locations in Carney, Disney, Grove, Ketchum, Luther, Tulsa and Wagoner. First Bank & Trust Company has approximately $280 million in total assets, $258 million in loans, $244 million in deposits, and $36 million in equity capital. The transaction is expected to be completed in January 2018 upon regulatory approval. The bank will operate as First Bank & Trust Company until it is merged into BancFirst, which is expected to be during the first quarter of 2018. The acquisition will not have a material effect on the Company’s consolidated financial statements.
On September 7, 2017, the Company announced it had entered into an agreement to acquire First Chandler Corp. and its subsidiary bank, First Bank of Chandler, with two locations in Chandler. First Bank of Chandler has approximately $90 million in total assets, $82 million in loans, $79 million in deposits, and $11 million in equity capital. The transaction is expected to be completed in January 2018 upon regulatory approval. The bank will operate as First Bank of Chandler until it is merged into BancFirst, which is expected to be during the second quarter of 2018. The acquisition will not have a material effect on the Company’s consolidated financial statements.
8
(3)
SECURITIES
The following table summarizes securities held for investment and securities available for sale:
September 30, 2017
December 31, 2016
Held for investment, at cost (fair value: $3,098 and $4,403, respectively)
3,068
4,365
Available for sale, at fair value
446,941
465,468
Total
The following table summarizes the amortized cost and estimated fair values of securities held for investment:
Amortized
Cost
Gross
Unrealized
Gains
Losses
Estimated
Fair
Value
Mortgage backed securities (1)
203
12
215
States and political subdivisions
2,365
19
(1
2,383
Other securities
31
3,098
252
17
269
3,613
25
(4
3,634
42
4,403
The following table summarizes the amortized cost and estimated fair values of securities available for sale:
U.S. treasuries
284,874
693
(293
285,274
U.S. federal agencies
94,150
212
(251
94,111
18,621
231
(577
18,275
42,678
773
(25
43,426
Other securities (2)
6,351
189
(685
5,855
446,674
2,098
(1,831
268,763
(920
268,543
129,674
373
(405
129,642
19,949
290
(567
19,672
40,335
836
(129
41,042
6,594
125
(150
6,569
465,315
2,324
(2,171
Primarily consists of FHLMC, FNMA, GNMA and mortgage backed securities through U.S. agencies.
Primarily consists of equity securities.
9
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
1,367
1,374
1,561
1,568
After one year but within five years
1,037
1,048
1,937
1,951
After five years but within ten years
655
666
707
723
After ten years
10
160
Available for Sale
113,844
113,717
66,542
66,662
261,600
262,299
320,150
319,839
6,257
6,616
5,830
6,152
58,622
58,454
66,199
66,246
Total debt securities
440,323
441,086
458,721
458,899
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
398,605
439,692
(4)
LOANS AND ALLOWANCE FOR LOAN LOSSES
The following is a schedule of loans outstanding by category:
Amount
Percent
Commercial and financial:
Commercial and industrial
943,881
20.31
%
828,260
18.82
Oil & gas production and equipment
105,492
2.27
84,228
1.91
Agriculture
135,695
2.92
144,751
3.29
State and political subdivisions:
79,874
1.72
33,793
0.77
45,485
0.98
47,283
1.07
Real estate:
Construction
425,023
9.15
420,884
9.57
Farmland
197,995
4.26
197,872
4.50
One to four family residences
868,332
18.69
846,360
19.24
Multifamily residential properties
47,142
1.01
57,806
1.31
Commercial
1,474,344
31.73
1,426,643
32.42
Consumer
284,864
6.13
279,704
6.36
Other (not classified above)
38,622
0.83
32,648
0.74
Total loans
100.00
The Company’s loans are mostly to customers within Oklahoma and approximately 65% of the loans are secured by real estate. Credit risk on loans is managed through limits on amounts loaned to individual and related 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.
The Company’s commercial and industrial loan category includes a small percentage of loans to companies that provide ancillary services to the oil and gas industry, such as transportation, preparation contractors and equipment manufacturers. The balance of these loans was approximately $64 million at September 30, 2017 and approximately $56 million at December 31, 2016.
Accounting policies related to appraisals, nonaccruals and charge-offs are disclosed in Note (1) to the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.
Nonperforming and Restructured Assets
The following is a summary of nonperforming and restructured assets:
Past due 90 days or more and still accruing
2,122
1,962
Nonaccrual
27,665
31,798
Restructured
3,603
1,713
Total nonperforming and restructured loans
33,390
35,473
Other real estate owned and repossessed assets
4,099
3,866
Total nonperforming and restructured assets
37,489
39,339
Nonaccrual loans, accruing loans past due 90 days or more and restructured loans are shown in the table above. Had nonaccrual loans performed in accordance with their original contractual terms, the Company would have recognized additional interest income of approximately $1.3 million for the nine months ended September 30, 2017 and approximately $1.5 million for the nine months ended September 30, 2016.
The Company charges interest on principal balances outstanding on restructured loans during deferral periods. The current and future financial effects of the recorded balance of loans considered to be restructured were not considered to be material.
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 owner occupied
1,470
713
Non-residential real estate other
1,811
5,688
Residential real estate permanent mortgage
878
1,116
Residential real estate all other
4,374
5,089
Non-consumer non-real estate
7,152
4,464
Consumer non-real estate
273
265
Other loans
9,384
8,370
Acquired loans
2,323
6,093
11
The following table presents an age analysis of past due loans, segregated by class of loans:
Age Analysis of Past Due Loans
30-59
Days
Past Due
60-89
90 Days
and
Greater
Loans
Current
Total Loans
Accruing
Loans 90
Days or
More
As of September 30, 2017
2,069
510
830
3,409
610,639
614,048
217
2,593
406
3,011
1,130,500
1,133,511
168
2,070
862
3,625
324,880
328,505
556
2,077
867
1,134
4,078
767,895
771,973
435
1,223
5,264
1,518
8,005
1,225,849
1,233,854
1,807
536
381
2,724
287,197
289,921
256
1,109
8,379
9,488
136,432
145,920
131
513
1,417
127,600
129,017
275
13,721
8,013
14,023
35,757
4,610,992
As of December 31, 2016
2,255
96
150
2,501
569,130
571,631
611
16
418
1,045
1,122,351
1,123,396
2,742
649
1,273
4,664
320,749
325,413
2,559
531
1,416
4,506
743,723
748,229
369
1,269
1,628
741
3,638
1,047,547
1,051,185
608
2,046
760
419
3,225
280,652
283,877
274
5,345
958
7,775
14,078
127,404
141,482
825
310
408
1,543
153,476
155,019
153
17,652
4,948
12,600
35,200
4,365,032
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 of allowance for loss, 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.
The following table presents impaired loans, segregated by class of loans. During the nine month period ended September 30, 2017, $2.3 million of interest income was recognized on impaired loans subsequent to their classification as impaired. During previous periods no material amount of interest income was recognized on impaired loans subsequent to their classification as impaired.
Unpaid
Principal
Balance
Recorded
Investment
with Allowance
Related
Allowance
Average
1,886
1,772
64
2,079
1,979
1,933
1,691
1,482
132
1,406
5,116
4,886
1,893
5,079
17,295
10,493
2,279
7,868
639
604
110
691
10,873
772
9,728
4,567
2,879
3,209
44,146
33,479
5,437
31,137
894
806
101
7,742
574
5,854
1,878
124
1,612
5,871
5,614
1,538
5,445
12,015
6,272
1,457
6,478
686
650
133
788
9,799
8,415
1,870
8,062
8,780
6,581
6,041
47,665
35,709
5,797
35,105
Credit Risk Monitoring and Loan Grading
The Company considers various factors to monitor the credit 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.
An internal risk grading system is used to indicate the credit risk of loans. 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 disclosed in Note (5) to the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.
The following table presents internal loan grading by class of loans:
Internal Loan Grading
Grade
490,986
107,108
14,056
1,898
941,470
175,333
14,672
2,036
287,905
33,335
5,547
1,718
613,932
142,874
9,825
5,342
963,362
236,765
26,318
7,409
269,864
17,479
1,977
601
136,765
6,337
1,489
1,329
71,878
36,807
17,673
2,659
3,776,162
756,038
91,557
22,992
464,504
89,978
16,220
929
933,743
169,561
14,404
284,893
32,889
5,987
1,644
614,338
119,018
9,382
5,491
856,318
170,865
19,101
4,901
263,442
17,154
2,640
132,254
5,376
1,514
2,338
92,946
42,668
12,888
6,517
3,642,438
647,509
82,136
28,149
Allowance for Loan Losses Methodology
The allowance for loan losses (“ALL”) methodology is disclosed in Note (5) to the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.
14
The following table details activity in the ALL 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.
ALL
Balance at
beginning of
period
Charge-
offs
Recoveries
Net
charge-offs
Provisions
charged to
operations
end of
Three Months Ended September 30, 2017
5,685
(2
261
5,945
10,480
10,551
3,148
(90
(81
91
3,158
8,912
(89
(76
503
9,339
13,643
(538
24
(514
1,838
14,967
2,706
(238
57
(181
207
2,732
3,006
(47
3,112
1,425
(134
(127
1,451
49,005
(1,138
112
(1,026
51,255
Nine Months Ended September 30, 2017
5,602
(74
(69
412
10,793
(26
(23
(219
3,129
(246
20
(226
255
8,622
(162
30
(132
849
12,421
(1,215
986
(229
2,775
(706
140
(566
494
4,045
(1,321
22
(1,299
366
1,277
(148
65
(83
257
48,693
(3,898
1,271
(2,627
15
Three Months Ended September 30, 2016
4,896
214
5,109
10,302
(5
285
10,583
3,203
(58
(48
3,207
8,293
(10
8,503
13,441
(1,053
(1,022
(385
12,034
2,749
(374
(313
443
3,377
(18
(16
812
4,173
305
(41
(39
1,573
46,566
(1,560
115
(1,445
48,061
Nine Months Ended September 30, 2016
4,661
(11
459
9,921
(6
668
(157
48
(109
6,725
(147
(128
1,906
11,754
(2,358
77
(2,281
2,561
2,642
(729
137
(592
829
2,648
(300
(285
1,810
167
18
(40
1,446
41,666
(3,769
317
(3,452
The following table details the amount of ALL by class of loans for the period presented, detailed on the basis of the impairment methodology used by the Company.
Individually
evaluated for
impairment
Collectively
Non-residential real estate owner occupied.
625
5,320
716
740
9,811
1,119
9,674
422
2,736
2,707
2,570
6,769
2,160
6,462
4,694
10,273
3,317
9,104
374
2,358
478
2,326
671
2,441
1,812
2,233
1,439
495
782
10,108
41,147
10,519
38,174
The following table details the loans outstanding by class of loans for the period presented, on the basis of the impairment methodology used by the Company.
Loans acquired
with deteriorated
credit quality
15,954
598,094
17,149
554,482
16,707
1,116,804
20,092
1,103,304
7,265
321,240
7,631
317,782
15,167
756,806
14,873
733,356
33,727
1,200,127
24,002
1,027,183
2,578
287,343
280,674
145,713
2,254
139,228
14,782
108,686
5,549
13,459
135,616
5,944
106,387
4,534,813
102,663
4,291,625
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.
Transfers from loans to other real estate owned and repossessed assets during the periods presented, are summarized as follows:
2,453
Repossessed assets
887
1,117
2,793
3,570
(5)
INTANGIBLE ASSETS
The following is a summary of intangible assets:
Carrying
Accumulated
Amortization
Core deposit intangibles
17,447
(7,991
9,456
Customer relationship intangibles
5,699
(3,680
2,019
Mortgage servicing intangibles
449
(279
170
23,595
(11,950
(6,611
10,836
(3,419
2,280
473
(259
23,619
(10,289
The following is a summary of goodwill by business segment:
Executive,
Metropolitan
Community
Financial
Operations
Banks
Services
& Support
Consolidated
Nine months ended September 30, 2017
Balance at beginning and end of period
8,078
40,050
5,464
450
Additional information for intangible assets can be found in Note (7) to the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.
(6)
STOCK-BASED COMPENSATION
The Company adopted a nonqualified incentive stock option plan (the “BancFirst ISOP”) in May 1986. The Company has amended the BancFirst ISOP since 1986 to increase the number of shares to be issued under the plan to 6,400,000 shares. At September 30, 2017, there were 371,470 shares available for future grants. The BancFirst ISOP will terminate on December 31, 2019. 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, 2017 will become exercisable through the year 2024. 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 has amended the BancFirst Directors’ Stock Option Plan since 1999 to increase the number of shares to be issued under the plan to 520,000 shares. At September 30, 2017, there were 60,000 shares 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 years, and expire at the end of fifteen years from the date of grant. Options outstanding as of September 30, 2017 will become exercisable through the year 2021. 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 shares for stock option exercises, but reserves the right to use shares 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:
Wgtd. Avg.
Remaining
Aggregate
Exercise
Contractual
Intrinsic
Options
Price
Term
(Dollars in thousands, except option data)
Outstanding at December 31, 2016
1,414,900
22.46
Options granted
80,000
46.63
Options exercised
(231,275
17.78
Outstanding at September 30, 2017
1,263,625
24.84
9.72 Yrs
40,317
Exercisable at September 30, 2017
523,625
19.44
6.67 Yrs
19,539
The following table has additional information regarding options granted and options exercised under both the BancFirst ISOP and the BancFirst Directors’ Stock Option Plan:
(Dollars in thousands except per share data)
Weighted average grant-date fair value per share of options granted
11.63
7.00
11.21
5.96
Total intrinsic value of options exercised
1,493
5,063
7,138
6,733
Cash received from options exercised
856
3,859
4,113
5,735
Tax benefit realized from options exercised
578
1,958
2,761
2,604
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.
The following table is a summary of the Company’s recorded stock-based compensation expense:
Stock-based compensation expense
Tax benefit
142
490
Stock-based compensation expense, net of tax
223
502
776
The Company will continue to amortize the unearned stock-based compensation expense over the remaining vesting period of approximately seven years. The following table shows the unearned stock-based compensation expense:
Unearned stock-based compensation expense
2,968
The following table shows the assumptions used for computing stock-based compensation expense under the fair value method on options granted during the periods presented:
Risk-free interest rate
2.15 to 2.38%
1.46 to 2.02%
Dividend yield
2.00%
Stock price volatility
22.57 to 23.53%
20.41 to 21.78%
Expected term
10 Yrs
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 May 1999, the Company adopted the BancFirst Corporation Directors’ Deferred Stock Compensation Plan (the “BancFirst Deferred Stock Compensation Plan”). The Company has amended the BancFirst Deferred Stock Compensation Plan since 1999 to increase the number of shares to be issued under the plan to 222,220 shares. Under the plan, directors and members of the community advisory boards of the Company and its subsidiaries may defer up to 100% of their board fees. They are credited for each deferral with a number of stock units based on the current market price of the Company’s stock, which accumulate in an account until such time as the director or community board member terminates serving as a board member. Shares of common stock of the Company are then distributed to the terminating director or community board member based upon the number of stock units accumulated in his or her account. There were 9,918 shares of common stock distributed from the BancFirst Deferred Stock Compensation Plan during the nine months ended September 30, 2017.
A summary of the accumulated stock units is as follows:
Accumulated stock units
136,679
140,044
Average price
22.33
20.87
(7)
STOCKHOLDERS’ EQUITY
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 may be determined by management within the limitations of the SRP.
All share repurchased in 2016 were purchased in the first three months of the year. The following table is a summary of the shares under the program:
Number of shares repurchased
200,000
Average price of shares repurchased
27.62
Shares remaining to be repurchased
300,000
The Company and BancFirst are subject to risk-based capital guidelines issued by the Board of Governors of the Federal Reserve System and the Federal Deposit Insurance Corporation (“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 Company’s financial statements. Management believes that as of September 30, 2017, the Company and BancFirst met all capital adequacy requirements to which they are subject. The actual and required capital amounts and ratios are shown in the following table:
Required
To Be Well
For Capital
With
Capitalized Under
Adequacy
Capital Conservation
Prompt Corrective
Actual
Purposes
Buffer
Action Provisions
Ratio
As of September 30, 2017:
Total Capital
(to Risk Weighted Assets)-
782,662
15.58%
401,869
8.00%
464,661
9.250%
BancFirst
702,516
14.00%
401,415
464,137
501,769
10.00%
Common Equity Tier 1 Capital
700,407
13.94%
226,051
4.50%
288,843
5.750%
631,261
12.58%
225,796
288,517
326,150
6.50%
Tier 1 Capital
731,407
14.56%
301,402
6.00%
364,194
7.250%
651,261
12.98%
301,062
363,783
(to Total Assets)-
10.44%
280,325
4.00%
9.31%
279,919
349,899
5.00%
As of September 30, 2017, the most recent notification from the Federal Reserve Bank of Kansas City and the FDIC categorized BancFirst as “well capitalized” under the regulatory framework from prompt corrective action. The Company’s trust preferred securities have continued to be included in Tier 1 capital as the Company’s total assets do not exceed $15 billion. There are no conditions or events since the most recent notifications of BancFirst’s capital category that management believes would materially change its category under capital requirements existing as of the report date.
Basel III Capital Rules
Under the Basel III Capital Rules, in order to avoid limitations on capital distributions, including dividend payments and certain discretionary bonus payments to executive officers, a banking organization must hold a capital conservation buffer composed of CET1 capital above its minimum risk-based capital requirements. The implementation of the capital conservation buffer began on January 1, 2016 at the 0.625% level and will be phased in over a four-year period (increasing by that amount on each subsequent January 1, until it reaches 2.5% on January 1, 2019).
Management believes that, as of September 30, 2017, the Company and BancFirst would meet all capital adequacy requirements under the Basel III Capital Rules on a fully phased-in basis as if such requirements were currently in effect.
(8)
Basic and diluted net income per common share based on weighted-average shares outstanding are calculated as follows:
Income
(Numerator)
Shares
(Denominator)
Per Share
Income available to common stockholders
31,838,392
Dilutive effect of stock options
753,885
Income available to common stockholders plus assumed
exercises of stock options
32,592,277
31,262,188
582,230
31,844,418
31,792,270
741,949
32,534,219
31,143,980
581,580
31,725,560
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:
Exercise Price
75,543
46.46
283,130
30.32
39,120
46.10
366,628
29.87
(9)
FAIR VALUE MEASUREMENTS
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.
21
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:
•
Level 1 Inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level 2 Inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset and liability, either directly or indirectly, for substantially the full term of the financial instrument.
Level 3 Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose values are determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation. This category includes certain impaired loans, repossessed assets, other real estate owned, goodwill and other intangible assets.
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, registered mortgage backed securities and state 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 private label mortgage backed securities and 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 portfolio primarily 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 for pricing mentioned in the preceding paragraph adjusted for the specific issue. Periodically, the Company will validate 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.
The following table summarizes financial assets and financial liabilities measured at fair value on a recurring basis as of the periods presented, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:
Level 1 Inputs
Level 2 Inputs
Level 3 Inputs
Total Fair Value
Securities available for sale:
U.S. Treasury
Mortgage-backed securities
3,808
14,467
Derivative assets
123
Derivative liabilities
38
4,856
14,816
1,306
The changes in Level 3 assets measured at estimated fair value on a recurring basis during the periods presented were as follows:
Twelve Months Ended
Balance at the beginning of the year
21,385
21,124
Purchases
293
1,096
Settlements
(523
(191
Sales
(429
Losses included in earnings
Total unrealized losses
(481
(104
Balance at the end of the period
20,322
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, 2017 and 2016, 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.
Impaired loans are reported at the fair value of the underlying collateral if repayment is dependent on liquidation of the collateral. In no case does the fair value of an impaired loan exceed the fair value of the underlying collateral. The impaired loans are adjusted to fair value through a specific allocation of the allowance for loan losses or a direct charge-down of the loan.
Repossessed 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.
23
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. The fair value represents end of period values, which approximate fair value measurements that occurred on various measurement dates throughout the period:
Level 3
As of and for the Year-to-date Period Ended September 30, 2017
Impaired loans (less specific allowance)
28,042
247
1,390
As of and for the Year-to-date Period Ended December 31, 2016
29,912
340
1,480
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 Deposits
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.
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.
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.
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 that are reported at amortized cost in the Company’s consolidated balance sheets, segregated by the level of valuation inputs within the fair value hierarchy utilized to measure fair value, are as follows:
Fair Value
FINANCIAL ASSETS
Level 2 inputs:
Cash and cash equivalents
1,728,943
1,851,161
Securities held for investment
2,568
2,598
3,722
3,760
Level 3 inputs:
643
4,599,161
4,367,363
FINANCIAL LIABILITIES
6,374,232
6,313,622
33,589
34,339
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS
Loan commitments
1,855
Letters of credit
424
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 periodically) 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 measured at fair value on a nonrecurring basis were not considered to be significant to the Company at September 30, 2017 or December 31, 2016.
(10)
DERIVATIVE FINANCIAL INSTRUMENTS
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
Notional Units
Notional
(Notional amounts and dollars in thousands)
Oil
Barrels
56
83
576
(38
(496
Natural Gas
MMBTUs
350
67
1,900
993
(350
(21
(1,900
(810
Included in
Other assets
Other liabilities
(1,306
The following table is a summary of the Company’s recognized income related to the activity, which was included in other noninterest income:
Three Months Ended September 30,
Nine Months Ended September 30,
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. The Company’s share of total profit is approximately 35%.
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
Balance Sheet Offsetting
Derivatives may be eligible for offset in the consolidated balance sheet and/or subject to master netting arrangements. The Company’s derivative transactions with upstream financial institution counterparties and bank customers are generally executed under International Swaps and Derivative Association (“ISDA”) master agreements which include “right of set-off” provisions. In such cases there is generally a legally enforceable right to offset recognized amounts and there may be an intention to settle such amounts on a net basis. Nonetheless, the Company does not generally offset such financial instruments for financial reporting purposes.
(11)
SEGMENT INFORMATION
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
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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:
Eliminations
Net interest income (expense)
18,617
37,310
1,332
Noninterest income
3,981
13,884
9,217
24,470
(22,383
11,499
23,810
3,762
15,137
(21,682
15,893
34,254
1,617
(333
4,235
14,918
8,050
19,025
(18,301
10,970
19,727
2,683
11,964
(18,130
54,969
109,480
4,525
(534
11,748
40,821
24,983
74,586
(66,901
36,357
71,038
10,526
47,368
(65,942
47,435
101,222
4,624
(1,006
12,121
42,922
22,175
55,501
(53,118
30,558
59,152
8,228
33,711
(52,835
Total Assets:
2,549,122
4,449,130
92,387
873,337
(831,808
2,493,096
4,412,174
83,594
803,810
(773,722
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, 2016 consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016 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. Examples of forward-looking statements include, but are not limited to: (i) projections of revenues, expenses, income or loss, earnings or loss per share, the payment or nonpayment of dividends, capital structure and other financial items; (ii) statements of plans, objectives and expectations, including those relating to products or services; (iii) statements of future economic performance; and (iv) statements of assumptions underlying such statements. Words such as “believes”, “anticipates”, “expects”, “intends”, “targeted”, “continue”, “remain”, “will”, “should”, “may” and other similar expressions are intended to identify forward-looking statements but are not the exclusive means of identifying such statements.
Forward-looking statements involve risks and uncertainties that may cause actual results to differ materially from those in such statements. Factors that could cause actual results to differ from those discussed in the forward-looking statements include, but are not limited to:
Local, regional, national and international economic conditions and the impact they may have on the Company and its customers and the Company’s assessment of that impact.
Changes in the mix of loan geographies, sectors and types or the level of non-performing assets and charge-offs.
Inflation, interest rate, crude oil price, securities market and monetary fluctuations.
The effect of changes in laws and regulations (including laws and regulations concerning taxes, banking, securities and insurance) with which the Company must comply.
Impairment of the Company’s goodwill or other intangible assets.
Changes in consumer spending, borrowing and savings habits.
Changes in the financial performance and/or condition of the Company’s borrowers.
Technological changes.
Acquisitions and integration of acquired businesses.
The effect of changes in accounting policies and practices, as may be adopted by the regulatory agencies, as well as the Public Company Accounting Oversight Board, the Financial Accounting Standards Board and other accounting standard setters.
The Company’s success at managing the risks involved in the foregoing items.
Actual results may differ materially from forward-looking statements.
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SUMMARY
BancFirst Corporation’s net income was $21.7 million, or $0.67 diluted earnings per share, for the third quarter of 2017, compared to net income of $18.0 million, or $0.57 diluted earnings per share, for the third quarter of 2016. Net income was $66.9 million, or $2.06 diluted earnings per share, for the nine months ended September, 30, 2017, compared to net income of $52.1 million, or $1.64 diluted earnings per share, for the nine months ended September, 30, 2016. Net income for the first nine months of 2017 included the effects of favorable resolutions of three problem loans which resulted in principal recovery of $894,000 and unaccrued interest income of $2.7 million. Net income for the first nine months of 2016 included a gain on the sale of other real estate owned totaling $1.2 million.
The Company’s net interest income for the third quarter of 2017 increased to $57.2 million, compared to $51.4 million for the third quarter of 2016. The net interest margin for the quarter was 3.46%, compared to 3.27% a year ago. The increase in margin was primarily due to the increase in the federal funds rate. The Company’s provision for loan losses for the third quarter of 2017 increased to $3.3 million, compared to $2.9 million a year ago. The provision was primarily driven by downgrades of commercial loans, which resulted in approximately $2.5 million in provision, and by loan growth, which resulted in approximately $750,000 in provision. Net charge-offs were stable at 0.02% of average loans for the third quarter of 2017 compared to 0.03% for the third quarter of 2016. Noninterest income for the quarter totaled $29.2 million, compared to $27.9 million last year. Noninterest expense for the quarter totaled $50.6 million, compared to $49.2 million last year. The increase in noninterest expense was primarily due to salary increases in 2017. The Company’s effective tax rate was 33.3% compared to 33.9% for the third quarter of 2016.
At September 30, 2017, the Company’s total assets were $7.1 billion, $113.2 million above the December 31, 2016 total. Loans totaled $4.7 billion, an increase of $249.0 million over December 31, 2016. Deposits were $6.3 billion at September 30, 2017, up $54.0 million above the December 31, 2016 total. The Company’s total stockholders’ equity was $764.4 million, an increase of $53.3 million over December 31, 2016.
Asset quality remained strong during the third quarter of 2017. Nonperforming and restructured assets were 0.53% of total assets at September 30, 2017 compared to 0.56% at December 31, 2016. The decrease in nonperforming and restructured assets was largely due to the resolution of problem loans during the first two quarters of 2017, offset by the downgrade of two commercial loans during the third quarter of 2017. The allowance for loan losses to total loans was 1.10% at September 30, 2017 and year-end 2016. The allowance to nonperforming and restructured loans was 153.5% at September 30, 2017 compared to 137.3% at year-end 2016.
On July 31, 2017, the Company completed a two-for-one stock split of the Company’s outstanding shares of common stock. The stock was issued in the form of a dividend on July 31, 2017 to shareholders of record of the outstanding common stock as of the close of business record date of July 17, 2017. Stockholders received one additional share for each share held on that date. This represents the second stock split for the Company since going public in 1993. All share and per share amounts in the consolidated financial statements and related notes have been retroactively adjusted to reflect this stock split for all periods presented.
Effective June 1, 2017, the Company organized a new wholly-owned captive insurance company named BancFirst Risk and Insurance. It insures certain risks of the Company and has entered into reinsurance agreements with a risk-sharing pool.
FUTURE APPLICATION OF ACCOUNTING STANDARDS
See Note (1) of the Notes to Consolidated Financial Statements for a discussion of recently issued accounting pronouncements.
See Note (11) 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
Securities transactions
Per Common Share Data
Net income – basic
Net income – diluted
Cash dividends
0.21
0.19
0.59
0.55
Performance Data
Return on average assets
1.22
1.06
1.26
1.03
Return on average stockholders’ equity
11.34
10.35
12.06
10.27
Cash dividend payout ratio
30.80
33.03
28.02
32.91
Net interest spread
3.20
3.09
3.10
Net interest margin
3.46
3.27
3.42
Efficiency ratio
58.56
62.00
58.79
61.76
Net charge-offs to average loans
0.02
0.03
0.06
0.08
Net Interest Income
For the three months ended September 30, 2017, net interest income, which is the Company’s principal source of operating revenue, increased 11.3% compared to the three months ended September 30, 2016. Net interest margin, which is shown in the preceding table, is the ratio of taxable-equivalent net interest income to average earning assets for the period. The increase in the federal funds rate of 25 basis points during the fourth quarter of 2016 and the first and second quarters of 2017 contributed to the higher net interest income and margin in 2017. If interest rates and/or loan volume do not increase, management would expect its net interest margin to generally remain at current levels.
Net interest income for the nine months ended September 30, 2017 increased 10.6% compared to the nine months ended September 30, 2016. The net interest margin increased for the nine months ended September 30, 2017 compared to the same period of the previous year, as shown in the preceding table. The increase in the margin was primarily due to interest income of $2.7 million related to the favorable resolution of three problem loans, which added approximately 0.05% to the margin, and the increase in the federal funds rate of 25 basis points during the fourth quarter of 2016 and the first and second quarters of 2017.
Provision for Loan Losses
The Company’s provision for loan loss for the third quarter of 2017 was $3.3 million, an increase of $336,000 or 11.4% compared to a year ago. The provision was primarily driven by downgrades of commercial loans, which resulted in approximately $2.5 million in provision, and by loan growth, which resulted in approximately $750,000 in provision. The Company establishes an allowance as an estimate of the probable inherent losses in the loan portfolio at the balance sheet date. Management believes 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 amount of future provisions for loan losses. Net loan charge-offs were $1.0 million for the third quarter of 2017, compared to $1.4 million for the third quarter of 2016. The rate of net charge-offs to average total loans, as presented in the preceding table, continues to be at a very low level.
For the nine months ended September 30, 2017, the Company’s provision for loan losses decreased $4.7 million or 47.3% compared to the nine months ended September 30, 2016. The decrease in the provision was due in part to the resolution of three problem loans and an unusually high provision for a few commercial loans in the prior year. Net loan charge-offs were $2.6 million, compared to $3.5 million for the same period of the prior year.
Noninterest Income
Noninterest income totaled $29.2 million for the third quarter of 2017 compared to $27.9 million for the third quarter of 2016. Noninterest income included increases in trust revenue, insurance commissions, debit card usage fees and non-sufficient funds fees. The Company had fees from debit card usage totaling $6.6 million and $6.0 million during the three month periods ended September 30, 2017 and 2016, respectively. This represents 22.6% and 21.5% of the Company’s noninterest income for the three month periods ended September 30, 2017 and 2016, respectively. In addition, the Company had non-sufficient fund fees totaling $7.5 million and $7.1 million during the three month periods ended September 30, 2017 and 2016, respectively. This represents 25.8% and 25.6% of the Company’s noninterest income for the three month periods ended September 30, 2017 and 2016, respectively.
Noninterest income for the nine months ended September 30, 2017 totaled $85.2 million compared to $79.6 million for the nine months ended September 30, 2016. Noninterest income included increases in trust revenue, insurance commissions, debit card usage fees and non-sufficient funds fees. Fees from debit card usage totaled $19.5 million and $18.0 million during the nine months ended September 30, 2017 and 2016, respectively. This represents 22.8% and 22.6% of the Company’s noninterest income for the nine month periods ended September 30, 2017 and 2016, respectively. In addition, the Company had non-sufficient fund fees totaling $21.7 million and $19.8 million during the nine months ended September 30, 2017 and 2016, respectively. This represents 25.4% and 24.9% of the Company’s noninterest income for the nine month periods ended September 30, 2017 and 2016, respectively.
Noninterest Expense
For the three months ended September 30, 2017, noninterest expense totaled $50.6 million, compared to $49.2 million for the three months ended September 30, 2016. The increase in noninterest expense for the third quarter of 2017 was primarily due to salary increases.
For the nine months ended September 30, 2017, noninterest expense totaled $149.1million compared to $143.2 million for the nine months ended September 30, 2016. The increase in noninterest expense for year-to-date 2017 was primarily due to salary increases and $1.2 million in gains on sale of other real estate owned that reduced expenses in 2016.
Income Taxes
The Company’s effective tax rate on income before taxes was 33.3% for the third quarter of 2017, compared to 33.9% for the third quarter of 2016. The decrease in the effective tax rate was primarily due to Accounting Standards Update 2016-09, which is a change in accounting standards related to stock based compensation.
The Company’s effective tax rate on income before taxes was 32.6% for the first nine months of 2017, compared to 34.0% for the first nine months of 2016. The decrease in the effective tax rate was primarily due to Accounting Standards Update 2016-09, which is a change in accounting standards related to stock based compensation.
FINANCIAL POSITION
Balance Sheet Data
Total loans (net of unearned interest)
4,658,525
4,409,550
Securities
Stockholders' equity
Book value per share
23.99
22.49
Tangible book value per share (non-GAAP)(1)
21.93
20.36
Average loans to deposits (year-to-date)
71.74
71.44
Average earning assets to total assets (year-to-date)
93.42
93.10
Average stockholders’ equity to average assets (year-to-date)
10.48
10.11
Asset Quality Ratios
Nonperforming and restructured loans to total loans
0.72
0.80
Nonperforming and restructured assets to total assets
0.53
0.56
Allowance for loan losses to total loans
1.10
Allowance for loan losses to nonperforming and restructured loans
153.50
137.27
Reconciliation of Tangible Book Value Per Common Share (non-GAAP)(2)
Less goodwill
Less intangible assets, net
Tangible stockholders' equity (non-GAAP)
698,727
643,722
Common shares outstanding
31,863,063
31,621,870
Tangible book value per share (non-GAAP)
(1) Refer to the “Reconciliation of Tangible Book Value per Common Share (non-GAAP)” Table.
(2) Tangible book value per common share is stockholders’ equity less goodwill and intangible assets, net, divided by common shares outstanding. This amount is a non-GAAP financial measure but has been included as it is considered to be a critical metric with which to analyze and evaluate the financial condition and capital strength of the Company. This measure should not be considered a substitute for operating results determined in accordance with GAAP.
Cash and Interest-Bearing Deposits with Banks
The aggregate of cash and due from banks, interest-bearing deposits with banks and federal funds sold decreased $122.2 million, or 6.6% to $1.7 billion, from December 31, 2016 to September 30, 2017. This decrease was due primarily to the increase in loans and minimal growth in deposits.
At September 30, 2017, total securities decreased $19.8 million, or 4.2% compared to December 31, 2016. The size of the Company’s securities portfolio is determined by the Company’s liquidity and asset/liability management. The net unrealized gain on securities available for sale, before taxes, was $267,000 at September 30, 2017, compared to $153,000 at December 31, 2016. These unrealized gains are included in the Company’s stockholders’ equity as accumulated other comprehensive income, net of income tax, in the amounts of $164,000 and $94,000, respectively.
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At September 30, 2017, loans totaled $4.7 billion, an increase of $249.0 million over December 31, 2016. The 5.6% increase in loans was due to the continuation of internal loan growth.
Allowance for Loan Losses/Fair Value Adjustments on Acquired Loans
The allowance for loan losses to total loans represented 1.10% of total loans at both September 30, 2017 and December 31, 2016.
The fair value adjustment on acquired loans consists of an interest rate component to adjust the effective rates on the loans to market rates and a credit component to adjust for estimated credit exposures in the acquired loans. The credit component of the adjustment was $1.3 million at September 30, 2017 and $2.0 million at December 31, 2016, while the acquired loans outstanding were $129.0 million and $155.0 million, respectively.
Nonperforming and restructured assets totaled $37.5 million at September 30, 2017, compared to $39.3 million at December 31, 2016. The Company’s level of nonperforming and restructured assets has continued to be relatively low. The decrease in nonperforming and restructured assets in 2017 was due to the resolution of three problem loans, partially offset by the downgrade of two commercial loans.
Nonaccrual loans totaled $27.7 million at September 30, 2017, compared to $31.8 million at December 31, 2016. The Company’s nonaccrual loans are primarily commercial and real estate loans. Nonaccrual loans negatively impact the Company’s net interest margin. A loan is placed on nonaccrual status when, in the opinion of management, the future collectability of interest or principal or both is in serious doubt. Interest income is recognized on certain of these loans on a cash basis if the full collection of the remaining principal balance is reasonably expected. Otherwise, interest income is not recognized until the principal balance is fully collected. Had nonaccrual loans performed in accordance with their original contractual terms, the Company would have recognized additional interest income of approximately $1.3 million for the nine months ended September 30, 2017 and $1.5 million for the for the nine months ended September 30, 2016. Only a small amount of this interest is expected to be ultimately collected.
Other real estate owned and repossessed assets totaled $4.1 million at September 30, 2017, compared to $3.9 million at December 31, 2016.
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 $7.0 million of these loans at September 30, 2017, compared to $7.5 million at December 31, 2016. Potential problem 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.
Liquidity and Funding
At September 30, 2017 deposits totaled $6.3 billion, up slightly from $6.2 billion at December 31, 2016. The Company’s core deposits provide it with a stable, low-cost funding source. The Company’s core deposits as a percentage of total deposits were 94.9% at September 30, 2017 compared to 94.7% at December 31, 2016. Noninterest-bearing deposits to total deposits were 41.0% at September 30, 2017, compared to 40.4% at December 31, 2016.
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. Short-term borrowings were $2.1 million at September 30, 2017, compared to $500,000 at December 31, 2016.
33
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 $687.2 million, are pledged as collateral for the borrowings under the line of credit. As of September 30, 2017 and December 31, 2016, the Company had no advances outstanding under the line of credit from FHLB. In addition, the Company has a revolving line of credit with another financial institution with the ability to draw up to $10.0 million with no advances outstanding. This line of credit has a variable rate based on prime rate minus 25 basis points and matures in 2020.
There have not been any other 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, 2016.
Capital Resources
Stockholders’ equity totaled $764.4 million at September 30, 2017, compared to $711.1 million at December 31, 2016. In addition to net income of $66.9 million, other increases in stockholders’ equity during the nine months ended September 30, 2017 included $4.3 million related to stock option exercises, $819,000 related to stock-based compensation and $70,000 increase in other comprehensive income, that were partially offset by $18.8 million in dividends. The Company’s leverage ratio and total risk-based capital ratios at September 30, 2017 were well in excess of the regulatory requirements.
See Note (7) of the Notes to Consolidated Financial Statements for a discussion of capital ratio requirements.
On January 20, 2017, the Company filed with the Securities and Exchange Commission (“SEC”) an automatic shelf registration statement on Form S-3, which became effective upon filing with the SEC. Under the shelf registration, the Company may offer and sell, from time to time, an indeterminate amount of its common stock in one or more future offerings.
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, 2016.
34
CONSOLIDATED AVERAGE BALANCE SHEETS AND INTEREST MARGIN ANALYSIS
Taxable Equivalent Basis (Dollars in thousands)
Interest
Income/
Yield/
Expense
Rate
Earning assets:
Loans (1)
4,597,267
56,319
4.86
4,300,400
51,817
4.78
Securities – taxable
421,464
1.66
407,434
1.21
Securities – tax exempt
30,920
287
3.68
38,021
383
4.00
Interest-bearing deposits w/ banks & FFS
1,552,975
4,978
1.27
1,535,048
0.51
Total earning assets
6,602,626
63,347
3.81
6,280,903
55,410
3.50
Nonearning assets:
176,194
171,762
Interest receivable and other assets
341,724
335,855
(49,186
(46,400
Total nonearning assets
468,732
461,217
7,071,358
6,742,120
LIABILITIES AND STOCKHOLDERS’ EQUITY
Interest-bearing liabilities:
Transaction deposits
759,160
372
777,284
202
0.10
Savings deposits
2,304,342
3,479
0.60
2,079,991
1,729
0.33
Time deposits
668,378
1,396
701,760
1,218
0.69
2,262
0.99
0.36
6.60
6.51
Total interest-bearing liabilities
3,766,101
0.61
3,592,973
0.41
Interest-free funds:
Noninterest-bearing deposits
2,515,521
2,433,136
Interest payable and other liabilities
30,071
26,660
Stockholders’ equity
759,665
689,351
Total interest free funds
3,305,257
3,149,147
Total liabilities and stockholders’ equity
57,562
51,735
Effect of interest free funds
0.26
0.18
Nonaccrual loans are included in the average loan balances and any interest on such nonaccrual loans is recognized on a cash basis.
35
4,501,675
165,132
4.90
4,279,894
153,362
4.77
427,635
1.70
451,824
1.15
32,107
848
3.53
40,515
1,148
3.77
1,650,902
12,844
1.04
1,471,623
6,612,319
184,254
3.73
6,243,856
164,045
174,975
175,738
339,232
336,188
(48,644
(44,180
465,563
467,746
7,077,882
6,711,602
782,588
796
0.14
785,496
609
2,280,310
8,554
0.50
2,082,417
5,112
678,520
3,922
710,566
3,600
0.92
1,657
6.65
6.54
3,775,283
3,612,095
0.40
2,533,750
2,399,275
26,801
25,232
742,048
675,000
3,302,599
3,099,507
169,380
153,150
0.22
0.17
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, 2016, 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 its Disclosure Committee, which includes the Company’s Executive Chairman, Chief Risk Officer, Chief Internal Auditor, Chief Asset Quality Officer, 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.
36
No changes were made to the Company’s internal control over financial reporting during the period covered by this report that materially affected, or are likely to materially affect, the Company’s internal control over financial reporting.
37
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.
As of September 30, 2017, 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, 2016.
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.
Item 6. Exhibits.
ExhibitNumber
Exhibit
3.1
Second Amended and Restated Certificate of Incorporation of BancFirst Corporation (filed as Exhibit 1 to the Company’s 8-A/A filed July 24, 1998 and incorporated herein by reference).
3.2
Certificate of Amendment of the Second Amended and Restated Certificate of Incorporation of BancFirst Corporation dated June 15, 2004 (filed as Exhibit 3.5 to the Company’s Quarterly Report on Form 10-Q for the Quarter Ended June 30, 2004 and incorporated herein by reference).
3.3
Amended and Restated By-Laws of BancFirst Corporation (filed as Exhibit 3.1 to the Company’s Current Report on Form 8-K dated March 30, 2015 and incorporated herein by reference).
3.4
Certificate of Amendment of the Second Amended and Restated Certificate of Incorporation of BancFirst Corporation dated May 23, 2013 (filed as Exhibit 3.1 to the Company’s Current Report on Form 8-K dated May 29, 2013 and incorporated herein by reference).
3.5
Certificate of Amendment of the Third Amended and Restated Certificate of Incorporation of BancFirst Corporation dated May 31, 2017 (filed as Exhibit 3.1 to the Company’s Current Report on Form 8-K dated May 31, 2017 and incorporated herein by reference).
4.1
Instruments defining the rights of securities holders (see Exhibits 3.1, 3.2, 3.3 and 3.4 above).
4.2
Form of Amended and Restated Trust Agreement relating to the 7.20% Cumulative Trust Preferred Securities of BFC Capital Trust II (filed as Exhibit 4.5 to the Company’s registration statement on Form S-3/A, File No. 333-112488 dated February 23, 2004, and incorporated herein by reference).
4.3
Form of 7.20% Cumulative Trust Preferred Security Certificate for BFC Capital Trust II (filed as Exhibit D to Exhibit 4.5 to the Company’s registration statement on Form S-3/A, File No. 333-112488 dated February 23, 2004, and incorporated herein by reference).
4.4
Form of Indenture relating to the 7.20% Junior Subordinated Deferrable Interest Debentures of BancFirst Corporation issued to BFC Capital Trust II (filed as Exhibit 4.1 to the Company’s registration statement on Form S-3, File No. 333-112488 dated February 4, 2004, and incorporated herein by reference).
4.5
Form of Certificate of 7.20% Junior Subordinated Deferrable Interest Debenture of BancFirst Corporation (filed as Exhibit 4.2 to the Company’s registration statement on Form S-3, File No. 333-112488 dated February 4, 2004, and incorporated herein by reference).
4.6
Form of Guarantee of BancFirst Corporation relating to the 7.20% Cumulative Trust Preferred Securities of BFC Capital Trust II (filed as Exhibit 4.7 to the Company’s registration statement on Form S-3/A, File No. 333-112488 dated February 23, 2004, and incorporated herein by reference).
4.7
Form of Guarantee Agreement by and between CSB Bancshares, Inc. and Wilmington Trust Company (filed as Exhibit 4.7 to the Company’s Quarterly Report on Form 10-Q for the Quarter ended September 30, 2015 and incorporated herein by reference).
4.8
Form of Indenture relating to the Floating Rate Junior Subordinated Deferrable Interest Debentures of CSB Bancshares, Inc., issued to Wilmington Trust Company (filed as Exhibit 4.8 to the Company’s Quarterly Report on Form 10-Q for the Quarter ended September 30, 2015 and incorporated herein by reference).
4.9
Form of First Supplemental Indenture relating to the Floating Rate Junior Subordinated Deferrable Interest Debentures by and between Wilmington Trust Company and BancFirst Corporation (filed as Exhibit 4.9 to the Company’s Quarterly Report on Form 10-Q for the Quarter ended September 30, 2015 and incorporated herein by reference).
10.1
BancFirst Corporation Employee Stock Ownership and Trust Agreement adopted effective January 1, 2015 (filed as Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the Quarter Ended March 31, 2015 and incorporated herein by reference).
10.2
Fifth Amended and Restated BancFirst Corporation Directors’ Stock Option Plan (filed as Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q for the Quarter Ended June 30, 2016 and incorporated herein by reference).
10.3
Fifth Amended and Restated BancFirst Corporation Directors’ Deferred Stock Compensation Plan (filed as Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q for the Quarter Ended June 30, 2016 and incorporated herein by reference).
39
10.4
Fourteenth Amended and Restated BancFirst Corporation Stock Option Plan (filed as Exhibit 10.4 to the Company’s Quarterly Report on Form 10-Q for the Quarter Ended June 30, 2016 and incorporated herein by reference).
10.5
Adoption Agreement for the BancFirst Corporation Thrift Plan adopted April 21, 2016 effective January 1, 2016. (filed as Exhibit 10.5 to the Company’s Quarterly Report on Form 10-Q for the Quarter Ended March 31, 2016 and incorporated herein by reference).
31.1*
Chief Executive Officer’s Certification pursuant to Rule 13a-14(a) or Rule 15d-14(a).
31.2*
Chief Financial Officer’s Certification pursuant to Rule 13a-14(a) or Rule 15d-14(a).
32.1*
CEO’s Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2*
CFO’s Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS*
XBRL Instance Document
101.SCH*
XBRL Taxonomy Extension Schema
101.CAL*
XBRL Taxonomy Extension Calculation Linkbase
101.DEF*
XBRL Taxonomy Extension Definition Linkbase
101.LAB*
XBRL Taxonomy Extension Label Linkbase
101.PRE*
XBRL Taxonomy Extension Presentation Linkbase
*
Filed herewith.
40
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)
Date: November 3, 2017
/s/ David Harlow
David Harlow
President
Chief Executive Officer
(Principal Executive Officer)
/s/ Kevin Lawrence
Kevin Lawrence
Executive Vice President
Chief Financial Officer
(Principal Financial Officer)
41