FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
For the quarterly period ended June 30, 2007
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 July 31, 2007 there were 15,724,536 shares of the registrant’s Common Stock outstanding.
PART I – FINANCIAL INFORMATION
BANCFIRST CORPORATION
CONSOLIDATED BALANCE SHEET
(Unaudited)
(Dollars in thousands, except per share data)
December 31,
2006
ASSETS
Cash and due from banks
Interest-bearing deposits with banks
Federal funds sold
Securities (market value: $459,130, $434,551 and $432,945, 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: 15,724,536, 15,716,195 and 15,764,310; respectively
Capital surplus
Retained earnings
Accumulated other comprehensive income (loss), net of income tax of $(530), $(2,703) and $54, 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
Early Extinguishment of Debt
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
Dividends on common stock
Common stock acquired and canceled
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
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 and due from banks used for acquisitions and dispositions
Purchases of securities:
Held for investment
Available for sale
Maturities of securities:
Proceeds from sales and calls of securities:
Net increase in federal funds sold
Purchase of life insurance
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 by investing activities
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in demand, transaction and savings deposits
Net increase in certificates of deposits
Net (decrease) increase in short-term borrowings
Net decrease in long-term borrowings
Prepayment of Jr. Subordinated Debentures
Issuance of common stock
Acquisition of common stock
Cash dividends paid
Net cash provided by financing activities
Net decrease 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 & McGrath, Inc., and BancFirst and its subsidiaries (the “Company”). The operating subsidiaries of BancFirst are Council Oak Investment Corporation, Citibanc Insurance Agency, Inc., BancFirst Agency, Inc., Lenders Collection Corporation, BancFirst Community Development Corporation, Council Oak Real Estate, Inc. and PremierSource LLC. PremierSource LLC was sold in August 2006 and Century Life Assurance Company was sold effective October 2006. 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, 2006, the date of the most recent annual report.
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.
(2) RECENT ACCOUNTING PRONOUNCEMENTS
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 adopted this new standard effective January 1, 2007. The Company has evaluated the effect of this pronouncement and determined that the adoption of this interpretation did not have a material effect on the Company’s consolidated financial statements.
In September 2006, the FASB issued FAS No. 157 (“FAS 157”), “Fair Value Measurements.” FAS 157 is effective for all financial statements issued for fiscal years beginning after November 15, 2007. FAS 157 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 FAS 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 misstatements added in the current year, and the balance sheet approach focusing on the cumulative amount of misstatements present in the 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
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material according to either the income statement or balance sheet approach. The Company adopted this new standard effective December 31, 2006. The Company has considered SAB 108 and determined that the adoption of SAB 108 did not have a material effect on the Company’s consolidated financial statements.
In February 2007, the FASB issued FAS No. 159 (“FAS 159”), “The Fair Value Option for Financial Assets and Financial Liabilities, including an amendment of FASB Statement No. 115.” FAS 159 allows entities to irrevocably elect fair value as the initial and subsequent measurement attribute for certain financial assets and financial liabilities that are not otherwise required to be measured at fair value, with changes in fair value recognized in earnings as they occur. FAS 159 also requires entities to report those financial assets and financial liabilities measure at fair value in a manner that separates those reported fair values from the carrying amounts of similar assets and liabilities measured using another measurement attribute on the face of the statement of financial position. Lastly, FAS 159 establishes presentation and disclosure requirements designed to improve comparability between entities that elect different measurement attributes for similar assets and liabilities. FAS 159 is effective for fiscal years beginning after November 15, 2007, with early adoption permitted if an entity also early adopts the provisions of FAS 157. The Company has not yet determined if, or to what extent, the Company will elect to use the fair value option to value financial assets and liabilities or the impact that the implementation of FAS 159 will have 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 tax credits for the 2006 year, however the Company reapplied for an allocation for 2007 and expects a determination to be made in the fall of 2007.
In March 2006, the Company organized a new subsidiary 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 opted to sell this interest to consolidate its insurance sales platform into a single wholly-owned subsidiary. 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 sale of PremierSource, including future revenue sharing payments, and the loss of future earnings from operating PremierSource did not have a significant impact on the results of the Company’s operations for 2006 and is not expected to have a significant impact on the results of the Company’s operations for 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 was 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 did not have a material effect on the results of operations of the Company for 2006 or 2007.
On September 6, 2006, the Company entered into an agreement to sell its 75% ownership in Century Life Assurance Company (“Century Life”) to American Underwriters Life Insurance Company. The Company decided to sell this subsidiary as the product line was not strategic for the Company. The effective date of the sale was October 1, 2006. Century Life reported approximately $945,000 of revenues and $111,000 of net income for the third quarter of 2006, and the Company reported a pre-tax gain on the sale approximating $640,000 during the fourth quarter of 2006. The resulting gain on the sale and the loss of future earnings from operating Century Life did not have a significant impact on the results of the Company’s operations for 2006 or 2007.
In November 2006, the Company announced its intent to exercise the optional prepayment terms of its 9.65%
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Junior Subordinated Debentures. The securities were redeemed effective January 15, 2007 for a redemption price equal to 104.825% of the aggregate $25,000,000 liquidation amount of the trust securities plus all accrued and unpaid interest to the redemption date. As a result of the prepayment, the Company incurred a loss of approximately $1.2 million after taxes at the time of the redemption. The loss reflects the premium paid and the acceleration of the unamortized issuance costs.
During the first quarter of 2007 the Company entered into an agreement to acquire Armor Assurance Company (Armor), an insurance agency in Muskogee, Oklahoma for cash of approximately $3.3 million and a $372,000 note payable in three equal annual installments. The transaction was consummated in April 2007. Armor had total assets of approximately $364,000. As a result of the acquisition, Armor was merged with the Company’s existing property casualty agency, Wilcox & Jones, to form Wilcox, Jones & McGrath.
In June 2007, the Company entered into an agreement to sell one of its investments held by Council Oak Investment Corporation, a wholly-owned subsidiary of BancFirst, that resulted in a one-time gain of approximately $7.8 million. The transaction was consummated on August 1, 2007. The Company intends to make a $1 million contribution to its charitable foundation with the funds from the gain. This one-time gain, net of related expenses, income taxes and the intended contribution is expected to have a net income effect of approximately $3.9 million.
In July 2007, the Company was awarded the $3 million bond claim by their fidelity bond carrier for the $3.3 million cash shortfall that was reported in the second quarter of 2005. See Note 14 – Commitments and Contingent Liabilities for further details.
(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; $24,696, $36,196 and $26,087, respectively)
Available for sale, at market value
Total
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 133 and 86 debt securities available for sale that had unrealized gains as of June 30, 2007 and 2006, respectively. These securities had a market value totaling approximately $69.9 million and $6.4 million, respectively, and unrealized gains totaling approximately $299,000 and $200,000, respectively. The Company also held 185 and 252 debt securities available for sale that had unrealized losses at June 30, 2007 and 2006, respectively. These securities had a market value totaling $327.5 million and $360.3 million and unrealized losses totaling $5.4 million and $9.9 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.
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(5) LOANS AND ALLOWANCE FOR LOAN LOSSES
The following is a schedule of loans outstanding by category (dollars in thousands):
December 31
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 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.
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Changes in the allowance for loan losses are summarized as follows (dollars in thousands):
Charge-offs
Recoveries
Net charge-offs
Provisions charged to operations
The net charge-offs by category are summarized as follows (dollars in thousands):
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 June 30, 2007
Three months ended June 30, 2006
Six months ended June 30, 2007
Six months ended June 30, 2006
Year ended December 31, 2006
Estimated Amortization:
Year ended December 31,
2007
2008
2009
2010
2011
10
The following is a summary of goodwill by business segment:
Three Months Ended:
June 30, 2007
Acquisitions
June 30, 2006
Six Months Ended:
Adjustments
(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. The reduction in the ratios from December 31, 2006 was related to the early redemption of the trust preferred securities.
Minimum
Required
Tier 1 capital
Total capital
Risk-adjusted assets
Leverage ratio
Tier 1 capital ratio
Total capital ratio
As of June 30, 2007 and 2006, and December 31, 2006, BancFirst 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.
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(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. The stock repurchase plan has been temporarily suspended until completion of the “modified Dutch auction” described in Note 15 – Tender Offer. At June 30, 2007 there were 233,052 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 to 2,500,000. At June 30, 2007, 90,860 shares were 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 June 30, 2007 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.
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 to 180,000 shares. At June 30, 2007, 35,000 shares were available for future grants. The options are exercisable beginning one year from the date of grant at the rate of 25% per year for four years, and expire at the end of fifteen years from the date of grant. Options outstanding as of June 30, 2007 will become exercisable through the year 2011. 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, 2007
Options granted
Options exercised
Options canceled
Outstanding at June 30, 2007
Exercisable at June 30, 2007
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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 FAS 123R. 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.
For the three months ended June 30, 2007 and 2006, the Company recorded share-based employee compensation expense of approximately $199,000 and $150,000, respectively, net of tax and approximately $373,000 and $292,000 for the six months ended June 30, 2007 and 2006, respectively.
The Company will continue to amortize the remaining fair value of these stock options of approximately $3.2 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
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.
(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
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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
(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):
Income
(Numerator)
Three Months Ended June 30, 2007
Income available to common stockholders
Effect of stock options
Income available to common stockholders plus assumed exercises of stock options
Three Months Ended June 30, 2006
Six Months Ended June 30, 2007
Six Months Ended June 30, 2006
14
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.
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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):
FinancialServices
Executive,
Operations& Support
Net interest income (expense)
Noninterest income
Total Assets:
December 31, 2006
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 had created uncertainty as to the timing of any recovery under the fidelity bond. While management still expected 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 believed it was prudent to write off, and recognize as an expense, the $3 million bond claim receivable.
In July 2007, the fidelity bond carrier awarded the Company the $3 million bond claim. The recovery will be included in other non-interest income during the third quarter of 2007.
(15) TENDER OFFER
On August 3, 2007, the Company commenced a modified Dutch Auction self-tender offer for up to 500,000 shares, of its common stock, representing approximately 3.18% of the total shares outstanding. The tender offer price range is from $39.50 to $45.00 per share. Shareholders may specify the number of shares and prices within the tender offer price range at which they are willing to tender their shares. The Company will determine the final purchase price that will enable it to purchase up to the maximum number of shares from those shareholders who agreed to sell shares at or below the purchase price. All shares purchased will be purchased at the final price. If more than 500,000 shares are tendered at or below the purchase price, the excess will be prorated among those shareholders whose shares are being purchased. Cash on hand will be used by the Company to pay for the purchase of the stock.
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SUMMARY
Net income for the second quarter of 2007 was $13.4 million, compared to $12.2 million for the second quarter of 2006. Diluted net income per share was $0.83, compared to $0.76 for the second quarter of 2006. For the first six months of 2007, net income was $24.5 million, compared to $23.1 million for the first six months of 2006. Diluted net income per share for the first six months of 2007 was $1.52 compared to $1.44 for the first six months of 2006.
Total assets at June 30, 2007 increased to $3.6 billion, up $183 million from December 31, 2006 and up $212 million from June 30, 2006. Total loans at June 30, 2007 increased to $2.35 billion, up $20.3 million from December 31, 2006 and up $5.9 million from June 30, 2006. Total deposits at June 30, 2007 were $3.15 billion, up $177.2 million from December 31, 2006 and up $196.6 million from June 30, 2006. Stockholders’ equity was $365 million at June 30, 2007, up $16 million from December 31, 2006 and up $44 million compared to June 30, 2006.
In November 2006, the Company announced its intent to exercise the optional prepayment terms of its 9.65% Junior Subordinated Debentures. The securities were redeemed effective January 15, 2007 for a redemption price equal to 104.825% of the aggregate $25,000,000 liquidation amount of the trust securities plus all accrued and unpaid interest to the redemption date. As a result of the prepayment, the Company incurred a loss of approximately $1.2 million after taxes at the time of the redemption. The loss reflects the premium paid and the acceleration of the unamortized issuance costs.
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RESULTS OF OPERATIONS
Second Quarter
Net interest income for the second quarter of 2007 was $37.4 million, up $1.7 million from the second quarter of 2006. While the net interest spread for the second quarter decreased 24 basis points to 3.62%, the net interest margin only decreased 10 basis points to 4.68% due to the higher interest rate environment. The company’s average earning assets reached $3.2 billion during the second quarter, an increase of $188 million over June 30 a year ago. Most of the growth in earnings assets was in Federal Funds Sold, up $175.8 million while loans grew $6 million from the second quarter of 2006. The growth in loans and earning assets was supported by deposit growth of $197 million from customer relationships. The loan loss provision was $132,000, down $785,000 from the same period a year ago. Net loan charge-offs were $57,000 for the second quarter of 2007, compared to $479,000 for the second quarter of 2006. While total nonperforming and restructured loans increased to $15.6 million from $8.6 million a year ago, nonperforming loans, 0.46% of assets, and net charge-offs, 0.01% of loans, remain at historically low levels.
Noninterest income totaled $15.2 million, an increase of $503,000 or 3.4%. The increase was due to growth in revenues from transaction accounts, electronic banking services and increase on cash value of life insurance. Noninterest expenses were $31.6 million, an increase of $792,000 or 2.57%. During the quarter the Company benefited from expense reimbursements and other expense reductions approximating $650,000, primarily resulting from lower health care costs and reimbursement of loan fees. The overall increase in noninterest expense was due primarily to the opening of five new branches within the last year. Income tax expense increased $987,000 compared to the second quarter of 2006. The effective tax rate on income before taxes was 35.9%, compared to 34.9% for the second quarter of 2006.
Year-To-Date
Net interest income for the first six months of 2007 was $73.8 million, up $3.5 million over the first six months of 2006. While the net interest spread for the six months of 2007 decreased 24 basis points to 3.67%, the net interest margin only decreased 6 basis points to 4.72% due to the higher interest rate environment. While average earning assets increased by $187.6 million between the first six months of 2007 and the first six months of 2006, average loans increased by $23.8 million in the same period while Federal Funds Sold increase an average of $169.6 million. The increase in average earning assets was substantially funded by an increase in total average deposits of approximately $165.1 million between the first six months of 2007 and the first six months of 2006. The increase in earning assets in lower yielding Federal Funds Sold combined with higher costs of funds compressed our net interest spread while the rising rate environment during this time helped support our net interest margin with only a slight decrease.
The Company provided $101,000 for loan losses in the first six months of 2007, compared to $1.6 million for the same period of 2006. The decrease in the provision for loan losses is a result of the company’s high credit quality and modest loan growth. Net charge-offs were $233,000 for the first six months of 2007 compared to $888,000 for the same period a year ago. The net charge-offs represent an annualized rate of 0.02% of average total loans for the first six months of 2007 versus 0.08% for the first six months of 2006.
Noninterest income of $29.1 million for the first six months of 2007 increased $976,000 compared to the same period in 2006 due to an increase in cash management and electronic banking services, securities transactions, and increased revenues from the acquisition of Armor during the second quarter of 2007. Noninterest expense increased $3.9 million to $65.0 million compared to the first six months of 2006. Noninterest expense included a $1.9 million one time pre-tax expense for the early redemption of the trust preferred securities and expense reimbursements and other expense reductions of approximately $650,000. The remaining increase of approximately $2.65 million was due in part to the opening of five new branches within the last year. Income tax expense increased $574,000 compared to the first six months of 2006. The effective tax rate on income before taxes remained consistent at 35.1% compared to 35.5% for the first six months of 2006.
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FINANCIAL POSITION
The aggregate of cash and due from banks, interest-bearing deposits with banks, and federal funds sold increased $312.8 million from December 31, 2006, and $156.3 million from June 30, 2006. The increases resulted from growth in federal funds sold of $375.0 million since December 31, 2006 and $188.6 million since June 30, 2006.
Total securities increased $26.4 million compared to December 31, 2006 and $24.6 million compared to June 30, 2006. 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 manage rate exposure and to provide funds for loan growth. The net unrealized gain on securities available for sale, before taxes, was $2.1 million at the end of the second quarter of 2007, compared to an unrealized gain of $154,000 at December 31, 2006 and an unrealized loss of $7.7 million at June 30, 2006. The average taxable equivalent yield on the securities portfolio for the second quarter of 2007 increased to 4.76% from 4.58% for the same quarter of 2006.
Total loans increased $20.3 million from December 31, 2006, and increased $5.9 million from June 30, 2006. The allowance for loan losses decreased $132,000 from year-end 2006 and $659,000 from the second quarter of 2006. The allowance as a percentage of total loans was 1.18%, 1.19% and 1.21% at June 30, 2007, December 31, 2006 and June 30, 2006, respectively. The allowance to nonperforming and restructured loans at the same dates was 177.18%, 231.41% and 328.88%, respectively.
Nonperforming and restructured loans totaled $15.6 million at June 30, 2007, compared to $12.0 million at December 31, 2006 and $8.6 million at June 30, 2006. The ratio of nonperforming and restructured loans to total loans for the same periods was 0.66%, 0.51% and 0.37%, 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 $177 million compared to December 31, 2006, and by $197 million compared to June 30, 2006. The Company’s deposit base continues to be comprised substantially of core deposits, with large denomination certificates of deposit being only 8.78% of total deposits at June 30, 2007, compared to 8.70% at December 31, 2006 and 8.74% at June 30, 2006.
Short-term borrowings increased $12.6 million from December 31, 2006, and $2.0 million from June 30, 2006. 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.
Long-term borrowings decreased $275,000 from year-end 2006 and $1.6 million from the second quarter of 2006. The Company uses these borrowings primarily to match-fund, long-term fixed rate loans.
Stockholders’ equity increased $16 million from year-end 2006 and $44 million from the second quarter of 2006, due to accumulated earnings offset by dividends. Average stockholders’ equity to average assets for the second quarter of 2007 was 10.11%, compared to 9.46% for the second quarter of 2006. The Company’s leverage ratio and total risk-based capital ratio were 9.80% and 14.03%, respectively, at June 30, 2007, well in excess of the regulatory minimums.
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FUTURE APPLICATION OF ACCOUNTING STANDARDS
See note (2) 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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Average
Balance
Interest
Income/
Expense
Yield/
Rate
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There have been no significant changes in the Registrant’s disclosures regarding market risk since December 31, 2006, the date of its annual report to stockholders.
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
At the Company’s Annual Meeting of Stockholders held on May 24, 2007, the following matters were voted upon, with the votes indicated below:
Description of Proposal
Proposal No. 1-Election of Directors
Class II Directors
William H. Crawford
K. Gordon Greer
Dr. Donald B. Halverstadt
William O. Johnstone
Dave R. Lopez
Melvin Moran
David E. Rainbolt
Proposal No. 2-Ratification of Grant Thornton LLP as independent registered public accounting firm
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Exhibit
Number
26
27
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
(Registrant)
/s/ Joe T. Shockley, Jr.
(Signature)
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