BANCFIRST CORP /OK/ 10-Q

Item 1. Financial Statements. BANCFIRST CORPORATION CONSOLIDATED BALANCE SHEETS (Dollars in thousands) June 30, December 31, 2020 2019 (unaudited) (see Note 1) ASSETS Cash and due from banks $ 205,227 $ 222,043 Interest-bearing deposits with banks 1,583,116 1,646,238 Federal funds sold — 1,000 Securities held for investment (fair value: $ 3,048 and $ 1,903 , respectively) 3,055 1,903 Securities available for sale at fair value 604,976 489,723 Loans held for sale 21,902 11,001 Loans (net of unearned interest) 6,674,954 5,662,143 Allowance for credit losses ( 89,500 ) ( 54,238 ) Loans, net of allowance for credit losses 6,585,454 5,607,905 Premises and equipment, net 232,517 206,275 Other real estate owned 4,668 5,607 Intangible assets, net 20,882 22,608 Goodwill 149,922 148,604 Accrued interest receivable and other assets 200,734 202,851 Total assets $ 9,612,453 $ 8,565,758 LIABILITIES AND STOCKHOLDERS' EQUITY Deposits: Noninterest-bearing $ 3,709,330 $ 2,956,370 Interest-bearing 4,777,341 4,527,265 Total deposits 8,486,671 7,483,635 Short-term borrowings 8,100 1,100 Long-term borrowings 3,000 — Accrued interest payable and other liabilities 53,679 49,230 Junior subordinated debentures 26,804 26,804 Total liabilities 8,578,254 7,560,769 Stockholders' equity: Senior preferred stock, $ 1.00 par; 10,000,000 shares authorized; none issued — — Cumulative preferred stock, $ 5.00 par; 900,000 shares authorized; none issued — — Common stock, $ 1.00 par, 40,000,000 shares authorized; shares issued and outstanding: 32,662,691 and 32,694,268 , respectively 32,663 32,694 Capital surplus 154,692 153,353 Retained earnings 837,154 815,488 Accumulated other comprehensive income, net of income tax of $ 3,278 and $ 1,187 , respectively 9,690 3,454 Total stockholders' equity 1,034,199 1,004,989 Total liabilities and stockholders' equity $ 9,612,453 $ 8,565,758 The accompanying Notes are an integral part of these consolidated financial statements. 2 BANCFIRST CORPORATION CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited) (Dollars in thousands, except per share data) Three Months Ended Six Months Ended June 30, June 30, 2020 2019 2020 2019 INTEREST INCOME Loans, including fees $ 78,855 $ 70,990 $ 155,373 $ 139,720 Securities: Taxable 2,047 3,855 4,633 8,190 Tax-exempt 154 118 252 244 Federal funds sold — — — 2 Interest-bearing deposits with banks 395 8,135 5,164 15,883 Total interest income 81,451 83,098 165,422 164,039 INTEREST EXPENSE Deposits 3,750 13,802 13,150 27,339 Short-term borrowings 1 12 8 22 Junior subordinated debentures 492 492 983 983 Total interest expense 4,243 14,306 14,141 28,344 Net interest income 77,208 68,792 151,281 135,695 Provision for credit losses 19,333 2,433 38,916 4,117 Net interest income after provision for credit losses 57,875 66,359 112,365 131,578 NONINTEREST INCOME Trust revenue 3,368 3,250 7,023 6,427 Service charges on deposits 16,760 19,114 35,564 36,777 Securities transactions (includes no accumulated other comprehensive income reclassifications) ( 595 ) 821 ( 545 ) 821 Income from sales of loans 1,561 868 2,342 1,566 Insurance commissions 4,443 4,420 10,119 9,685 Cash management 4,255 4,402 8,575 8,178 Gain/(loss) on sale of other assets 49 ( 7 ) 135 ( 11 ) Other 2,241 1,209 4,014 2,635 Total noninterest income 32,082 34,077 67,227 66,078 NONINTEREST EXPENSE Salaries and employee benefits 42,226 36,124 81,982 72,295 Occupancy, net 3,839 2,953 7,385 5,580 Depreciation 3,544 3,015 7,035 6,000 Amortization of intangible assets 968 758 1,932 1,517 Data processing services 1,629 1,262 3,321 2,742 Net income from other real estate owned ( 12 ) 97 ( 2,147 ) ( 387 ) Marketing and business promotion 1,485 1,919 3,840 4,180 Deposit insurance 365 544 501 1,077 Other 10,607 9,936 22,187 19,810 Total noninterest expense 64,651 56,608 126,036 112,814 Income before taxes 25,306 43,828 53,556 84,842 Income tax expense 4,576 9,661 10,218 18,838 Net income $ 20,730 $ 34,167 $ 43,338 $ 66,004 NET INCOME PER COMMON SHARE Basic $ 0.64 $ 1.04 $ 1.33 $ 2.02 Diluted $ 0.63 $ 1.02 $ 1.31 $ 1.98 OTHER COMPREHENSIVE (LOSS) GAIN Unrealized (loss) gain on securities, net of tax of $ 85 , $( 1,112 ), $( 2,091 ) and $( 1,980 ) respectively ( 189 ) 3,254 6,236 5,794 Comprehensive income $ 20,541 $ 37,421 $ 49,574 $ 71,798 The accompanying Notes are an integral part of these consolidated financial statements. 3 BANCFIRST CORPORATION CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (Unaudited) (Dollars in thousands) Three Months Ended Six Months Ended June 30, June 30, 2020 2019 2020 2019 COMMON STOCK Issued at beginning of period $ 32,647 $ 32,618 $ 32,694 $ 32,604 Shares issued for stock options 16 22 28 36 Shares acquired and canceled — — ( 59 ) — Issued at end of period $ 32,663 $ 32,640 $ 32,663 $ 32,640 CAPITAL SURPLUS Balance at beginning of period $ 153,999 $ 150,195 $ 153,353 $ 149,709 Common stock issued for stock options 287 433 507 745 Stock-based compensation arrangements 406 367 832 541 Balance at end of period $ 154,692 $ 150,995 $ 154,692 $ 150,995 RETAINED EARNINGS Balance at beginning of period $ 826,855 $ 744,713 $ 815,488 $ 722,615 Net income 20,730 34,167 43,338 66,004 Cumulative effect of change in accounting principle, net of tax of $ 925 (Note 1) — — 2,270 — Dividends on common stock ($ 0.32 , $ 0.30 , $ 0.64 and $ 0.60 per share, respectively) ( 10,431 ) ( 9,790 ) ( 20,903 ) ( 19,529 ) Common stock acquired and canceled — — ( 3,039 ) — Balance at end of period $ 837,154 $ 769,090 $ 837,154 $ 769,090 ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) Unrealized gain/(losses) on securities: Balance at beginning of period $ 9,879 $ 401 $ 3,454 $ ( 2,139 ) Net change ( 189 ) 3,254 6,236 5,794 Balance at end of period $ 9,690 $ 3,655 $ 9,690 $ 3,655 Total stockholders’ equity $ 1,034,199 $ 956,380 $ 1,034,199 $ 956,380 The accompanying Notes are an integral part of these consolidated financial statements. 4 BANCFIRST CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOW (Unaudited) (Dollars in thousands) Six Months Ended June 30, 2020 2019 CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 43,338 $ 66,004 Adjustments to reconcile to net cash provided by operating activities: Provision for credit losses 38,916 4,117 Depreciation and amortization 8,967 7,517 Net amortization of securities premiums and discounts ( 340 ) ( 3,650 ) Realized securities losses (gains) 545 ( 821 ) Gain on sales of loans ( 2,342 ) ( 1,566 ) Cash receipts from the sale of loans originated for sale 171,433 98,587 Cash disbursements for loans originated for sale ( 179,996 ) ( 99,782 ) Deferred income tax benefit ( 3,987 ) ( 893 ) Gain on sale of other assets ( 2,289 ) ( 455 ) Increase in interest receivable ( 3,438 ) ( 2,064 ) (Decrease)/increase in interest payable ( 943 ) 461 Amortization of stock-based compensation arrangements 832 541 Excess tax benefit from stock-based compensation arrangements ( 143 ) ( 263 ) Other, net 12,094 4,374 Net cash provided by operating activities 82,647 72,107 INVESTING ACTIVITIES Net cash received from acquisitions, net of cash paid 18,397 — Net decrease in federal funds sold 1,000 — Purchases of held for investment securities ( 1,395 ) ( 1,010 ) Purchases of available for sale securities ( 255,178 ) — Proceeds from maturities, calls and paydowns of held for investment securities 470 440 Proceeds from maturities, calls and paydowns of available for sale securities 148,365 358,972 Purchase of equity securities ( 234 ) ( 2,649 ) Proceeds from paydowns and sales of equity securities 437 1,892 Net change in loans ( 993,997 ) ( 121,426 ) Purchases of premises, equipment and computer software ( 30,292 ) ( 12,907 ) Purchase of tax credits ( 357 ) ( 6,946 ) Other, net 5,641 3,053 Net cash (used in) provided by investing activities ( 1,107,143 ) 219,419 FINANCING ACTIVITIES Net change in deposits 958,030 8,118 Net change in short-term borrowings 7,000 ( 675 ) Proceeds from long-term borrowings 3,000 — Issuance of common stock in connection with stock options, net 535 781 Common stock acquired ( 3,098 ) — Cash dividends paid ( 20,909 ) ( 19,567 ) Net cash provided by (used in) financing activities 944,558 ( 11,343 ) Net (decrease)/increase in cash, due from banks and interest-bearing deposits ( 79,938 ) 280,183 Cash, due from banks and interest-bearing deposits at the beginning of the period 1,868,281 1,424,255 Cash, due from banks and interest-bearing deposits at the end of the period $ 1,788,343 $ 1,704,438 SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the period for interest $ 15,053 $ 27,882 Cash paid during the period for income taxes $ 5,075 $ 17,175 Noncash investing and financing activities: Fair value of assets acquired in acquisitions $ 47,838 $ — Liabilities assumed in acquisitions $ 45,040 $ — Unpaid common stock dividends declared $ 10,447 $ 9,788 The accompanying Notes are an integral part of these consolidated financial statements. 5 BANCFIRST CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (1) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The accounting and reporting policies of BancFirst Corporation and its subsidiaries (the “Company”) conform to accounting principles generally accepted in the United States of America (U.S. GAAP) and general practice within the banking industry. A summary of significant accounting policies can be found in Note (1) to the Company’s Annual Report on Form 10-K for the year ended December 31, 2019. Basis of Presentation The accompanying unaudited interim consolidated financial statements include the accounts of BancFirst Corporation, Council Oak Partners, LLC, BancFirst Insurance Services, Inc., BancFirst Risk & Insurance Company, Pegasus Bank and BancFirst and its subsidiaries. The principal operating subsidiaries of BancFirst are Council Oak Investment Corporation, Council Oak Real Estate, Inc., BFTower, LLC and BancFirst Agency, Inc. All significant intercompany accounts and transactions have been eliminated. Assets held in a fiduciary or agency capacity are not assets of the Company and, accordingly, are not included in the unaudited interim consolidated financial statements. The accompanying unaudited interim consolidated financial statements and notes are presented in accordance with U.S. GAAP for interim financial information and the instructions for Form 10-Q adopted by the Securities and Exchange Commission (“SEC”). The information contained in the financial statements and footnotes included in BancFirst Corporation’s Annual Report on Form 10-K for the year ended December 31, 2019, should be referred to in connection with these unaudited interim consolidated financial statements. Operating results for the interim periods disclosed herein are not necessarily indicative of the results that may be expected for a full year or any future period. The unaudited interim consolidated financial statements contained herein reflect all adjustments which are, in the opinion of management, necessary to provide a fair statement of the financial position and results of operations of the Company for the interim periods presented. All such adjustments are of a normal and recurring nature. Reclassifications Certain items in prior financial statements have been reclassified to conform to the current presentation. Such reclassifications had no effect on previously reported cash flows, stockholders’ equity or comprehensive income. Use of Estimates in the Preparation of Financial Statements The preparation of financial statements in conformity with accounting principles generally accepted in the United States inherently involves the use of estimates and assumptions that affect the amounts reported in the financial statements and the related disclosures. These estimates relate principally to the determination of the allowance for credit losses, income taxes, the fair value of financial instruments and the valuation of intangibles. Such estimates and assumptions may change over time and actual amounts realized may differ from those reported. Recent Accounting Pronouncements Standards Adopted During Current Period: In August 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2018-13, “Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement (Topic 820).” ASU 2018-13 modifies disclosure requirements on fair value measurements in Topic 820. ASU 2018-13 was effective for the Company on January 1, 2020. ASU No. 2018-13 was adopted on January 1, 2020 and did not have a significant impact on the Company’s financial statements. On January 1, 2020, the Company adopted ASU No. 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” Accounting Standards Codification (“ASC”) 326 replaces the incurred loss methodology with an expected loss methodology that is referred to as the current expected credit loss (“CECL”) methodology. The measurement of expected credit losses under the CECL methodology is applicable to financial assets measured at amortized cost, including loan receivables and held-to-maturity debt securities. It also applies to off-balance sheet credit exposures not accounted for as insurance (loan commitments, standby letters of credit, financial guarantees, and other similar instruments) and net investments in 6 leases recognized by a lessor in accordance with Topic 842 on leases. In addition, ASC 326 made changes to the accounting for purchased loans and securities with credit deterioration and available-for-sale debt securities. The Company adopted ASC 326 using the modified retrospective method for all financial assets measured at amortized cost and off-balance sheet credit exposures. Operating results for periods from January 1, 2020 are presented in accordance with ASC 326 while prior period amounts continue to be reported in accordance with previously applicable standards and the accounting policies described in our 2019 Form 10-K. The Company recorded a net increase to retained earnings of $ 2.3 million, net of tax of $ 925,000 , as of January 1, 2020 for the cumulative effect of adopting ASC 326, and the impact on our results of operations and cash flows was not material. The Company adopted ASC 326 using the prospective transition approach for financial assets purchased with credit deterioration (PCD) that were previously classified as purchased credit impaired (PCI) and accounted for under ASC 310-30. In accordance with the standard, management did not reassess whether PCI assets met the criteria of PCD assets as of the date of adoption. On January 1, 2020, the amortized cost basis of the PCD assets was adjusted to reflect the addition of approximately $ 1.2 million to the allowance for credit losses. The Company has not recorded an allowance for credit losses against its available-for-sale securities, as the credit risk is not material. The following table illustrates the impact of ASC 326 on the allowance for credit losses on the Company’s loans as of January 1, 2020. January 1, 2020 As Reported Under ASC 326 Pre ASC 326 Adoption Impact of ASC 326 Adoption (Dollars in thousands) BancFirst Real estate: Commercial real estate owner occupied $ 2,819 $ 5,625 $ ( 2,806 ) Commercial real estate non-owner occupied 2,851 8,358 ( 5,507 ) Construction and development < 60 months 1,158 2,214 ( 1,056 ) Construction residential real estate < 60 months 1,155 1,933 ( 778 ) Residential real estate first lien 4,861 8,692 ( 3,831 ) Residential real estate all other 1,359 2,767 ( 1,408 ) Farmland 1,413 2,821 ( 1,408 ) Commercial and agricultural non-real estate 27,194 15,345 11,849 Consumer non-real estate 2,630 3,252 ( 622 ) Other loans 2,516 2,632 ( 116 ) Pegasus Bank 3,087 599 2,488 Allowance for credit losses on loans $ 51,043 $ 54,238 $ ( 3,195 ) The estimate of expected credit losses considers historical credit loss information that is adjusted for current conditions and reasonable and supportable forecasts. In order to estimate expected losses using historical loss information, the Company elected to utilize a methodology known as vintage loss analysis for substantially all of our loan portfolio. Vintage loss analysis measures impairment based on the age of the accounts and the historical asset performance of assets with similar risk characteristics. Vintage loss analysis accounts for expected losses by allowing the Company to calculate the cumulative loss rates of a given loan pool and in so doing, determine the loan pool’s lifetime expected loss experience. This includes a reasonable approximation of probable and estimable future losses determined by applying historical net charge off information to forward looking qualitative and environmental factors. First, the Company determined the appropriate type of financial assets that share similar risk characteristics, and then the Company developed a cumulative loss curve for the applicable financial assets based on historical data using different “vintages” analyzed by year of origination. This is done by dividing each year’s net charge-offs by the original principal balance. The respective vintage’s original principal balance remains the denominator in each annual calculation, as it references the specific vintage’s original balance. The loss experience of this original balance is tracked annually and summed over the life of the loan for each separate loan pool leaving a cumulative, life of credit loss rate based on historic averages weighted towards more recent loss experience. In addition to life of credit loss data, primary drivers like macroeconomic indicators of qualitative factors are used as adjustments to the expected loss calculation to reach a forecast supported by both quantitative and qualitative data points. The intent is to express the impact of changes in external factors while incorporating analysis of where the loan pool is in its loss history. Loans that do not share risk characteristics are evaluated on an individual basis. Loans evaluated individually are not included in the collective evaluation. The Company has made the accounting policy election to use the fair value of the collateral to measure expected credit losses on collateral-dependent financial assets. When management determines that foreclosure is probable or when the borrower is experiencing financial difficulty at the reporting date and repayment is expected to be provided substantially through the operation or sale of the collateral, expected credit losses are based on the fair value of the collateral at the reporting date, adjusted for selling costs as appropriate. 7 In connection with the adoption of ASC 326, the Company revised certain accounting policies and implemented accounting policy elections. The revised accounting policies are described below. Loans : Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at amortized cost. Amortized cost is the principal balance outstanding, net of purchase premiums and discounts. Accrued interest receivable totaled $ 31.0 million at June 30, 2020 and $ 27.4 million at December 31, 2019, and was reported in accrued interest receivable and other assets on the consolidated balance sheets. The Company has made the accounting policy election to exclude accrued interest receivable on loans from the estimate of credit losses. Interest income is accrued on the unpaid principal balance using the simple-interest method on the daily balances of the principal amounts outstanding. Interest income on consumer and commercial loans is discontinued and placed on nonaccrual status at the time the loan is 90 days delinquent unless the loan is well secured and in process of collection. Consumer loans are charged off at 180 days past due and commercial loans are charged off to the extent principal or interest is deemed uncollectible. Past-due status is based on the contractual terms of the loan. In all cases, loans are placed on nonaccrual or charged off at an earlier date if collection of principal or interest is considered doubtful. All interest accrued but not received for loans placed on nonaccrual is reversed against interest income. Interest received on such loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Under the cost-recovery method, interest income is not recognized until the loan balance is reduced to zero. Under the cash-basis method, interest income is recorded when the payment is received in cash. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured. Troubled debt restructurings are loans on which, due to the borrower’s financial difficulties, the Company has granted a concession that the Company would not otherwise consider for borrowers of similar credit quality. This may include a transfer of real estate or other assets from the borrower, a modification of loan terms, or a combination of the two. Modifications of terms that could potentially qualify as a restructuring include reduction of contractual interest rate, extension of the maturity date at a contractual interest rate lower than the current rate for new debt with similar risk, and a reduction of the face amount of debt or forgiveness of either principal or accrued interest. A loan continues to qualify as restructured until a consistent payment history or change in the borrower’s financial condition has been evidenced, generally for no less than twelve months. If the restructuring agreement specifies an interest rate at the time of the restructuring that is greater than or equal to the rate that the Company is willing to accept for a new extension of credit with comparable risk, then the loan is no longer considered a restructured loan if it is in compliance with the modified terms in calendar years after the year of restructure. Purchased Credit Deteriorated (PCD) Loans : The Company has purchased loans, some of which have experienced more than insignificant credit deterioration since origination. An allowance for credit losses is determined using the same methodology as other loans held for investment. The initial allowance for credit losses determined on a collective basis is allocated to individual loans. The sum of the loan’s purchase price and allowance for credit losses becomes its initial amortized cost basis. The difference between the initial amortized cost basis and the par value of the loan is a noncredit discount or premium, which is amortized into interest income over the life of the loan. Subsequent changes to the allowance for credit losses are recorded through provision expense. Allowance for Credit Losses - Loans : The allowance for credit losses is a valuation account that is deducted from the loans amortized cost basis to present the net amount expected to be collected on the loans. Loans are charged off against the allowance when management believes the uncollectibility of a loan balance is confirmed. Expected recoveries do not exceed the aggregate of amounts previously charged-off and expected to be charged-off. The allowance for credit losses is measured on a collective (pool) basis when similar risk characteristics exist. In connection with our adoption of ASC 326, changes were made to our primary portfolio segments to align with the methodology applied in determining the allowance under CECL. The Company has identified the following portfolio segments, which includes the applicable weighted average life, and measures the allowance for credit losses using the vintage loss analysis adjusted for qualitative factors: 8 Loan Segment Life (in years) BancFirst Real estate: Commercial real estate owner occupied 8 Commercial real estate non-owner occupied 6 Construction and development < 60 months 3 Construction residential real estate < 60 months 1 Residential real estate first lien 13 Residential real estate all other 6 Farmland 12 Commercial and agricultural non-real estate 3 Consumer non-real estate 4 Other loans 9 Pegasus Bank 4 These portfolio segments are separately identified because they exhibit distinctive risk characteristics, such as financial asset types, loan purpose, collateral, and industry of the borrower. A summary of our primary portfolio segments is as follows: Commercial real estate owner occupied. Commercial real estate owner occupied are nonresidential property loans for which the primary source of repayment is the cash flow from the ongoing operations and activities conducted by the entity, or an affiliate of the entity, who owns the property. This category includes, among other loans, loans secured by office buildings, garden office buildings, manufacturing facilities, warehouse and flex warehouse facilities, hospitals, and car washes unless the property is owned by an investor who leases the property to the operator who, in turn, is not related to or affiliated with the investor. Commercial real estate non-owner occupied. Commercial real estate non-owner occupied are nonresidential property loans where the primary source of repayment is derived from rental income associated with the property or the proceeds of the sale, refinancing, or permanent financing of the property. This category includes, among other loans, loans secured by shopping centers, office buildings, hotels/motels, nursing homes, assisted-living facilities, mini-storage warehouse facilities, and similar properties. Construction and development < 60 months . Residential development loans include loans to develop raw land into a residential development. Advances on the loans typically include land costs, hard costs (grading, utilities, roads, etc.), soft costs (engineering fees, development fees, entitlement fees, etc.) and carrying costs until the development is completed. Upon completion of the development, the loan is typically repaid through the sale of lots to homebuilders. Construction residential real estate < 60 months. Residential construction includes loans to builders for speculative or custom homes, as well as direct loans to individuals for construction of their personal residence. Custom construction and self-construction loans typically will have commitments in place for long-term financing at the completion of construction. Speculative construction loans generally will have periodic curtailment plans beginning after completion of construction and a reasonable time for sales to have occurred. Residential real estate first lien. Residential real estate first lien loans includes all closed-end loans secured by first liens on 1-to-4 family residential properties. This category includes property containing 1-to-4 dwelling units (including vacation homes) or more than four dwelling units if each is separated from other units by dividing walls that extend from ground to roof. This category also includes individual condominium dwelling units and loans secured by an interest in individual cooperative housing units, even if in a building with five or more dwelling units. Residential real estate all other. Residential real estate all other loans includes loans secured by junior (i.e., other than first) liens on 1-to-4 family residential properties. This category includes loans secured by junior liens even if the Company also holds a loan secured by a first lien on the same 1-to-4 family residential property. Farmland. This category includes loans secured by all land known to be used or usable for agricultural purposes, such as crop and livestock production. Farmland includes grazing or pasture land, whether tillable or not and whether wooded or not. Commercial and agricultural non-real estate. Commercial and agricultural non-real estate represent loans for working capital, facilities acquisition or expansion, purchase of equipment and other needs of commercial customers primarily located within Oklahoma. Loans in this category include commercial and industrial, oil and gas, agriculture and state and political subdivisions. Consumer non-real estate. Consumer loans are loans to individuals for household, family and other personal expenditures. Commonly, such loans are made to finance purchases of consumer goods, such as automobiles, boats, household goods, vacations and education. 9 Other loans. Other loans consist of loans approved by the Small Business A dministratio n (SBA), which include loans funded through the Paycheck Protection Program (PPP) . Since PPP loans are fully guaranteed by the SBA, there is no expected credit loss related to these loans. Pegasus Bank. Pegasus Bank’s loans are commercial and consumer loans mostly to customers within Texas secured by real estate. Pegasus Bank also includes commercial and industrial loans, which includes loans to companies in the oil and gas industry. The Company considers various factors to monitor the credit risk in the loan portfolio including volume and severity of loan delinquencies, nonaccrual loans, internal grading of loans, historical loan loss experience and economic conditions. Management estimates the allowance balance using relevant available information, from internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts. Historical credit loss experience provides the basis for the estimation of expected credit losses. Adjustments to historical loss information are made for differences in current loan-specific risk characteristics such as differences in underwriting standards, portfolio mix, delinquency level, or term as well as for changes in environmental conditions, such as the political, legal, and regulatory environment, technology and consumer preferences. Historical loss information is also adjusted for reasonable and supportable changes in national and local economic conditions, such as oil and gas prices, national and local unemployment, real gross domestic product (“GDP”), house price index (“HPI”), consumer price index (“CPI”), rental vacancies, and retail sales. Economic conditions are forecast as "current conditions" over the forecast period. Forecast models were used to validate credit performance during the forecast period. Beyond the reasonable and supportable forecast, the economic expectation reverts to the historical average, which is determined by the weighted average life of each loan pool. Determining the Contractual Term: Expected credit losses are estimated over the contractual term of the loans, adjusted for expected prepayments when appropriate. The contractual term excludes expected extensions, renewals, and modifications unless either of the following applies: management has a reasonable expectation at the reporting date that a troubled debt restructuring will be executed with an individual borrower or the extension or renewal options are included in the original or modified contract at the reporting date and are not unconditionally cancellable by the Company. Troubled Debt Restructurings (TDRs ): The allowance for credit loss on a TDR is measured using the same method as all other loans held for investment, except when the value of a concession cannot be measured using a method other than the discounted cash flow method. When the value of a concession is measured using the discounted cash flow method, the allowance for credit loss is determined by discounting the expected future cash flows at the original interest rate of the loan. Allowance for Credit Losses on Off-Balance Sheet Credit Exposures : The Company estimates expected credit losses over the contractual period in which the Company is exposed to credit risk via a contractual obligation to extend credit, unless that obligation is unconditionally cancellable by the Company. The allowance for credit losses on off-balance sheet credit exposures is adjusted as a provision for credit loss expense. The estimate includes consideration of the likelihood that funding will occur and an estimate of expected credit losses on commitments expected to be funded over its estimated life. Based on a low likelihood that funding will occur and the Company’s ability to manage the extension of credit to our borrowers, the allowance for credit losses on off-balance sheet credit exposure is not material. Allowance for Credit Losses - Available-for-Sale Securities : The Company reviews its portfolio of securities in an unrealized loss position at least quarterly. The Company first assesses whether it intends to sell or it is more-likely-than-not that it will be required to sell the securities before recovery of the amortized cost basis. If either of these criteria is met, the securities amortized cost basis is written down to fair value as a current period expense. If either of the above criteria is not met, the Company evaluates whether the decline in fair value is the result of credit losses or other factors. In making this assessment, the Company considers, among other things, the period of time the security has been in an unrealized loss position, and performance of any underlying collateral and adverse conditions specifically related to the security. At December 31, 2019 and June 30, 2020 approximately 95 % of the available for sale securities held by the Company were issued by the U.S. Treasury, or U.S. government-sponsored entities and agencies. The Company does not consider the unrealized position of these securities to be the result of credit factors, because the decline in fair value is attributable to changes in interest rates and illiquidity, and not credit quality, and the Company does not have the intent to sell these securities and it is likely that it will not be required to sell the securities before their anticipated recovery. Therefore, the Company has not recorded an allowance for credit losses against its securities portfolio, as the credit risk is not material. PPP Fee Income Policy: The PPP, established as part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act, provides that the SBA will pay processing fees of up to 5 % to lenders based on the volume of the PPP loans disbursed. The fee is based on the balance of each PPP loan outstanding at the time of full disbursement. As of June 30, 2020, the Company received approximately $ 30.0 million in processing fees from the SBA. The unamortized balance of these fees is reported on the Company's balance sheet as part of the loan balance to which it relates and is recognized over the remaining life of the loan as an adjustment of yield. Upon notification from the SBA of the amount of the PPP loan to be forgiven the acceleration of recognition of deferred loan fee will occur for the percentage of the loan forgiven. 10 (2) RECENT DEVELOPMENTS, INCLUDING MERGERS AND ACQUISITIONS Section 4013 of the CARES Act and the Interagency Statement on Loan Modifications by Financial Institutions provides temporary relief from the accounting and reporting requirements for TDRs regarding certain loan modifications related to COVID-19 that are offered by financial institutions Specifically, the CARES Act provides that a financial institution may elect to suspend (1) the requirements under U.S. GAAP for certain loan modifications that would otherwise be categorized as a TDR and (2) any determination that such loan modifications would be considered a TDR, including the related impairment for accounting purposes. The modifications that would qualify for this exception include any modification involving a loan that was not more than 30 days past due as of December 31, 2019, that occurs during the “applicable period,” including any of the following: • A forbearance arrangement. • An interest rate modification. • A repayment plan. • Any other similar arrangement that defers or delays the payment of principal or interest. The exception does not apply to any adverse impact on the credit of a borrower that is not related to the COVID-19 pandemic. Furthermore, even when the exception is applied, an entity may determine that it is appropriate to place the loan on nonaccrual status. As of June 30, 2020, the Company has identified $ 939.8 million in loans that have been modified according to these terms. On March 5, 2020 , the Company purchased approximately $ 47.8 million in total assets, which included $ 22.9 million in loans, and assumed approximately $ 45.0 million in deposits and certain other obligations of The Citizens State Bank of Okemah, Oklahoma “Citizens” for a purchase price of $ 2.9 million. As a result of the purchase, the Company recorded a core deposit intangible of approximately $ 206,000 and goodwill of approximately $ 1.3 million. The effect of this purchase was included in the consolidated financial statements of the Company from the date of purchase forward. The purchase did not have a material effect on the Company’s consolidated financial statements. Citizens was an Oklahoma state-chartered bank with banking locations in Okemah and Paden, Oklahoma. These banking locations became branches of BancFirst. In January 2020, the Company sold property held in other real estate owned for a $ 2.2 million gain. On August 15, 2019 the Company acquired Pegasus Bank, a Texas state-charted bank with three banking locations in Dallas, Texas. This acquisition is disclosed in Note (2) to the Company’s Annual Report on Form 10-K for the year ended December 31, 2019. ( 3 ) SECURITIES The following table summarizes the amortized cost and estimated fair values of debt securities held for investment: Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Estimated Fair Value June 30, 2020 (Dollars in thousands) Mortgage backed securities (1) $ 75 $ 4 $ — $ 79 States and political subdivisions 2,480 3 ( 14 ) 2,469 Other securities 500 — — 500 Total $ 3,055 $ 7 $ ( 14 ) $ 3,048 December 31, 2019 Mortgage backed securities (1) $ 93 $ 4 $ — $ 97 States and political subdivisions 1,310 1 ( 5 ) 1,306 Other securities 500 — — 500 Total $ 1,903 $ 5 $ ( 5 ) $ 1,903 11 The following table summarizes the amortized cost and estimated fair values of debt securities available for sale: Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Estimated Fair Value June 30, 2020 (Dollars in thousands) U.S. treasuries $ 500,161 $ 12,700 $ — $ 512,861 U.S. federal agencies 21,242 5 ( 66 ) 21,181 Mortgage backed securities (1) 16,127 455 — 16,582 States and political subdivisions 41,150 497 ( 9 ) 41,638 Asset backed securities 13,328 — ( 614 ) 12,714 Total $ 592,008 $ 13,657 $ ( 689 ) $ 604,976 December 31, 2019 U.S. treasuries $ 409,488 $ 4,974 $ ( 13 ) $ 414,449 U.S. federal agencies 23,039 23 ( 38 ) 23,024 Mortgage backed securities (1) 16,941 128 ( 64 ) 17,005 States and political subdivisions 22,294 282 ( 45 ) 22,531 Asset backed securities 13,320 — ( 606 ) 12,714 Total $ 485,082 $ 5,407 $ ( 766 ) $ 489,723 (1) Primarily consists of FHLMC, FNMA, GNMA and mortgage backed securities through U.S. agencies. The maturities of debt securities held for investment and available for sale are summarized in the following table using contractual maturities. Actual maturities may differ from contractual maturities due to obligations that are called or prepaid. For purposes of the maturity table, mortgage-backed securities, which are not due at a single maturity date, have been presented at their contractual maturity. June 30, 2020 December 31, 2019 Amortized Cost Estimated Fair Value Amortized Cost Estimated Fair Value (Dollars in thousands) Held for Investment Contractual maturity of debt securities: Within one year $ 880 $ 879 $ 300 $ 300 After one year but within five years 1,581 1,574 1,058 1,055 After five years but within ten years 593 594 543 546 After ten years 1 1 2 2 Total $ 3,055 $ 3,048 $ 1,903 $ 1,903 Available for Sale Contractual maturity of debt securities: Within one year $ 314,154 $ 315,140 $ 186,373 $ 186,539 After one year but within five years 234,514 246,662 252,519 257,430 After five years but within ten years 4,918 5,074 5,873 6,008 After ten years 38,422 38,100 40,317 39,746 Total debt securities $ 592,008 $ 604,976 $ 485,082 $ 489,723 The following table is a summary of the Company’s book value of securities that were pledged as collateral for public funds on deposit, repurchase agreements and for other purposes as required or permitted by law: June 30, 2020 December 31, 2019 (Dollars in thousands) Book value of pledged securities $ 423,779 $ 445,702 12 ( 4 ) LOANS HELD FOR INVESTMENT AND ALLOWANCE FOR CREDIT LOSSES ON LOANS In connection with our adoption of ASC 326 , changes were made to our primary portfolio segments to align with the methodology applied in determining the allowance under CECL. Loans held for investment are summarized by portfolio segment as follows: June 30, 2020 December 31, 2019 Amount Amount (Dollars in thousands) BancFirst Real estate: Commercial real estate owner occupied $ 651,416 $ 621,188 Commercial real estate non-owner occupied 990,180 851,200 Construction and development < 60 months 225,598 287,138 Construction residential real estate < 60 months 206,504 189,480 Residential real estate first lien 860,964 834,849 Residential real estate all other 180,839 187,647 Farmland 256,136 246,988 Commercial and agricultural non-real estate 1,470,523 1,499,404 Consumer non-real estate 360,740 359,529 Other loans (2) 987,250 154,015 Pegasus Bank 484,804 430,705 Total (1) $ 6,674,954 $ 5,662,143 (1) Excludes accrued interest receivable of $ 31.0 million at June 30, 2020 and $ 27.4 million at December 31, 2019, that is recorded in accrued interest receivable and other assets. (2) Includes PPP loans of $ 825.1 million, net of unamortized processing fees of $ 26.2 million, at June 30, 2020. BancFirst’s loans are mostly to customers within Oklahoma and approximately 50 % of the loans are secured by real estate. Credit risk on loans is managed through limits on amounts loaned to individual and related borrowers, underwriting standards and loan monitoring procedures. The amounts and types of collateral obtained, if any, to secure loans are based upon the Company’s underwriting standards and management’s credit evaluation. Collateral varies, but may include real estate, equipment, accounts receivable, inventory, livestock and securities. The Company’s interest in collateral is secured through filing mortgages and liens, and in some cases, by possession of the collateral. BancFirst’s commercial and agricultural non-real estate loan category includes upstream and midstream energy loans and loans to companies that provide ancillary services to the energy industry, such as transportation, preparation contractors and equipment manufacturers. The balance of upstream energy loans was approximately $ 229 million at June 30, 2020 and approximately $ 189 million at December 31, 2019. The balance of midstream energy loans was approximately $ 45 million at June 30, 2020 and approximately $ 41 million at December 31, 2019. The balance of the ancillary services energy loans was approximately $ 78 million at June 30, 2020 and approximately $ 90 million at December 31, 2019. Pegasus Bank’s loans are mostly to customers within Texas and approximately $ 246 million or 51 % of the loans are secured by real estate at June 30, 2020. Pegasus Bank’s commercial and agricultural non-real estate loan were approximately $ 208 million at June 30, 2020 and approximately $ 172 million at December 31, 2019. Pegasus Bank’s commercial and agricultural non-real estate loan category includes upstream energy loans and loans to companies that provide ancillary services to the energy industry, such as transportation, preparation contractors and equipment manufacturers. The balance of upstream energy loans was approximately $ 88 million at June 30, 2020 and approximately $ 57 million at December 31, 2019. The balance of the ancillary services energy loans was approximately $ 8 million at June 30, 2020 and approximately $ 7 million at December 31, 2019. As of June 30, 2020, the Company reported $ 825.1 million in PPP loans, net of unamortized processing fees of $ 26.2 million and recognized $ 3.6 million of processing fees, which were included in interest income. Accounting policies related to appraisals, and charge-offs are disclosed in Note (1) to the Company’s Annual Report on Form 10-K for the year ended December 31, 2019. 13 Troubled Debt Restructur ings and Other Real Estate Owned and Repossessed Assets The following is a summary of troubled debt restructurings and other real estate owned and repossessed assets: June 30, December 31, 2020 2019 (Dollars in thousands) Troubled debt restructurings $ 3,213 $ 18,010 Other real estate owned and repossessed assets $ 4,948 $ 6,073 The Company charges interest on principal balances outstanding on troubled debt restructurings during deferral periods. The current and future financial effects of the recorded balance of loans considered to be troubled debt restructurings were not considered to be material. Nonaccrual loans Had nonaccrual loans performed in accordance with their original contractual terms, the Company would have recognized additional interest income of approximately $ 983,000 for the six months ended June 30, 2020 and approximately $ 1.0 million for the six months ended June 30, 2019. In addition, approximately $ 8.0 million of nonaccrual loans are guaranteed by government agencies. The following table is a summary of amounts included in nonaccrual loans, segregated by portfolio segment. Residential real estate refers to one-to-four family real estate. June 30, 2020 (Dollars in thousands) BancFirst Real estate: Commercial real estate owner occupied $ 2,094 Commercial real estate non-owner occupied 463 Construction and development < 60 months 119 Construction residential real estate < 60 months — Residential real estate first lien 3,904 Residential real estate all other 792 Farmland 3,118 Commercial and agricultural non-real estate 32,299 Consumer non-real estate 247 Other loans 5,841 Pegasus Bank 600 Total $ 49,477 December 31, 2019 (Dollars in thousands) BancFirst Real estate: Non-residential real estate owner occupied $ 2,275 Non-residential real estate other 1,815 Residential real estate permanent mortgage 1,206 Residential real estate all other 3,060 Non-consumer non-real estate 2,915 Consumer non-real estate 264 Other loans 1,083 Acquired loans 4,496 Pegasus Bank 851 Total $ 17,965 14 Loans are considered past due if the required principal and interest payments have not been received as of the date such payments were due. The following table presents an age analysis of our loans held for investment: Age Analysis of Past Due Loans 30-59 Days Past Due 60-89 Days Past Due 90 Days and Greater Total Past Due Loans Current Loans Total Loans Accruing Loans 90 Days or More Past Due (Dollars in thousands) As of June 30, 2020 BancFirst Real estate: Commercial real estate owner occupied $ 415 $ 55 $ 2,037 $ 2,507 $ 648,909 $ 651,416 $ 77 Commercial real estate non-owner occupied 50 112 188 350 989,830 990,180 — Construction and development < 60 months 952 — — 952 224,646 225,598 — Construction residential real estate < 60 months 396 — — 396 206,108 206,504 — Residential real estate first lien 3,587 1,316 4,575 9,478 851,486 860,964 1,945 Residential real estate all other 449 171 766 1,386 179,453 180,839 63 Farmland 1,649 888 3,257 5,794 250,342 256,136 763 Commercial and agricultural non-real estate 19,056 4,766 4,841 28,663 1,441,860 1,470,523 2,154 Consumer non-real estate 1,712 595 465 2,772 357,968 360,740 313 Other loans 219 162 5,621 6,002 981,248 987,250 67 Pegasus Bank — — 600 600 484,204 484,804 — Total $ 28,485 $ 8,065 $ 22,350 $ 58,900 $ 6,616,054 $ 6,674,954 $ 5,382 As of December 31, 2019 BancFirst Real estate: Non-residential real estate owner occupied $ 1,600 $ 967 $ 5,159 $ 7,726 $ 699,690 $ 707,416 $ 3,799 Non-residential real estate other 971 — 1,228 2,199 1,134,976 1,137,175 — Residential real estate permanent mortgage 4,705 973 2,215 7,893 332,679 340,572 1,660 Residential real estate other 4,496 1,028 2,541 8,065 912,767 920,832 549 Non-consumer non-real estate 2,290 1,446 1,763 5,499 1,448,894 1,454,393 354 Consumer other 2,829 858 592 4,279 358,075 362,354 491 Other loans 1,670 8 4,613 6,291 147,724 154,015 4,426 Acquired loans 2,167 1,376 3,447 6,990 147,691 154,681 555 Pegasus Bank — — 851 851 429,854 430,705 — Total $ 20,728 $ 6,656 $ 22,409 $ 49,793 $ 5,612,350 $ 5,662,143 $ 11,834 Due to the impacts of the COVID-19 pandemic, the Company has modified approximately $ 939.8 million in loans, most of which are secured by commercial real estate. These modifications were undertaken in response to Section 4013 of the CARES Act and the regulatory intent outlined in the Interagency Statement on Loan Modifications by Financial Institutions Working with Customers Affected by the Coronavirus and to provide businesses financial flexibility until the economy has time to recover to a more normal level of activity. However, these modifications, which typically involve payment modifications and forbearance, also have the effect of delaying recognition of loans that may ultimately be permanently impaired. Consequently, it is reasonable to expect that when temporary regulatory accounting relief and payment modifications cease, there will be a marked increase in credit impairment and restructured loans. The timing and extent of such consequences are impossible to ascertain at this time and are dependent on the duration of the COVID-19 pandemic, the level and success of the government’s economic stimulus, and further regulatory guidance. These modified loans are included in current loans in the table above. Credit Quality Indicators The Company considers credit quality indicators to monitor the credit risk in the loan portfolio including volume and severity of loan delinquencies, nonaccrual loans, internal grading of loans, historical credit loss experience and economic conditions. An internal risk grading system is used to indicate the credit risk of loans. The loan grades used by the Company are for internal risk identification purposes and do not directly correlate to regulatory classification categories or any financial reporting definitions. The general characteristics of the risk grades are disclosed in Note (5) to the Company’s Annual Report on Form 10-K for the year ended December 31, 2019. The Company’s revolving loans that are converted to term loans are not material and therefore have not been presented. 15 The following table summarizes our gross loans held for investment by year of origination and internally assigned credit grades: Term Loans Amortized Cost Basis by Origination Year 2020 2019 2018 2017 2016 Prior Revolving Loans Amortized Cost Basis Total (Dollars in thousands) As of June 30, 2020 BancFirst Commercial real estate owner occupied Grade 1 $ 93,204 $ 115,392 $ 88,126 $ 56,119 $ 43,573 $ 117,406 $ 9,505 $ 523,325 Grade 2 16,310 31,307 12,723 10,742 13,926 29,741 3,324 118,073 Grade 3 142 107 599 1,583 495 1,380 2,742 7,048 Grade 4 47 78 879 — 392 1,107 467 2,970 Total commercial real estate owner occupied loans 109,703 146,884 102,327 68,444 58,386 149,634 16,038 651,416 Commercial real estate non-owner occupied Grade 1 188,253 178,055 105,465 90,957 91,046 107,176 13,590 774,542 Grade 2 25,466 68,282 18,066 23,070 11,432 52,193 3,712 202,221 Grade 3 1,126 3,929 7,118 543 42 155 70 12,983 Grade 4 — 94 191 — — 149 — 434 Total commercial real estate non-owner occupied loans 214,845 250,360 130,840 114,570 102,520 159,673 17,372 990,180 Construction and development < 60 months Grade 1 66,608 76,743 28,386 5,535 2,880 4,081 14,229 198,462 Grade 2 12,612 8,249 1,698 853 166 568 442 24,588 Grade 3 34 2,211 184 — — — — 2,429 Grade 4 — 70 10 24 — — — 104 Grade 5 15 — — — — — — 15 Total construction and development < 60 months 79,269 87,273 30,278 6,412 3,046 4,649 14,671 225,598 Construction residential real estate < 60 months Grade 1 94,678 72,479 69 22 37 32 4,727 172,044 Grade 2 18,660 11,920 114 — — 481 32 31,207 Grade 3 1,416 1,440 397 — — — — 3,253 Total construction residential real estate < 60 months 114,754 85,839 580 22 37 513 4,759 206,504 Residential real estate first lien Grade 1 135,181 176,422 94,426 76,299 56,326 169,576 — 708,230 Grade 2 16,067 26,417 23,633 12,417 13,232 37,470 — 129,236 Grade 3 3,796 2,195 1,597 1,737 2,340 6,592 — 18,257 Grade 4 88 815 858 301 1,105 2,023 — 5,190 Grade 5 — — — — 51 — — 51 Total residential real estate first lien 155,132 205,849 120,514 90,754 73,054 215,661 — 860,964 Residential real estate all other Grade 1 13,054 17,126 13,224 9,660 6,747 13,647 32,726 106,184 Grade 2 2,064 2,381 1,545 1,997 415 2,999 59,063 70,464 Grade 3 180 890 996 161 226 386 311 3,150 Grade 4 52 — 74 51 34 720 40 971 Grade 5 — 70 — — — — — 70 Total residential real estate all other 15,350 20,467 15,839 11,869 7,422 17,752 92,140 180,839 Farmland Grade 1 27,303 32,686 22,385 16,365 15,894 35,182 7,696 157,511 Grade 2 7,741 34,758 7,341 7,582 6,262 10,985 8,486 83,155 Grade 3 748 625 5,313 1,109 584 1,353 3,320 13,052 Grade 4 — — 758 639 381 379 261 2,418 Total farmland 35,792 68,069 35,797 25,695 23,121 47,899 19,763 256,136 Commercial and agricultural non-real estate Grade 1 245,805 218,847 148,454 114,049 56,916 48,438 310,921 1,143,430 Grade 2 52,956 46,418 31,373 9,951 8,123 27,830 95,956 272,607 Grade 3 9,530 2,634 2,494 1,473 1,517 398 4,724 22,770 Grade 4 26,681 989 836 2,361 150 266 377 31,660 Grade 5 — 51 — — — — 5 56 Total commercial and agricultural non-real estate 334,972 268,939 183,157 127,834 66,706 76,932 411,983 1,470,523 Consumer non-real estate Grade 1 97,332 134,078 62,491 23,064 8,531 3,601 6,040 335,137 Grade 2 5,823 8,919 5,049 1,440 822 451 268 22,772 Grade 3 207 866 574 303 127 114 15 2,206 Grade 4 17 224 211 53 49 70 1 625 16 Total consumer non-real estate 103,379 144,087 68,325 24,860 9,529 4,236 6,324 360,740 Other loans Grade 1 840,615 31,131 28,254 21,729 18,562 17,839 20,228 978,358 Grade 2 — — 17 3,011 1,174 2,136 794 7,132 Grade 3 — — 14 3 71 229 122 439 Grade 4 — — 26 62 28 120 1,085 1,321 Total other loans 840,615 31,131 28,311 24,805 19,835 20,324 22,229 987,250 Pegasus Bank Grade 1 55,924 73,386 41,076 29,680 15,297 42,601 91,378 349,342 Grade 2 17,057 34,856 7,213 22,767 4,652 8,014 38,964 133,523 Grade 3 — — — — — 1,339 — 1,339 Grade 4 — — — — 600 — — 600 Total Pegasus Bank 72,981 108,242 48,289 52,447 20,549 51,954 130,342 484,804 Total loans held for investment $ 2,076,792 $ 1,417,140 $ 764,257 $ 547,712 $ 384,205 $ 749,227 $ 735,621 $ 6,674,954 Allowance for Credit Losses Methodology On January 1, 2020, the Company adopted ASC 326, which replaces the incurred loss methodology for determining its provision for credit losses and allowance for credit losses with an expected loss methodology that is referred to as the CECL model. See Note (1) for additional information regarding the factors that influenced the Company’s current estimate of expected credit losses. Upon adoption, the allowance for credit losses was decreased by $ 3.2 million, with no impact to the consolidated statement of income. Subsequent to the adoption of ASC 326, the Company recorded a $ 38.9 million provision for credit losses for the first six months of 2020 utilizing the newly adopted CECL methodology, a significant increase from the first six months of 2019. The increase resulted primarily from the anticipated impact on our loan portfolio resulting from the economic outlook related to the COVID-19 pandemic and the decline in energy prices and to a lesser degree, loan growth during the first six months of 2020. Prolonged low energy prices will not only have a direct impact on the energy portfolio; it will have an indirect effect on the economies of Oklahoma and the Dallas, Texas market, including higher unemployment, with a residual effect on land values and real estate prices. 17 The following table details activity in the allowance for credit losses on loans for the period presented. Allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other categories. Allowance for Credit Losses Balance at beginning of period Impact of CECL adoption Initial allowance on loans purchased with credit deterioration Charge- offs Recoveries Net charge-offs Provision for credit losses on loans Balance at end of period (Dollars in thousands) Three Months Ended June 30, 2020 BancFirst Real estate: Commercial real estate owner occupied $ 4,544 $ — $ — $ ( 113 ) $ 1 $ ( 112 ) $ 2,198 $ 6,630 Commercial real estate non-owner occupied 5,935 — — — — — 3,548 9,483 Construction and development < 60 months 1,136 — — ( 56 ) 3 ( 53 ) 672 1,755 Construction residential real estate < 60 months 1,618 — — ( 28 ) — ( 28 ) 669 2,259 Residential real estate first lien 6,192 — — ( 66 ) 4 ( 62 ) 2,423 8,553 Residential real estate all other 2,292 — — ( 7 ) 1 ( 6 ) 434 2,720 Farmland 1,788 — — — — — 723 2,511 Commercial and agricultural non-real estate 37,276 — — ( 287 ) 66 ( 221 ) 7,450 44,505 Consumer non-real estate 3,385 — — ( 235 ) 57 ( 178 ) 1,507 4,714 Other loans 2,751 — — — — — ( 238 ) 2,513 Pegasus Bank 3,163 — — 330 417 747 ( 53 ) 3,857 Total $ 70,080 $ — $ — $ ( 462 ) $ 549 $ 87 $ 19,333 $ 89,500 Six Months Ended June 30, 2020 BancFirst Real estate: Commercial real estate owner occupied $ 5,625 $ ( 2,806 ) $ 432 $ ( 113 ) $ 1 $ ( 112 ) $ 3,491 $ 6,630 Commercial real estate non-owner occupied 8,358 ( 5,507 ) — — — — 6,632 9,483 Construction and development < 60 months 2,214 ( 1,056 ) — ( 59 ) 3 ( 56 ) 653 1,755 Construction residential real estate < 60 months 1,933 ( 778 ) — ( 29 ) — ( 29 ) 1,133 2,259 Residential real estate first lien 8,692 ( 3,831 ) 7 ( 218 ) 6 ( 212 ) 3,897 8,553 Residential real estate all other 2,767 ( 1,408 ) — ( 32 ) 28 ( 4 ) 1,365 2,720 Farmland 2,821 ( 1,408 ) 1 — — — 1,097 2,511 Commercial and agricultural non-real estate 15,345 11,849 62 ( 374 ) 83 ( 291 ) 17,540 44,505 Consumer non-real estate 3,252 ( 622 ) — ( 556 ) 114 ( 442 ) 2,526 4,714 Other loans 2,632 ( 116 ) — — 2 2 ( 5 ) 2,513 Pegasus Bank 599 2,488 — ( 241 ) 424 183 587 3,857 Total $ 54,238 $ ( 3,195 ) $ 502 $ ( 1,622 ) $ 661 $ ( 961 ) $ 38,916 $ 89,500 18 Allowance for Credit Losses Balance at beginning of period Charge- offs Recoveries Net charge-offs Provision for credit losses on loans Balance at end of period (Dollars in thousands) Three Months Ended June 30, 2019 BancFirst Real estate: Non-residential real estate owner occupied $ 6,655 $ ( 3 ) $ — $ ( 3 ) $ 235 $ 6,887 Non-residential real estate other 11,362 ( 16 ) 1 ( 15 ) ( 60 ) 11,287 Residential real estate permanent mortgage 3,261 ( 4 ) 4 — 64 3,325 Residential real estate all other 11,046 ( 143 ) 25 ( 118 ) 793 11,721 Non-consumer non-real estate 14,409 ( 87 ) 85 ( 2 ) 825 15,232 Consumer non-real estate 3,072 ( 162 ) 38 ( 124 ) 286 3,234 Other loans 2,408 — 43 43 ( 2 ) 2,449 Acquired loans 702 ( 170 ) 149 ( 21 ) 292 973 Total $ 52,915 $ ( 585 ) $ 345 $ ( 240 ) $ 2,433 $ 55,108 Six Months Ended June 30, 2019 BancFirst Real estate: Non-residential real estate owner occupied $ 6,328 $ ( 9 ) $ 1 $ ( 8 ) $ 567 $ 6,887 Non-residential real estate other 11,027 ( 22 ) 1 ( 21 ) 281 11,287 Residential real estate permanent mortgage 3,261 ( 67 ) 9 ( 58 ) 122 3,325 Residential real estate all other 10,673 ( 195 ) 27 ( 168 ) 1,216 11,721 Non-consumer non-real estate 13,151 ( 157 ) 152 ( 5 ) 2,086 15,232 Consumer non-real estate 3,065 ( 282 ) 109 ( 173 ) 342 3,234 Other loans 2,423 — 78 78 ( 52 ) 2,449 Acquired loans 1,461 ( 196 ) 153 ( 43 ) ( 445 ) 973 Total $ 51,389 $ ( 928 ) $ 530 $ ( 398 ) $ 4,117 $ 55,108 Purchased Credit Deteriorated Loans The Company has purchased loans, for which there was, at acquisition, evidence of more than insignificant deterioration of credit quality since origination. The purchased credit deteriorated loans for the period are as follows: Loans acquired with deteriorated credit quality (Dollars in thousands) For the period ended June 30, 2020 Purchase price of loans at acquisition $ 1,586 Allowance for credit losses at acquisition 502 Par value of acquired loans at acquisition $ 2,088 Collateral Dependent Loans A loan is considered collateral-dependent when the borrower is experiencing financial difficulty and repayment is expected to be provided substantially through the operation or sale of the collateral. The following table summarizes collateral-dependent gross loans held for investment by collateral type as follows: 19 Collateral Type Real Estate Business Assets Energy Reserves Other Assets (Dollars in thousands) As of June 30, 2020 BancFirst Real estate: Commercial real estate owner occupied $ 2,386 $ — $ — $ — Commercial real estate non-owner occupied 341 — — — Construction and development < 60 months 15 — — — Construction residential real estate < 60 months — — — — Residential real estate first lien 1,491 — — — Residential real estate all other 657 — — — Farmland 984 — — — Commercial and agricultural non-real estate — 515 28,282 760 Consumer non-real estate — — — 127 Other loans — 23 — — Pegasus Bank 1,265 — — — Total collateral-dependent loans held for investment $ 7,139 $ 538 $ 28,282 $ 887 Non-Cash Transfers from Loans and Premises and Equipment Transfers from loans and premises and equipment to other real estate owned and repossessed assets are non-cash transactions, and are not included in the statements of cash flow. Transfers from loans and premises and equipment to other real estate owned and repossessed assets during the periods presented are summarized as follows: Six Months Ended June 30, 2020 2019 (Dollars in thousands) Other real estate owned $ 2,876 $ 2,010 Repossessed assets 722 627 Total $ 3,598 $ 2,637 ( 5 ) INTANGIBLE ASSETS AND GOODWILL The following is a summary of intangible assets: Gross Carrying Amount Accumulated Amortization Net Carrying Amount (Dollars in thousands) As of June 30, 2020 Core deposit intangibles $ 35,562 $ ( 15,453 ) $ 20,109 Customer relationship intangibles 3,391 ( 2,618 ) 773 Total $ 38,953 $ ( 18,071 ) $ 20,882 As of December 31, 2019 Core deposit intangibles $ 35,856 $ ( 14,131 ) $ 21,725 Customer relationship intangibles 3,391 ( 2,508 ) 883 Total $ 39,247 $ ( 16,639 ) $ 22,608 20 The following is a summary of goodwill by business segment: Other Executive, Metropolitan Community Pegasus Financial Operations Banks Banks Bank Services & Support Consolidated (Dollars in thousands) Six months ended June 30, 2020 Balance at beginning of period $ 13,767 $ 59,894 $ 68,855 $ 5,464 $ 624 $ 148,604 Acquisitions — 1,318 — — — 1,318 Balance at beginning and end of period $ 13,767 $ 61,212 $ 68,855 $ 5,464 $ 624 $ 149,922 The Company acquired Citizens on March 5, 2020 , which added $ 1.3 million in goodwill. Additional information for intangible assets can be found in Note (7) to the Company’s Annual Report on Form 10-K for the year ended December 31, 2019. (6) LEASES Lessee The Company has operating leases, which primarily consist of office space in buildings, ATM locations, storage facilities, parking lots, equipment and land on which it owns certain buildings. Rent expense for all operating leases, including those rented on a monthly or temporary basis totaled approximately $ 453,000 and $ 376,000 for the three months ended June 30, 2020 and June 30, 2019, respectively. Rent expense for all operating leases, including those rented on a monthly or temporary basis totaled approximately $ 916,000 and $ 767,000 for the six months ended June 30, 2020 and June 30, 2019, respectively. As of June 30, 2020, right of use lease asset included in accrued interest receivable and other assets on the balance sheet totaled $ 4.8 million, and a related lease liability included in accrued interest payable and other liabilities on the balance sheet totaled $ 4.6 million. There have been no significant changes in our expected future minimum lease payments since December 31, 2019. The future minimum lease payments are disclosed in Note (20) to the Company’s Annual Report on Form 10-K for the year ended December 31, 2019. As of June 30, 2020, our operating leases have a weighted-average remaining lease term of 3.2 years and a weighted-average discount rate of 3.3 percent. Maturity of Operating Lease Liabilities June 30, 2020 (Dollars in thousands) 2020 (six months) $ 782 2021 1,240 2022 993 2023 562 2024 339 Thereafter 1,165 Total lease payments 5,081 Less imputed Interest ( 473 ) Operating lease liability $ 4,608 Lessor The Company is a lessor of operating leases, which primarily consist of office space in buildings and parking lots. These assets are classified on the balance sheet as premises and equipment. The Company had operating lease revenue of $ 1.4 million and $ 1.5 million for the three months ended June 30, 2020 and June 30, 2019, respectively. The Company had operating lease revenue of $ 2.8 million and $ 3.1 million for the six months ended June 30, 2020 and June 30, 2019, respectively. Lease revenue is included in occupancy, net on the consolidated statement of comprehensive income. Future Minimum Lease Payments to be received The Company does not have operating leases that extend beyond 2030. The following table presents the scheduled minimum future contractual rent to be received under the remaining non-cancelable term of the operating leases: 21 June 30, 2020 (Dollars in thousands) 2020 (six months) $ 2,022 2021 3,394 2022 2,810 2023 2,324 2024 1,783 2025-2030 4,496 Total future minimum lease payments $ 16,829 ( 7 ) STOCK-BASED COMPENSATION The Company has had a nonqualified incentive stock option plan (the “BancFirst ISOP”) since May 1986. At June 30, 2020, there were 330,000 shares available for future grants. The BancFirst ISOP will terminate on December 31, 2024 , if not extended. The options vest and are exercisable beginning four years from the date of grant at the rate of 25 % per year for four years . Options expire no later than the end of fifteen years from the date of grant . The option price must be no less than 100 % of the fair value of the stock relating to such option at the date of grant. The Company has had the BancFirst Corporation Non-Employee Directors’ Stock Option Plan (the “BancFirst Directors’ Stock Option Plan”) since June 1999. Each non-employee director is granted an option for 10,000 shares. At June 30, 2020, there were 30,000 shares available for future grants. The BancFirst Directors’ Stock Option Plan will terminate on December 31, 2024 , if not extended. The options vest and are exercisable beginning one year from the date of grant at the rate of 25 % per year for four years , and expire no later than the end of fifteen years from the date of grant. The option price must be no less than 100 % of the fair value of the stock relating to such option at the date of grant. The Company currently uses newly issued shares for stock option exercises, but reserves the right to use shares purchased under the Company’s Stock Repurchase Program (the “SRP”) in the future. The following table is a summary of the activity under both the BancFirst ISOP and the BancFirst Directors’ Stock Option Plan: Wgtd. Avg. Wgtd. Avg. Remaining Aggregate Exercise Contractual Intrinsic Options Price Term Value (Dollars in thousands, except option data) Six Months Ended June 30, 2020 Outstanding at December 31, 2019 1,257,730 $ 32.70 Options granted 157,500 49.32 Options exercised ( 26,400 ) 19.07 Options canceled, forfeited, or expired ( 135,000 ) 51.56 Outstanding at June 30, 2020 1,253,830 33.04 8.93 Yrs $ 9,440 Exercisable at June 30, 2020 697,330 24.13 7.12 Yrs $ 11,461 The following table has additional information regarding options exercised under both the BancFirst ISOP and the BancFirst Directors’ Stock Option Plan: Three Months Ended June 30, Six Months Ended June 30, 2020 2019 2020 2019 (Dollars in thousands) (Dollars in thousands) Total intrinsic value of options exercised $ 337 $ 759 $ 726 $ 904 Cash received from options exercised 303 455 504 611 Tax benefit realized from options exercised 86 193 185 230 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. 22 The following table is a summary of the Company’s recorded stock-based compensation expense: Three Months Ended June 30, Six Months Ended June 30, 2020 2019 2020 2019 (Dollars in thousands) (Dollars in thousands) Stock-based compensation expense $ 406 $ 367 $ 832 $ 541 Tax benefit 103 94 212 138 Stock-based compensation expense, net of tax $ 303 $ 273 $ 620 $ 403 The Company will continue to amortize the unearned stock-based compensation expense over the remaining vesting period of approximately seven years . The following table shows the unearned stock-based compensation expense: June 30, 2020 (Dollars in thousands) Unearned stock-based compensation expense $ 4,128 The following table shows the assumptions used for computing stock-based compensation expense under the fair value method on options granted during the periods presented: Six Months Ended June 30, 2020 2019 Weighted average grant-date fair value per share of options granted $ 10.63 $ 13.67 Risk-free interest rate 0.66 to 1.13% 2.62 to 2.76% Dividend yield 2.00 % 2.00 % Stock price volatility 22.84 to 33.56% 22.93 to 22.96% Expected term 10 Yrs 10 Yrs The risk-free interest rate is determined by reference to the spot zero-coupon rate for the U.S. Treasury security with a maturity similar to the expected term of the options. The dividend yield is the expected yield for the expected term. The stock price volatility is estimated from the recent historical volatility of the Company’s stock. The expected term is estimated from the historical option exercise experience. The Company accounts for forfeitures as they occur. The Company has had the BancFirst Corporation Directors’ Deferred Stock Compensation Plan (the “BancFirst Deferred Stock Compensation Plan”) since May 1999. As of June 30, 2020, there are 28,582 shares available for future issuance under the BancFirst Deferred Stock Compensation Plan. The BancFirst Deferred Stock Compensation Plan will terminate on December 31, 2024 , if not extended. Under the plan, directors and members of the community advisory boards of the Company and its subsidiaries may defer up to 100 % of their board fees. They are credited for each deferral with a number of stock units based on the current market price of the Company’s stock, which accumulate in an account until such time as the director or community board member terminates serving as a board member. Shares of common stock of the Company are then distributed to the terminating director or community board member based upon the number of stock units accumulated in his or her account. There were 1,307 and 8,362 shares of common stock distributed from the BancFirst Deferred Stock Compensation Plan during the six months ended June 30, 2020 and June 30, 2019, respectively. A summary of the accumulated stock units is as follows: June 30, December 31, 2020 2019 Accumulated stock units 148,550 143,362 Average price $ 27.85 $ 27.17 ( 8 ) STOCKHOLDERS’ EQUITY In November 1999, the Company adopted the SRP. The SRP may be used as a means to increase earnings per share and return on equity, to purchase treasury stock for the exercise of stock options or for distributions under the Deferred Stock Compensation Plan, to provide liquidity for optionees to dispose of stock from exercises of their stock options, and to provide liquidity for stockholders wishing to sell their stock. All shares repurchased under the SRP have been retired and not held as treasury stock. The 23 timing, price and amount of stock repurchases under the SRP may be determined by management and approved by the Company’s Executive Committee. The following table is a summary of the shares under the program: Six Months Ended June 30, 2020 2019 Number of shares repurchased 59,284 — Average price of shares repurchased $ 52.26 $ — Shares remaining to be repurchased 62,782 148,736 The Company, BancFirst and Pegasus Bank are subject to risk-based capital guidelines issued by the Board of Governors of the Federal Reserve System and the Federal Deposit Insurance Corporation (“FDIC”). These guidelines are used to evaluate capital adequacy and involve both quantitative and qualitative evaluations of the Company’s, BancFirst’s and Pegasus Bank’s assets, liabilities and certain off-balance-sheet items calculated under regulatory practices. Failure to meet the minimum capital requirements can initiate certain mandatory or discretionary actions by the regulatory agencies that could have a direct material effect on the Company’s financial statements. Management believes that as of June 30, 2020, the Company, BancFirst and Pegasus Bank met all capital adequacy requirements to which they are subject. The actual and required capital amounts and ratios are shown in the following table: Required To Be Well For Capital With Capitalized Under Adequacy Capital Conservation Prompt Corrective Actual Purposes Buffer Action Provisions Amount Ratio Amount Ratio Amount Ratio Amount Ratio (Dollars in thousands) As of June 30, 2020: Total Capital (to Risk Weighted Assets)- BancFirst Corporation $ 960,793 14.83 % $ 518,290 8.00 % $ 680,256 10.50 % N/A N/A BancFirst 871,013 14.62 % 476,462 8.00 % 625,357 10.50 % $ 595,578 10.00 % Pegasus Bank 67,867 13.28 % 40,893 8.00 % 53,672 10.50 % 51,116 10.00 % Common Equity Tier 1 Capital (to Risk Weighted Assets)- BancFirst Corporation $ 853,705 13.18 % $ 291,538 4.50 % $ 453,504 7.00 % N/A N/A BancFirst 776,428 13.04 % 268,010 4.50 % 416,905 7.00 % $ 387,126 6.50 % Pegasus Bank 63,636 12.45 % 23,002 4.50 % 35,781 7.00 % 33,226 6.50 % Tier 1 Capital (to Risk Weighted Assets)- BancFirst Corporation $ 879,705 13.58 % $ 388,718 6.00 % $ 550,683 8.50 % N/A N/A BancFirst 796,428 13.37 % 357,347 6.00 % 506,241 8.50 % $ 476,462 8.00 % Pegasus Bank 63,636 12.45 % 30,670 6.00 % 43,449 8.50 % 40,893 8.00 % Tier 1 Capital (to Total Assets)- BancFirst Corporation $ 879,705 9.45 % $ 372,344 4.00 % N/A N/A N/A N/A BancFirst 796,428 9.33 % 341,272 4.00 % N/A N/A $ 426,591 5.00 % Pegasus Bank 63,636 8.34 % 30,517 4.00 % N/A N/A 38,146 5.00 % As of June 30, 2020, the most recent notification from the Federal Reserve Bank of Kansas City and the FDIC categorized BancFirst and Pegasus Bank as “well capitalized” under the prompt corrective action provisions. The Common Equity Tier 1 Capital of the Company, BancFirst and Pegasus Bank includes common stock and related paid-in capital and retained earnings. In connection with the adoption of the Basel III Capital Rules, the election was made to opt-out of the requirement to include most components of accumulated other comprehensive income in Common Equity Tier 1 Capital. Common Equity Tier 1 Capital for the Company, BancFirst and Pegasus Bank is reduced by goodwill and other intangible assets, net of associated deferred tax liabilities. The Company’s trust preferred securities have continued to be included in Tier 1 capital, as the Company’s total assets do not exceed $ 15 billion. There are no conditions or events since the most recent notification of BancFirst and Pegasus Bank’s capital category that management believes would materially change its category under capital requirements existing as of the report date. In April 2020, the Company began originating loans to qualified small businesses under the PPP administered by the SBA. Federal bank regulatory agencies have issued an interim final rule that permits banks to neutralize the regulatory capital effects of 24 participating in the Paycheck Protection Program Lending Facility (the “PPP Facility”) and clarify that PPP loans have a zero percent risk weight under applicable risk-based capital rules. Specifically, a bank may exclude all PPP loans pledged as collateral to the PPP Facility from its average total consolidated assets for the purposes of calculating its leverage ratio, while PPP loans that are not pledged as collateral to the PPP Facility are included. The PPP loans the Company originated in the second quarter of 2020 are included in the calculation of the Company’s leverage ratio as of June 30, 2020 as the Company did not utilize the PPP Facility for funding purposes. As discussed in Note 1 - Significant Accounting Policies, in connection with the adoption of ASC 326, the Company recognized an after-tax cumulative effect reduction to retained earnings totaling $ 2.3 million. In February 2019, the federal bank regulatory agencies issued a final rule (the “2019 CECL Rule”) that revised certain capital regulations to account for changes to credit loss accounting under U.S. GAAP. The 2019 CECL Rule included a transition option that allows banking organizations to phase in, over a three-year period, the day-one adverse effects of CECL on their regulatory capital ratios (three-year transition option). In March 2020, the federal bank regulatory agencies issued an interim final rule that maintains the three-year transition option of the 2019 CECL Rule and also provides banking organizations that were required under U.S. GAAP (as of January 2020) to implement CECL before the end of 2020 the option to delay for two years an estimate of the effect of CECL on regulatory capital, relative to the incurred loss methodology’s effect on regulatory capital, followed by a three-year transition period (five-year transition option). The Company elected not to adopt the five-year transition option. ( 9 ) NET INCOME PER COMMON SHARE Basic and diluted net income per common share are calculated as follows: Income (Numerator) Shares (Denominator) Per Share Amount (Dollars in thousands, except per share data) Three Months Ended June 30, 2020 Basic Income available to common stockholders $ 20,730 32,651,262 $ 0.64 Dilutive effect of stock options — 424,231 Diluted Income available to common stockholders plus assumed exercises of stock options $ 20,730 33,075,493 $ 0.63 Three Months Ended June 30, 2019 Basic Income available to common stockholders $ 34,167 32,629,146 $ 1.04 Dilutive effect of stock options — 688,047 Diluted Income available to common stockholders plus assumed exercises of stock options $ 34,167 33,317,193 $ 1.02 Six Months Ended June 30, 2020 Basic Income available to common stockholders $ 43,338 32,665,425 $ 1.33 Dilutive effect of stock options — 531,966 Diluted Income available to common stockholders plus assumed exercises of stock options $ 43,338 33,197,391 $ 1.31 Six Months Ended June 30, 2019 Basic Income available to common stockholders $ 66,004 32,620,819 $ 2.02 Dilutive effect of stock options — 685,610 Diluted Income available to common stockholders plus assumed exercises of stock options $ 66,004 33,306,429 $ 1.98 25 The following table shows the number and average exercise price of options that were excluded from the computation of diluted net income per common share for each period because the options were anti-dilutive for the period: Shares Three Months Ended June 30, 2020 448,016 Three Months Ended June 30, 2019 158,500 Six Months Ended June 30, 2020 424,939 Six Months Ended June 30, 2019 169,301 ( 10 ) FAIR VALUE MEASUREMENTS Accounting standards define fair value as the price that would be received to sell an asset or the price paid to transfer a liability in the principal or most advantageous market available to the entity in an orderly transaction between market participants on the measurement date. FASB Accounting Standards Codification (“ASC”) Topic 820 establishes a fair value hierarchy for valuation inputs that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The fair value hierarchy is as follows: • Level 1 Inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets. • Level 2 Inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset and liability, either directly or indirectly, for substantially the full term of the financial instrument. • Level 3 Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose values are determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation. This category includes certain impaired loans, repossessed assets, other real estate owned, goodwill and other intangible assets. Financial Assets and Financial Liabilities Measured at Fair Value on a Recurring Basis A description of the valuation methodologies and key inputs used to measure financial assets and financial liabilities at fair value on a recurring basis, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth below. These valuation methodologies were applied to the following categories of the Company’s financial assets and financial liabilities. Securities Available for Sale Securities classified as available for sale are reported at fair value. U.S. Treasuries are valued using Level 1 inputs. Other securities available for sale including U.S. federal agencies, registered mortgage backed securities and state and political subdivisions are valued using prices from an independent pricing service utilizing Level 2 data. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the bond’s terms and conditions, among other things. The Company also invests in private label mortgage backed securities for which observable information is not readily available. These securities are reported at fair value utilizing Level 3 inputs. For these securities, management determines the fair value based on replacement cost, the income approach or information provided by outside consultants or lead investors. Discount rates are primarily based on reference to interest rate spreads on comparable securities of similar duration and credit rating as determined by the nationally recognized rating agencies adjusted for a lack of trading volume. Significant unobservable inputs are developed by investment securities professionals involved in the active trading of similar securities. 26 The Company reviews the prices for Level 1 and Level 2 securities supplied by the independent pricing service for reasonableness and to ensure such prices are aligned with traditional pricing matrices. In general, the Company does not purchase investment portfolio securities that are esoteric or that have complicated structures. The Company’s portfolio primarily consists of traditional investments including U.S. Treasury obligations, federal agency mortgage pass-through securities, general obligation municipal bonds and a small amount of municipal revenue bonds. Pricing for such instruments is fairly generic and is easily obtained. For in-state bond issues that have relatively low issue sizes and liquidity, the Company utilizes the same parameters for pricing mentioned in the preceding paragraph adjusted for the specific issue. Periodically, the Company will validate prices supplied by the independent pricing service by comparison to prices obtained from third party sources. The following table summarizes financial assets and financial liabilities measured at fair value on a recurring basis as of the periods presented, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value: Level 1 Inputs Level 2 Inputs Level 3 Inputs Total Fair Value (Dollars in thousands) June 30, 2020 Securities available for sale: U.S. Treasury $ 512,861 $ — $ — $ 512,861 U.S. federal agencies — 21,181 — 21,181 Mortgage-backed securities — 16,582 — 16,582 States and political subdivisions — 41,048 590 41,638 Asset backed securities — — 12,714 12,714 December 31, 2019 Securities available for sale: U.S. Treasury $ 414,449 $ — $ — $ 414,449 U.S. federal agencies — 23,024 — 23,024 Mortgage-backed securities — 17,005 — 17,005 States and political subdivisions — 22,531 — 22,531 Asset backed securities — — 12,714 12,714 The changes in Level 3 assets measured at estimated fair value on a recurring basis during the periods presented were as follows: Six Months Ended June 30, Twelve Months Ended December 31, 2020 2019 (Dollars in thousands) Balance at the beginning of the year $ 12,714 $ 13,443 Transfers from level 2 1,644 — Settlements ( 1,047 ) ( 695 ) Total unrealized losses ( 7 ) ( 34 ) Balance at the end of the period $ 13,304 $ 12,714 The Company’s policy is to recognize transfers in and transfers out of Levels 1, 2 and 3 as of the end of the reporting period. During the six months ended June 30, 2020, the Company transferred securities from Level 2 to Level 3 due to a review of the pricing models that determined some state and political subdivisions bonds to be Level 3. During the twelve months ended December 31, 2019, the Company did no t transfer any securities between levels in the fair value hierarchy. Financial Assets and Financial Liabilities Measured at Fair Value on a Nonrecurring Basis Certain financial assets and financial liabilities are measured at fair value on a nonrecurring basis; that is, the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment). These financial assets and financial liabilities are reported at fair value utilizing Level 3 inputs. The Company invests in equity securities without readily determinable fair values and utilizes Level 3 inputs. Beginning January 1, 2018, upon adoption of ASU 2016-01, these securities are reported at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. The realized and unrealized gains and losses are reported as securities transactions in the noninterest income section of the consolidated statements of comprehensive income. 27 Collateral dependent l oans are reported at the fair value of the underlying collateral if repayment is dependent on liquidation of the collateral. When management determines that foreclosure is probable or when the borrower is experiencing financial difficulty at the reporting date and repayment is expected to be provided substantially through the operation or sale of the collateral, expected credit losses are based on the fair value of the collateral at the reporting date, adjusted for selling costs as appropriate. In no case does the fair value of a collateral dependent loan exceed the fair value of the underlying collateral. The collateral dependent loans are adjusted to fair value through a specific allocation of the allowance for credit losses or a direct charge-down of the loan. Repossessed assets, upon initial recognition, are measured and adjusted to fair value through a charge-off to the allowance for possible credit losses based upon the fair value of the repossessed asset. Other real estate owned is revalued at fair value subsequent to initial recognition, with any losses recognized in net expense from other real estate owned. The following table summarizes assets measured at fair value on a nonrecurring basis. The fair value represents end of period values, which approximate fair value measurements that occurred on various measurement dates throughout the period: Total Fair Value Level 3 (Dollars in thousands) As of and for the Year-to-date Period Ended June 30, 2020 Equity securities $ 9,373 Collateral dependent loans 21,440 Repossessed assets 264 Other real estate owned 2,215 As of and for the Year-to-date Period Ended December 31, 2019 Equity securities $ 10,121 Collateral dependent loans 45,687 Repossessed assets 465 Other real estate owned 3,024 Estimated Fair Value of Financial Instruments The Company is required under current authoritative accounting guidance to disclose the estimated fair value of their financial instruments that are not recorded at fair value. For the Company, as for most financial institutions, substantially all of its assets and liabilities are considered financial instruments. A financial instrument is defined as cash, evidence of an ownership interest in an entity or a contract that creates a contractual obligation or right to deliver or receive cash or another financial instrument from a second entity. The following methods and assumptions were used to estimate the fair value of each class of financial instruments: Cash and Cash Equivalents Include: Cash and Due from Banks and Interest-Bearing Deposits with Banks The carrying amount of these short-term instruments is based on a reasonable estimate of fair value. Federal Funds Sold The carrying amount of these short-term instruments is based on a reasonable estimate of fair value. Securities Held for Investment For securities held for investment, which are generally traded in secondary markets, fair values are based on quoted market prices or dealer quotes, if available. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities making adjustments for credit or liquidity if applicable. Loans Held For Sale The Company originates mortgage loans to be sold. At the time of origination, the acquiring bank has already been determined and the terms of the loan, including interest rate, have already been set by the acquiring bank, allowing the Company to originate the loan at fair value. Mortgage loans are generally sold within 30 days of origination. Loans held for sale are valued using Level 2 inputs. Gains or losses recognized upon the sale of the loans are determined on a specific identification basis. 28 Loans To determine the fair value of loans, the Company uses an exit price calculation, which takes into account factors such as liquidity, credit and the nonperformance risk of loans. For certain homogeneous categories of loans, such as some residential mortgages, fair values are estimated using the quoted market prices for securities backed by similar loans, adjusted for differences in loan characteristics. The fair values of other types of loans including PPP loans are estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. Deposits The fair values of transaction and savings accounts are the amounts payable on demand at the reporting date. The fair values of fixed-maturity certificates of deposit are estimated using the rates currently offered for deposits of similar remaining maturities. Short-Term Borrowings The amounts payable on these short-term instruments are reasonable estimates of fair value. Long-Term Borrowings The fair values of fixed-rate long-term borrowings are estimated using rates that would be charged for borrowings of similar remaining maturities. Junior Subordinated Debentures The fair values of junior subordinated debentures are estimated using the rates that would be charged for junior subordinated debentures of similar remaining maturities. Loan Commitments and Letters of Credit The fair values of commitments are estimated using the fees currently charged to enter into similar agreements, taking into account the terms of the agreements. The fair values of letters of credit are based on fees currently charged for similar agreements. The estimated fair values of the Company’s financial instruments that are reported at amortized cost in the Company’s consolidated balance sheets, segregated by the level of valuation inputs within the fair value hierarchy utilized to measure fair value, are as follows: June 30, December 31, 2020 2019 Carrying Amount Fair Value Carrying Amount Fair Value (Dollars in thousands) FINANCIAL ASSETS Level 2 inputs: Cash and cash equivalents $ 1,788,343 $ 1,788,343 $ 1,868,281 $ 1,868,281 Federal funds sold — — 1,000 1,000 Securities held for investment 75 78 1,403 1,403 Loans held for sale 21,902 21,902 11,001 11,001 Level 3 inputs: Securities held for investment 2,980 2,970 500 500 Loans, net of allowance for credit losses 6,585,454 6,643,225 5,607,905 5,625,005 FINANCIAL LIABILITIES Level 2 inputs: Deposits 8,486,671 8,503,240 7,483,635 7,497,429 Short-term borrowings 8,100 8,100 1,100 1,100 Long-term borrowings 3,000 2,989 — — Junior subordinated debentures 26,804 30,246 26,804 29,324 OFF-BALANCE SHEET FINANCIAL INSTRUMENTS Loan commitments 3,140 2,832 Letters of credit 476 485 29 Non-financial Assets and Non-financial Liabilities Measured at Fair Value The Company has no non-financial assets or non-financial liabilities measured at fair value on a recurring basis. Certain non-financial assets and non-financial liabilities measured at fair value on a nonrecurring basis include intangible assets and other non-financial long-lived assets measured at fair value and adjusted for impairment. These items are evaluated at least annually for impairment. The overall levels of non-financial assets and non-financial liabilities measured at fair value on a nonrecurring basis were no t considered to be significant to the Company at June 30, 2020 or December 31, 2019. (11) SEGMENT INFORMATION The Company evaluates its performance with an internal profitability measurement system that measures the profitability of its business units on a pre-tax basis. The five principal business units are metropolitan banks, community banks, Pegasus Bank, other financial services and executive, operations and support. Metropolitan banks, community banks and Pegasus Bank 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. Pegasus Bank consists of banking locations in the Dallas metropolitan area. Other financial services are specialty product business units including guaranteed small business lending, residential mortgage lending, trust services, securities brokerage, electronic banking and insurance. The executive, operations and support groups represent executive management, operational support and corporate functions that are not allocated to the other business units. The results of operations and selected financial information for the four business units are as follows: Metropolitan Banks Community Banks Pegasus Bank Other Financial Services Executive, Operations & Support Eliminations Consolidated (Dollars in thousands) Three Months Ended June 30, 2020 Net interest income $ 22,310 $ 43,917 $ 4,976 $ 5,905 $ 100 $ — $ 77,208 Noninterest income 4,571 13,841 121 9,328 25,774 ( 21,553 ) 32,082 Income before taxes 3,613 15,532 1,345 7,786 18,232 ( 21,202 ) 25,306 Three Months Ended June 30, 2019 Net interest income $ 21,438 $ 44,775 $ — $ 1,411 $ 1,168 $ — $ 68,792 Noninterest income 4,635 16,243 — 10,105 37,917 ( 34,823 ) 34,077 Income before taxes 14,866 30,041 — 5,572 27,590 ( 34,241 ) 43,828 Six Months Ended June 30, 2020 Net interest income $ 44,494 $ 88,415 $ 10,584 $ 7,488 $ 300 $ — $ 151,281 Noninterest income 9,271 29,694 252 20,218 53,257 ( 45,465 ) 67,227 Income before taxes 14,026 39,968 2,943 13,545 27,635 ( 44,561 ) 53,556 Six Months Ended June 30, 2019 Net interest income $ 42,791 $ 88,182 $ — $ 2,582 $ 2,140 $ — $ 135,695 Noninterest income 8,844 31,128 — 19,978 73,438 ( 67,310 ) 66,078 Income before taxes 30,235 58,086 — 10,071 52,613 ( 66,163 ) 84,842 Total Assets: June 30, 2020 $ 3,035,989 $ 5,703,770 $ 774,939 $ 938,034 $ 248,390 $ ( 1,088,669 ) $ 9,612,453 December 31, 2019 2,806,021 4,998,247 738,351 102,442 950,920 ( 1,030,223 ) 8,565,758 The financial information for each business unit is presented on the basis used internally by management to evaluate performance and allocate resources. The Company utilizes a transfer pricing system to allocate the benefit or cost of funds provided or used by the various business units. Certain services provided by the support group to other business units, such as item processing, are allocated at rates approximating the cost of providing the services. Eliminations are adjustments to consolidate the business units and companies. Capital expenditures are generally charged to the business unit using the asset. 30