FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
For the quarterly period ended September 30, 2006
OR
For the transition period from to
Commission File Number 0-14384
BancFirst Corporation
(Exact name of registrant as specified in charter)
(State or other Jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
101 N. Broadway, Oklahoma City, Oklahoma
73102-8401
(Address of principal executive offices)
(Zip Code)
(405) 270-1086
(Registrant’s telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨.
Indicate by check mark whether the registrant 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 x Non-accelerated filer ¨
Indicated by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act). Yes ¨ No x
As of October 31, 2006 there were 15,747,671 shares of the registrant’s Common Stock outstanding.
PART I – FINANCIAL INFORMATION
Item 1. Financial Statements.
BANCFIRST CORPORATION
CONSOLIDATED BALANCE SHEET
(Unaudited)
(Dollars in thousands, except per share data)
December 31,
2005
ASSETS
Cash and due from banks
Interest-bearing deposits with banks
Federal funds sold
Securities (market value: $422,681, $485,333 and $456,469, Respectively)
Loans:
Total loans (net of unearned interest)
Allowance for loan losses
Loans, net
Premises and equipment, net
Other real estate owned
Intangible assets, net
Goodwill
Accrued interest receivable
Other assets
Total assets
LIABILITIES AND STOCKHOLDERS’ EQUITY
Deposits:
Noninterest-bearing
Interest-bearing
Total deposits
Short-term borrowings
Accrued interest payable
Other liabilities
Long-term borrowings
Junior subordinated debentures
Minority interest
Total liabilities
Commitments and contingent liabilities
Stockholders’ equity:
Senior preferred stock, $1.00 par; 10,000,000 shares authorized; none issued
Cumulative preferred stock, $5.00 par; 900,000 shares authorized; none issued
Common stock, $1.00 par, 20,000,000 shares authorized; shares issued and outstanding: 15,742,171, 15,630,270 and 15,637,170; respectively
Capital surplus
Retained earnings
Accumulated other comprehensive income, net of income tax (expense) benefit of $(691), $900 and $(1,600), respectively
Total stockholders’ equity
Total liabilities and stockholders’ equity
The accompanying notes are an integral part of these consolidated financial statements.
CONSOLIDATED STATEMENT OF INCOME AND COMPREHENSIVE INCOME
INTEREST INCOME
Loans, including fees
Securities:
Taxable
Tax-exempt
Total interest income
INTEREST EXPENSE
Deposits
Total interest expense
Net interest income
Provision for loan losses
Net interest income after provision for loan losses
NONINTEREST INCOME
Trust revenue
Service charges on deposits
Securities transactions
Income from sales of loans
Insurance commissions and premiums
Other
Total noninterest income
NONINTEREST EXPENSE
Salaries and employee benefits
Occupancy and fixed assets expense, net
Depreciation
Amortization of intangible assets
Data processing services
Net expense (income) from other real estate owned
Marketing and business promotion
Total noninterest expense
Income before taxes
Income tax expense
Net income
Other comprehensive income, net of tax:
Unrealized gains (losses) on securities
Reclassification adjustment for (gains) losses included in net income
Comprehensive income
NET INCOME PER COMMON SHARE
Basic
Diluted
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CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(unaudited)
COMMON STOCK
Issued at beginning of period
Shares issued
Shares acquired and canceled
Issued at end of period
CAPITAL SURPLUS
Balance at beginning of period
Common stock issued
Balance at end of period
RETAINED EARNINGS
Adjustment to basis of Subsidiary
Dividends on common stock
Common stock acquired and canceled
ACCUMULATED OTHER COMPREHENSIVE INCOME
Unrealized gains/(losses) on securities:
Net change
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CONSOLIDATED STATEMENT OF CASH FLOWS
(Dollars in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
CASH FLOWS FROM INVESTING ACTIVITIES
Net cash used in acquisition
Purchases of securities:
Held for investment
Available for sale
Maturities of securities:
Proceeds from sales and calls of securities:
Net (increase) decrease in federal funds sold
Purchases of loans
Proceeds from sales of loans
Net other increase in loans
Purchases of premises and equipment
Proceeds from the sale of other real estate owned and repossessed assets
Net cash (used) provided by investing activities
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in demand, transaction and savings deposits
Net increase (decrease) in certificates of deposits
Net increase (decrease) in short-term borrowings
Net decrease in long-term borrowings
Issuance of common stock
Acquisition of common stock
Cash dividends paid
Net cash provided by financing activities
Net (decrease) increase in cash and due from banks
Cash and due from banks at the beginning of the period
Cash and due from banks at the end of the period
SUPPLEMENTAL DISCLOSURE
Cash paid during the period for interest
Cash paid during the period for income taxes
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) GENERAL
The accompanying consolidated financial statements include the accounts of BancFirst Corporation, Century Life Assurance Company, Council Oak Partners, LLC, Wilcox & Jones, Inc., First Bartlesville Bank, and BancFirst and its subsidiaries (the “Company”). The operating subsidiaries of BancFirst are Council Oak Investment Corporation, Citibank Insurance Agency, Inc., BancFirst Agency, Inc., Lenders Collection Corporation, BancFirst Community Development Corporation, and Council Oak Real Estate, 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 consolidated financial statements.
The unaudited interim 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, 2005, the date of the most recent annual report. Certain amounts in the 2005 financial statements have been reclassified to conform to the 2006 presentation.
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 and the fair values of financial instruments. Such estimates and assumptions may change over time and actual amounts realized may differ from those reported.
Prior to the issuance of the Company’s consolidated financial statements for the year ended December 31, 2005, management determined that the Company’s consolidated statements of cash flow for 2004 should be restated to reclassify certain disbursements from “Net other increase in loans” in Investing Activities to Operating Activities as such amounts relate to cash disbursements of mortgage loans originated for sale. The consolidated statement of cash flow for the nine months ended September 30, 2005 has been restated to reclassify disbursements of $85.7 million and cash receipts of $88.4 million from “Net other increase in loans” and “Proceeds from sales of loans”, respectively, in Investing Activities to Operating Activities. The restatement does not affect the net change in cash and due from banks for the nine months ended September 30, 2005 and has no impact on the Company’s September 30, 2005 consolidated balance sheet or the consolidated statements of income and related net income per share amounts or on the consolidated statements of stockholders’ equity or on the Company’s liquidity for the period ended September 30, 2005.
In January 2006, the Company approved a two-for-one split of shares of common stock to be issued in the form of a stock dividend. As a result of the stock split, the Company’s stockholders received one additional share of the Company’s common stock for each share of common stock held of record on February 16, 2006. The additional shares of our common stock were distributed on March 1, 2006. 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.
(2) RECENT ACCOUNTING PRONOUNCEMENTS
In March 2004, the Financial Accounting Standards Board (FASB) Emerging Issues Task Force (EITF) released Issue 03-01, “Meaning of Other Than Temporary Impairment,” which addressed other-than-temporary impairment for certain debt and equity investments. The recognition and measurement requirements of Issue 03-01, and other disclosure requirements not already implemented, were effective for periods beginning after June 15, 2004. In September 2004, the FASB staff issued FASB Staff Position (FSP) 03-1-a, which delayed the effective date for certain measurement and recognition guidance contained in Issue 03-01. The FSP requires the application of pre-existing other-than-temporary guidance during the period of delay until a final consensus is reached. In July 2005, the FASB decided to retain the accounting for certain debt securities and will not make the changes proposed in FSP 03-1-a but will issue a final FSP codifying the existing accounting guidance rather than changing the accounting. In November 2005, the FASB issued FSP 115-1 and 124-1 which addresses the determination as to when an investment is considered impaired, whether that
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impairment is other than temporary, and the measurement of an impairment loss. The FSP also includes accounting considerations subsequent to the recognition of an other-than-temporary impairment and requires certain disclosures about unrealized losses that have not been recognized as other-than-temporary impairments. The FSP amends FASB Statements No. 115 “Accounting for Certain Investments in Debt and Equity Securities”, and No. 124 “Accounting for Certain Investments Held by Not-for-Profit Organizations”, and APB Opinion No. 18 “the Equity Method of Accounting for Investments in Common Stock” and was adopted January 1, 2006. The adoption of Issue 03-01 is not expected to have a material effect on the Company’s consolidated financial statements.
In June 2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes – an Interpretation of FASB Statement No. 109”. This interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This interpretation also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. This interpretation is expected to increase the relevance and comparability in financial reporting of income taxes because all tax positions accounted for in accordance with Statement 109 will be evaluated for recognition, derecognition and measurement using consistent criteria. Finally, the disclosure provisions of this interpretation will provide more information about the uncertainty in income tax assets and liabilities. This interpretation is effective for fiscal years beginning after December 15, 2006 and earlier adoption is encouraged. The Company is not currently aware of any uncertainty in its accounting for income taxes and as such, the adoption of this interpretation is not expected to have a material effect on the Company’s consolidated financial statements.
In September 2006 the FASB issued SFAS No. 157, “Fair Value Measurements.” The Statement is effective for all financial statements issued for fiscal years beginning after November 15, 2007. The Statement defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. Adoption of SFAS No. 157 is not expected to have a material impact on the Company’s results of operations or financial condition.
On September 13, 2006, the Securities and Exchange Commission “SEC” issued Staff Accounting Bulletin No. 108 (“SAB 108”). SAB 108 provides interpretive guidance on how the effects of the carryover or reversal of prior year misstatements should be considered in quantifying a potential current year misstatement. Prior to SAB 108, companies might evaluate the materiality of financial-statement misstatements using either the income statement or balance sheet approach, with the income statement approach focusing on new misstatements added in the current year, and the balance sheet approach focusing on the cumulative amount of misstatements present in a company’s balance sheet. Misstatements that would be material under one approach could be viewed as immaterial under another approach, and not be corrected. SAB 108 now requires that companies view financial statement misstatements as material if they are material according to either the income statement or balance sheet approach. The Company has considered SAB 108 and determined that the adoption of SAB 108 is not expected to have a material effect on the Company’s consolidated financial statements.
(3) RECENT DEVELOPMENTS; MERGERS, ACQUISITIONS AND DISPOSALS
In September 2005, the Company organized a Community Development Entity known as BancFirst Community Development Corporation and funded the entity with $1 million of equity. The entity was organized to make certain investments in low to moderate income communities and to apply for an allocation of New Markets Tax Credits designed to assist in the development of communities in accordance with the guidelines established for Community Development Entities. The Company did not receive an allocation of funds for the 2006 year, however the Company intends to apply again for an allocation for 2007.
In December 2005, BancFirst Corporation completed the acquisition of Park State Bank (Park State), Nicoma Park, Oklahoma for cash of approximately $11 million. Park State had total assets of approximately $44 million. As a result of the acquisition, Park State became a wholly-owned subsidiary of BancFirst Corporation and was merged into BancFirst in February 2006. The acquisition was accounted for as a purchase. Accordingly, the effects of the acquisition are included in the Company’s consolidated financial statements from the date of the acquisition forward. The acquisition did not have a material effect on the results of operations of the Company for 2005 or for the nine months ended September 30, 2006.
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In March 2006, the Company’s principal subsidiary, BancFirst, organized an investment company known as Council Oak Real Estate, Inc. and funded the entity with $4.5 million of equity. The entity was organized to make certain investments in real estate.
On June 30, 2006, the Company entered into an agreement to sell its 50% ownership in PremierSource, LLC (PremierSource). The Company decided to sell its interest in PremierSource as the Company has similar product offerings through wholly owned subsidiaries that have proven to be a more effective delivery channel. The Company did not have a controlling interest in PremierSource and accounted for the subsidiary on the equity method of accounting. The sale of PremierSource was completed during August 2006 and the Company had an investment in PremierSource of approximately $274,000 at the time of sale. The Company sold PremierSource for a one-time payment of approximately $163,000 and a three year share of gross revenues collected by PremierSource from current clients of PremierSource that are attributable to referrals from the Company. Such payments will be paid at a rate of 50%, 30%, and 20% for the years-ended June 30, 2007, 2008, and 2009, respectively. The sale of PremierSource, including future revenue sharing payments, and the loss of future earnings from operating PremierSource is not expected to have a significant impact on the results of the Company’s operations for 2006 or 2007.
In August 2006, the Company completed the acquisition of First Bartlesville Bank (First Bartlesville), Bartlesville, Oklahoma for cash of approximately $5.6 million. First Bartlesville had total assets of approximately $46.6 million. As a result of the acquisition, First Bartlesville became a wholly-owned subsidiary of BancFirst Corporation and will be merged into BancFirst in December 2006. The acquisition was accounted for as a purchase. Accordingly, the effects of the acquisition are included in the Company’s consolidated financial statements from the date of the acquisition forward. The acquisition is not expected to have a material effect on the results of operations of the Company for 2006.
On September 6, 2006, the Company determined to dispose of its 75% ownership in Century Life Assurance Company (Century Life), an insurance agency, and entered into an agreement to sell the stock of the business to American Underwriters Life Insurance Company. The Company decided to sell this subsidiary as the product line was not strategic for the Company and management felt that Century Life would be more efficiently managed by insurance professionals. The effective date of the sale is October 1, 2006 and is expected to be consummated in the fourth quarter of 2006, pending regulatory approval. The Company reported approximately $945,000 of operating income and $111,000 of after-tax net income for the 3rd quarter of 2006 and is expected to report an after-tax gain approximating $400,000 to $600,000 during the 4th quarter of 2006. The resulting gain on the sale and the loss of future earnings from operating Century Life is not expected to have a significant impact on the results of the Company’s operations for 2006 or 2007.
(4) SECURITIES
The table below summarizes securities held for investment and securities available for sale (dollars in thousands).
Held for investment at cost (market value; $28,003, $32,596 and $30,781, respectively)
Available for sale, at market value
Total
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The table below summarizes the maturity of securities (dollars in thousands).
Contractual maturity of debt securities:
Within one year
After one year but within five years
After five years
Total debt securities
Equity securities
The Company held 150 and 151 debt securities available for sale that had unrealized gains as of September 30, 2006 and 2005, respectively. These securities had a market value totaling $88.2 million and $129.7 million, respectively, and unrealized gains totaling $1.4 million and $738,000, respectively. The Company also held 180 and 111 debt securities available for sale that had unrealized losses at September 30, 2006 and 2005, respectively. These securities had a market value totaling $293.1 million and $308.1 million and unrealized losses totaling $5.3 million and $6.4 million, respectively. These unrealized losses occurred due to increases in interest rates and spreads and not as a result of a decline in credit quality. The Company has both the intent and ability to hold these debt securities until the unrealized losses are recovered.
(5) LOANS AND ALLOWANCE FOR LOAN LOSSES
The following is a schedule of loans outstanding by category (dollars in thousands):
Commercial and industrial
Oil & gas production & equipment
Agriculture
State and political subdivisions:
Real Estate:
Construction
Farmland
One to four family residences
Multifamily residential properties
Commercial
Consumer
Total loans
Loans held for sale (included above)
The Company’s loans are mostly to customers within Oklahoma and over half of the loans are secured by real estate. Credit risk on loans is managed through limits on amounts loaned to individual borrowers, underwriting standards and loan monitoring procedures. The amounts and types of collateral obtained 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 amount of estimated loss due
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to credit risk in the Company’s loan portfolio is provided for in the allowance for loan losses. The amount of the allowance required to provide for all existing losses in the loan portfolio is an estimate based upon evaluations of loans, appraisals of collateral and other estimates which are subject to rapid change due to changing economic conditions and the economic prospects of borrowers. It is reasonably possible that a material change could occur in the estimated allowance for loan losses in the near term.
Changes in the allowance for loan losses are summarized as follows (dollars in thousands):
Three Months Ended
September 30,
Nine Months Ended
Charge-offs
Recoveries
Net charge-offs
Provisions charged to operations
Additions from acquisitions
Total additions
Commercial, financial and other
Real estate – construction
Real estate – mortgage
(6) NONPERFORMING AND RESTRUCTURED ASSETS
Below is a summary of nonperforming and restructured assets (dollars in thousands):
Past due over 90 days and still accruing
Nonaccrual
Restructured
Total nonperforming and restructured loans
Other real estate owned and repossessed assets
Total nonperforming and restructured assets
Nonperforming and restructured loans to total loans
Nonperforming and restructured assets to total assets
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(7) INTANGIBLE ASSETS AND GOODWILL
The following is a summary of intangible assets (dollars in thousands):
Core deposit intangibles
Customer relationship Intangibles
Amortization of intangible assets and estimated amortization of intangible assets are as follows(dollars in thousands):
Amortization:
Three months ended September 30, 2006
Three months ended September 30, 2005
Nine months ended September 30, 2006
Nine months ended September 30, 2005
Year ended December 31, 2005
Estimated Amortization:
Year ended December 31,
2006
2007
2008
2009
2010
10
The following is a summary of goodwill by business segment (2005 amounts have been reclassified for the realignment of regional executive responsibilities for certain bank locations as described in note 13, Segment Information, dollars in thousands):
Three Months Ended:
September 30, 2006
Acquisitions
September 30, 2005
Balance at beginning and end of period
Nine Months Ended:
Adjustments
Balance at beginning of period, as presented
Restatement for realignment
Balance at beginning and end of period, as restated
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(8) CAPITAL
The Company is subject to risk-based capital guidelines issued by the Board of Governors of the Federal Reserve System. These guidelines are used to evaluate capital adequacy and involve both quantitative and qualitative evaluations of the Company’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 consolidated financial statements. The required minimums and the Company’s respective ratios are shown below.
Minimum
Required
Tier 1 capital
Total capital
Risk-adjusted assets
Leverage ratio
Tier 1 capital ratio
Total capital ratio
To be “well capitalized” under federal bank regulatory agency definitions, a depository institution must have a Tier 1 Ratio of at least 6%, a combined Tier 1 and Tier 2 ratio of at least 10%, and a leverage ratio of at least 5%. As of September 30, 2006 and 2005, and December 31, 2005, the Company was considered to be “well capitalized”. There are no conditions or events since the most recent notification of the Company’s capital category that management believes would change its category.
(9) STOCK REPURCHASE PLAN
In November 1999, the Company adopted a new Stock Repurchase Program (the “SRP”) authorizing management to repurchase up to 600,000 shares of the Company’s common stock. The SRP was amended in May 2001 to increase the shares authorized to be purchased by 555,832 shares and was amended again in August 2002 to increase the number of shares authorized to be purchased by 364,530 shares. 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 shareholders wishing to sell their stock. The timing, price and amount of stock repurchases under the SRP may be determined by management and must be approved by the Company’s Executive Committee. At September 30, 2006 there were 286,052 shares remaining that could be repurchased under the SRP. Below is a summary of the shares repurchased under the program.
Number of shares repurchased
Average price of shares repurchased
(10) SHARE-BASED COMPENSATION
BancFirst Corporation adopted a nonqualified incentive stock option plan (the “BancFirst ISOP”) in May 1986. In May 2006, the Company amended the BancFirst ISOP to increase the number of shares to be issued under the plan by 100,000 shares to an aggregate of 2,500,000. At September 30, 2006, 215,360 shares are available for future grants. The BancFirst ISOP will terminate December 31, 2011. The options are exercisable beginning four years from the date of grant at the rate of 25% per year for four years. Options granted prior to 1996 expire at the end of eleven years from the date of the grant. Options granted after January 1, 1996 expire at the end of fifteen years from the date of grant. Options outstanding as of September 30, 2006 will become exercisable through the year 2014. The option price must be no less than 100% of the fair market value of the stock relating to such option at the date of grant.
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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. In May 2006, the Company amended the BancFirst Directors’ Stock Option Plan to increase the number of shares to be issued under the plan by 30,000 shares to an aggregate of 180,000 shares. At September 30, 2006, 30,000 shares are 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, 2006 will become exercisable through the year 2010. 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.
Below is a summary of the activity under both the BancFirst ISOP and the BancFirst Directors’ Stock Option Plan (dollars in thousands, except per share data):
Outstanding at January 1, 2006
Options granted
Options exercised
Options canceled
Outstanding at September 30, 2006
Exercisable at September 30, 2006
Below is 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
Total intrinsic value of options exercised
Cash received from options exercised
Tax benefit realized from options exercised
Effective January 1, 2006 the Company adopted, on a modified prospective basis, the fair value provisions of Statement of Financial Accounting Standards No 123 (Revised 2004), “Share-Based Payment” (FAS 123(R)). 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.
13
For the three and nine months ended September 30, 2006, the Company recorded share-based employee compensation expense of approximately $150,000 and $442,000, respectively, net of tax. As a result of the adoption of Statement 123R, our financial results were lower than under our previous accounting method for share-based compensation by the following amounts (dollars in thousands, except per share data):
Income from continuing operations before income taxes
Income from continuing operations
Basic and diluted net earnings per common share
The Company will continue to amortize the remaining fair value of these stock options of approximately $2.1 million, net of tax, over the remaining vesting period of approximately seven years. Share-based employee compensation expense under the fair value method was measured using the following assumptions for the options granted:
Risk-free interest rate
Dividend yield
Stock price volatility
Expected term
Prior to January 1, 2006, the Company applied Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (APB 25) and related interpretations in accounting for its stock options granted. Had compensation expense for the options issues prior to January 1, 2006 been recorded consistent with the fair value provisions of SFAS 123 for those periods, income before taxes, cash flow from operations, cash flow from financing activities, net income and earnings per share would have been reduced to the pro forma amounts indicated below (dollars in thousands, except per share data):
Net Income
As reported
Stock-based compensation cost, net of tax
Pro forma net income
Earnings per share
As reported:
Pro forma:
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(11) COMPREHENSIVE INCOME
The only component of comprehensive income reported by the Company is the unrealized gain or loss on securities available for sale. The amount of this unrealized gain or loss, net of tax, has been presented in the statement of income for each period as a component of other comprehensive income. Below is a summary of the tax effects of this unrealized gain or loss.
Unrealized gain (loss) during the period:
Before-tax amount
Tax (expense) benefit
Net-of-tax amount
The amount of unrealized gain or loss, net of tax, included in accumulated other comprehensive income is summarized below.
Unrealized gain (loss) on securities:
Beginning balance
Current period change
Ending balance
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(12) NET INCOME PER COMMON SHARE
Basic and diluted net income per common share are calculated as follows (dollars in thousands, except per share data):
Three Months Ended September 30, 2006
Income available to common stockholders
Effect of stock options
Income available to common stockholders plus assumed exercises of stock options
Three Months Ended September 30, 2005
Nine Months Ended September 30, 2006
Income available to common stockholders Plus assumed exercises of stock options
Nine Months Ended September 30, 2005
Below is the number and average exercise prices of options that were excluded from the computation of diluted net income per share for each period because the options’ exercise prices were greater than the average market price of the common shares.
Three Months Ended June 30, 2005
Six Months Ended June 30, 2005
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(13) 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, guaranteed student lending, residential mortgage lending, trust services, securities brokerage, electronic banking and insurance. The executive, operations and support groups represent executive management, operational support and corporate functions that are not allocated to the other business units.
The results of operations and selected financial information for the four business units are as follows (dollars in thousands):
Net interest income (expense)
Noninterest income
Total Assets:
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 revenues related to other financial services are allocated to the banks whose customers receive the services and, therefor, are not reflected in the income for other financial services. 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.
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(14) COMMITMENTS AND CONTINGENT LIABILITIES
In the second quarter of 2005, the Company reported a $3.3 million cash shortfall at one of its branches. The Company notified its fidelity bond carrier of the pending claim and that a thorough investigation would ensue. Based on the facts available at the time and outside consultation, the Company recorded as an expense its deductible on the coverage of $250 thousand and a receivable for the bond claim of approximately $3 million during the second quarter.
During the third quarter of 2005, it became apparent that the Company’s investigation was going to take much longer than management and the Company’s consultant originally expected. Specifically, the time frame for ongoing criminal investigation of the matter and the possibility of litigation amongst the parties has created uncertainty as to the timing of any recovery under the fidelity bond. While management still expects a significant recovery under its fidelity bond coverage, the amount and timing of the recovery was no longer reasonably estimable. As a result, the Company believes it was prudent to write off, and recognize as an expense, the $3 million bond claim receivable. The amount of the recovery will be recognized as income upon final agreement with the fidelity bond carrier.
In October of 2006, the Company completed and submitted its claim to the fidelity bond carrier. The amount and timing of the recovery is still not reasonably estimable.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SUMMARY
Net income for the third quarter of 2006 was $12.7 million, compared to $9.2 million for the third quarter of 2005. Diluted net income per share was $0.79, compared to $0.58 for the third quarter of 2005. For the first nine months of 2006, net income was $35.8 million, compared to $31.3 million for the first nine months of 2005. Diluted net income per share for the first nine months of 2006 was $2.23 compared to $1.96 for the first nine months of 2005.
Total assets at September 30, 2006 increased to $3.4 billion, up $201 million from December 31, 2005 and up $347 million from September 30, 2005. Total loans at September 30, 2006 grew to $2.33 billion, up $15.4 million from December 31, 2005 and up $65.8 million from September 30, 2005. Total deposits at September 30, 2006 were $2.97 billion, up $162.5 million from December 31, 2005 and up $286.7 million from September 30, 2005. Stockholders’ equity was $335 million at September 30, 2006, up $33 million from December 31, 2005 and up $41 million compared to September 30, 2005.
In December 2005, BancFirst Corporation completed the acquisition of Park State Bank (Park State), Nicoma Park, Oklahoma for cash of approximately $11 million. Park State had total assets of approximately $44 million. As a result of the acquisition, Park State became a wholly-owned subsidiary of BancFirst Corporation and was merged into BancFirst in February 2006. The acquisition was accounted for as a purchase. Accordingly, the effects of the acquisition are included in the Company’s consolidated financial statements from the date of the acquisition forward. The acquisition did not have a material effect on the results of operations of the Company for 2006 or 2005.
In January 2006, the Company approved a two-for-one split for shares of common stock to be issued in the form of a stock dividend. As a result of the stock split, the Company’s stockholders received one additional share of the Company’s common stock for each share of common stock held of record on February 16, 2006. The additional shares of our common stock were distributed on March 1, 2006. 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 June 30, 2006, the Company entered into an agreement to sell its 50% ownership in PremierSource, LLC (PremierSource). The Company decided to sell its interest in PremierSource as the Company has similar product offerings through wholly owned subsidiaries that have proven to be a more effective delivery channel. The Company did not have a controlling interest in PremierSource and accounted for the subsidiary on the equity method of accounting. The sale of PremierSource was completed during August 2006 and the Company had an investment in PremierSource of approximately $274,000 at the time of sale. The Company sold PremierSource for a one-time payment of approximately $163,000 and a three year share of gross revenues payable at a rate of 50%, 30%, and 20% for the years-ended June 30, 2007, 2008, and 2009, respectively. The sale of PremierSource, including future revenue sharing payments, and the loss of future earnings from operating PremierSource is not expected to have a significant impact on the results of the Company’s operations for 2006 or 2007.
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The Company is expanding its branch delivery system, primarily in the metropolitan areas of Oklahoma City and Tulsa. A new branch in south Oklahoma City, 134th and May Avenue, opened in August. Construction of new branches are underway in eastern Oklahoma County and in south Tulsa which are expected to open in late 2006 or early 2007.
RESULTS OF OPERATIONS
Third Quarter
Net interest income for the third quarter of 2006 was $36.4 million, up $3.4 million from the third quarter of 2005. While the net interest spread for the third quarter decreased 38 basis points to 3.76%, the net interest margin only decreased 2 basis points to 4.77% due to the change in mix of earning assets and interest bearing liabilities during a rising rate environment. The company’s earning assets surpassed $3 billion during the third quarter, an increase of $294 million over September 30 a year ago. Loans grew $65.8 million from the third quarter of 2005. The growth in loans and earning assets was supported by core deposit growth of $287 million. The loan loss provision was $315,000 down $558,000 from the same period a year ago. Nonperforming loans, 0.38% of assets, and net charge-offs, 0.01% of loans, remain at historically low levels. Noninterest income totaled $15.5 million, an increase of $615,000 or 4.1%. The increase is due to growth in revenues from trust services, growth in transaction accounts, and electronic banking services. Noninterest expenses were $31.6 million, a decrease of $1.6 million or 4.9%. The decrease in noninterest expense is due primarily to the write-off of a $3 million receivable the Company had recorded in the second quarter of 2005 for a fidelity bond claim offset by an increase in salaries and benefits, marketing and expansion.
The Company provided $315,000 for loan losses in the third quarter of 2006, compared to $873,000 for the same period of 2005. The Company’s nonperforming and restructured loans were $10.5 million in the third quarter of 2006 compared to $10.2 million at September 30, 2005. The percentage coverage of loan loss reserve to total nonperforming and restructured loans increased from 264.01% at September 30, 2005 to 276.91% at September 30, 2006. Net loan charge-offs were $63,000 for the third quarter of 2006, compared to $1.2 million for the third quarter of 2005. The net charge-offs represent an annualized rate of 0.01% and 0.21% of average total loans for the third quarter of 2006 and 2005, respectively.
Noninterest income of $15.5 million increased $615,000 compared to the third quarter of 2005 due to an increase in cash management and electronic banking services and trust revenues. Noninterest expense decreased $1.6 million to $31.6 million compared to the third quarter of 2005. The decrease in noninterest expense is due primarily to the write-off of a $3 million receivable the Company had recorded in the second quarter of 2005 for a fidelity bond claim offset by an increase in salaries and benefits, marketing and expansion. The effective tax rate on income before taxes was 36.2%, compared to 33.2% for the third quarter of 2005.
Year-To-Date
Net interest income for the first nine months of 2006 was $106.8 million, up $9.1 million over the first nine months of 2005. While the net interest spread for the nine months of 2006 decreased 32 basis points to 3.86%, the net interest margin increased 2 basis points to 4.78% due to the change in mix of earning assets and interest bearing liabilities during a rising rate environment. The net interest margin remained consistent at 4.78% for the first nine months of 2006 compared to 4.76% for the same period of 2005. While average earning assets increased by $244.3 million between the first nine months of 2006 and the first nine months of 2005, average loans increased by $136.0 million in the same
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period. The increase in average earning assets was substantially funded by an increase in total average deposits of approximately $249.1 million between the first nine months of 2006 and the first nine months of 2005. This, combined with the change in mix of average earning assets slowed the growth of the net interest margin while still producing a positive result.
The Company provided $1.9 million for loan losses in the first nine months of 2006, compared to $3.0 million for the same period of 2005. The decrease in the provision for loan losses is a result of the company’s high credit quality. The Company’s ratio of nonperforming loans to total loans remained steady at 0.45% at September 30, 2006 compared to 0.45% at September 30 a year ago and increased slightly over 0.40% at year end 2005. The allowance for loan losses to nonperforming loans and restructured assets decreased to 276.91% as of September 30, 2006 from 293.36% as of December 31, 2005 and increased from 264.01% as of September 30, 2005. Net charge-offs were $951,000 for the first nine months of 2006 compared to $1.8 million for the same period a year ago. The net charge-offs represent an annualized rate of 0.05% of average total loans for the first nine months of 2006 versus 0.11% for the first nine months of 2005.
Noninterest income of $43.6 million for the first nine months of 2006 increased $2.6 million compared to the same period in 2005 due to an increase in cash management and electronic banking services and trust revenues. Noninterest expense increased $4.1 million to $92.7 million compared to the first nine months of 2005. The Company’s efficiency ratio (total noninterest expenses divided by total revenues) improved from 63.94% for the first nine months of 2005 to 61.65% for the same period of 2006. Income tax expense increased $4.2 million compared to the first nine months of 2005. The effective tax rate on income before taxes increased to 35.7% compared to 33.5% for the first nine months of 2005; the increase was principally due to the recognition of tax credits on qualified loans during the 2005 period.
FINANCIAL POSITION
The aggregate of cash and due from banks, interest-bearing deposits with banks, and federal funds sold increased $203.1 million from December 31, 2005, and $326.6 million from September 30, 2005. The increases resulted from growth in federal funds sold of $266.8 million since December 31, 2005 and $352.9 million since September 30, 2005.
Total securities decreased $33.6 million compared to December 31, 2005 and $62.2 million compared to September 30, 2005. The size of the Company’s securities portfolio is a function of liquidity management and excess funds available for investment. The Company has maintained a short maturity on its securities portfolio to provide funds for loan growth. The net unrealized loss on securities available for sale, before taxes, was $1.9 million at the end of the third quarter of 2006, compared to an unrealized loss of $4.6 million at December 31, 2005 and an unrealized loss of $2.6 million at September 30, 2005. The average taxable equivalent yield on the securities portfolio for the third quarter of 2006 increased to 4.53% from 4.17% for the same quarter of 2005.
Total loans increased $15.4 million from December 31, 2005, and increased $65.8 million from September 30, 2005. The allowance for loan losses increased $1.5 million from year-end 2005 and increased $2.1 million from the third quarter of 2005. The allowance as a percentage of total loans was 1.24% at September 30, 2006 and 1.19% at September 30, 2005 and December 31, 2005. The allowance to nonperforming and restructured loans at the same dates was 276.91%, 264.01% and 293.36%, respectively.
Nonperforming and restructured loans totaled $10.5 million at September 30, 2006, compared to $9.4 million at December 31, 2005 and $10.2 million at September 30, 2005. The ratio of nonperforming and restructured loans to total loans for the same periods was 0.45%, 0.40% and 0.45%, respectively. The level of nonperforming loans and loan losses may rise over time as a result of economic and credit cycles.
Total deposits increased by $162.5 million compared to December 31, 2005, and by $286.7 million compared to September 30, 2005. The Company’s deposit base continues to be comprised substantially of core deposits, with large denomination certificates of deposit being only 8.97% of total deposits at September 30, 2006, compared to 8.61% at December 31, 2005 and 8.76% at September 30, 2005.
Short-term borrowings increased $147,000 from December 31, 2005, and $12.8 million from September 30, 2005. Fluctuations in short-term borrowings are a function of federal funds purchased from correspondent banks, customer demand for repurchase agreements and liquidity needs of the bank.
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Long-term borrowings decreased $2.2 million from year-end 2005 and $2.9 million from the third quarter of 2005. The Company uses these borrowings primarily to match-fund, long-term fixed rate loans.
Stockholders’ equity increased $32.8 million from year-end 2005 and $40.9 million from the third quarter of 2005, due to accumulated earnings offset by dividends. Average stockholders’ equity to average earning assets for the third quarter of 2006 was 9.54%, compared to 9.33% for the third quarter of 2005. The Company’s leverage ratio and total risk-based capital ratio were 10.30% and 14.41%, respectively, at September 30, 2006, well in excess of the regulatory minimums.
FUTURE APPLICATION OF ACCOUNTING STANDARDS
See notes (2) and (10) of the Notes to Consolidated Financial Statements for a discussion of recently issued and newly adopted accounting pronouncements.
SEGMENT INFORMATION
See note (13) of the Notes to Consolidated Financial Statements for disclosures regarding business segments.
FORWARD LOOKING STATEMENTS
The Company may make forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 with respect to earnings, credit quality, corporate objectives, interest rates and other financial and business matters. Forward-looking statements include estimates and give management’s current expectations or forecasts of future events. The Company cautions readers that these forward-looking statements are subject to numerous assumptions, risks and uncertainties, including economic conditions, the performance of financial markets and interest rates; legislative and regulatory actions and reforms; competition; as well as other factors, all of which change over time. Actual results may differ materially from forward-looking statements.
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SELECTED CONSOLIDATED FINANCIAL DATA
Per Common Share Data
Net income – basic
Net income – diluted
Cash dividends
Performance Data
Return on average assets
Return on average stockholders’ equity
Cash dividend payout ratio
Net interest spread
Net interest margin
Efficiency ratio
Net charge-offs to average total loans
Balance Sheet Data
Book value per share
Tangible book value per share
Average loans to deposits (year-to-date)
Average earning assets to total assets (year-to-date)
Average stockholders’ equity to average assets (year-to-date)
Asset Quality Ratios
Allowance for loan losses to total loans
Allowance for loan losses to nonperforming and restructured loans
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CONSOLIDATED AVERAGE BALANCE SHEETS AND INTEREST MARGIN ANALYSES
Taxable Equivalent Basis (Dollars in thousands)
Earning assets:
Loans (1)
Securities - taxable
Securities - tax exempt
Total earning assets
Nonearning assets:
Interest receivable and other assets
Total nonearning assets
Interest-bearing liabilities:
Transaction deposits
Savings deposits
Time deposits
Total interest-bearing liabilities
Interest-free funds:
Noninterest-bearing deposits
Interest payable and other liabilities
Stockholders’ equity
Total interest free funds
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Item 3. Quantitative and Qualitative Disclosures About Market Risk.
There have been no significant changes in the Registrant’s disclosures regarding market risk since December 31, 2005, the date of its annual report to stockholders.
Item 4. Controls and Procedures.
The Company’s Chief Executive Officer and Chief Financial Officer and Disclosure Committee, which includes the Company’s Chief Risk Officer, Chief Asset Quality Control Officer, Chief Internal Auditor, Senior Vice President of Corporate Finance, Holding Company Controller, Bank 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. There have been no changes in the Company’s internal controls or in other factors that could significantly affect internal controls subsequent to the date of their evaluation.
PART II – OTHER INFORMATION
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Item 6. Exhibits.
Exhibit
Number
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
/s/ Joe T. Shockley, Jr.
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