What changed in this filing

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Item 2. Management’s Discussion and Analysis

2020-11-09 compared with 2020-08-07 · 102 added, 97 removed, 272 unchanged (42% of the section changed)

Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion and analysis of our financial condition as of June 30,2020 and December 31, 2019 and results of operations for the three and six months ended June 30, 2020 should be read in conjunction with our consolidated financial statements and notes to the financial statements for the year ended December 31, 2019, and the other information included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.

Certain risks, uncertainties and other factors, including those set forth under "Risk Factors" in Part I, Item 1A of the 2019 Form 10-K, and "Item 1A.

Risk Factors" in this Quarterly Report on Form 10-Q, may cause actual results to differ materially from the results discussed in the forward-looking statements appearing in this discussion and analysis.

The following discussion and analysis of our financial condition as of September 30, 2020 and December 31, 2019 and results of operations for the three and nine months ended September 30, 2020 should be read in conjunction with our consolidated financial statements and notes to the financial statements for the year ended December 31, 2019, and the other information included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.

Certain risks, uncertainties and other factors, including those set forth under "Risk Factors" in Part I, Item 1A of the 2019 Form 10-K, and "Item 1A, Risk Factors" in this Quarterly Report on Form 10-Q, may cause actual results to differ materially from the results discussed in the forward-looking statements appearing in this discussion and analysis.

FORWARD LOOKING STATEMENTS

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The Company is closely monitoring its loan portfolio for effects related to COVID-19.

Since 2014, the oil and gas industry has experienced a sustained downturn due to low oil and gas prices.

The unprecedented sharp decline in crude oil prices since February 2020 has negatively impacted the oil and gas industry and the overall economies of our Oklahoma and Dallas, Texas markets and is expected to cause further worsening conditions of energy companies, oilfield services companies, related businesses and overall economic activities in the Company’s primary markets.

The decline in economic activity as a result of the pandemic has caused a sharp decline in crude oil prices since February 2020.

This decline has negatively impacted the oil and gas industry and the overall economies of our Oklahoma and Dallas, Texas markets and is expected to cause further worsening conditions of energy companies, oilfield services companies, related businesses and overall economic activities in the Company’s primary markets.

Prolonged or heightened pricing pressure on oil and gas could lead to increased credit stress in the Company’s energy portfolio, increased losses associated with that portfolio and weaker demand for energy lending, lower borrowing needs, negative impact on construction and real estate related to energy, and a number of other potential impacts that are difficult to isolate or quantify.

If the negative impacts due to COVID-19 continue coupled with low energy prices, it is possible that the Company’s goodwill could become impaired in future periods.

BancFirst Corporation’s net income for the second quarter of 2020 was $20.7 million, compared to $34.2 million for the second quarter of 2019.

Diluted net income per common share was $0.63 and $1.02 for the second quarter of 2020 and 2019, respectively.

The results for the second quarter of 2020 were negatively impacted by a higher provision for credit losses.

The second quarter of 2020 includes the net income of Pegasus Bank in Dallas, Texas, which was acquired on August 15, 2019, and the income and expenses associated with the purchase of certain assets and assumption of certain liabilities on March 5, 2020, from The Citizens State Bank of Okemah.

Net income was $43.3 million, or $1.31 diluted earnings per share, for the six months ended June 30, 2020, compared to net income of $66.0 million, or $1.98 diluted earnings per share, for the six months ended June 30, 2019.

The Company’s net interest income for the second quarter of 2020 increased to $77.2 million, compared to $68.8 million for the second quarter of 2019.

BancFirst Corporation’s net income for the third quarter of 2020 was $20.9 million, compared to $33.4 million for the third quarter of 2019.

Diluted net income per common share was $0.63 and $1.00 for the third quarter of 2020 and 2019, respectively.

The results for the third quarter of 2020 were negatively impacted by a higher provision for credit losses.

The third quarter of 2020 includes the net income of Pegasus Bank in Dallas, Texas, which was acquired on August 15, 2019, and the income and expenses associated with the purchase of certain assets and assumption of certain liabilities on March 5, 2020, from The Citizens State Bank of Okemah.

Net income was $64.2 million, or $1.94 diluted earnings per share, for the nine months ended September 30, 2020, compared to net income of $99.4 million, or $2.98 diluted earnings per share, for the nine months ended September 30, 2019.

The Company’s net interest income for the third quarter of 2020 increased to $75.9 million, compared to $72.3 million for the third quarter of 2019.

The net interest margin for the quarter was 3.40%, compared to 3.89% a year ago.

The Company’s provision for credit losses for the second quarter of 2020 was $19.3 million, compared to $2.4 million a year ago.

The Company’s provision for credit losses for the third quarter of 2020 was $18.7 million, compared to $2.8 million a year ago.

The increase in the provision related to reserve build up for expected credit losses stemming from the COVID-19 pandemic and low energy prices.

The Company had net recoveries for the quarter of less than 0.01% of average loans, compared to net charge-offs of less than 0.01% of average loans for the second quarter of 2019.

The Company had net charge-offs 0.03% of average loans, compared to 0.04% of average loans for the third quarter of 2019.

Noninterest income for the quarter totaled $34.6 million, compared to $35.6 million last year.

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Noninterest expense for the quarter totaled $66.1 million, compared to $62.2 million last year.

The increase in noninterest expenses was primarily due to salary increases in 2020 related to annual merit increases, acquisition of Pegasus Bank and COVID-19 pandemic related salary expenses.

The Company’s effective tax rate was 18.1% compared to 22.0% for the second quarter of 2019.

At June 30, 2020, the Company’s total assets were $9.6 billion, an increase of $1.0 billion from December 31, 2019.

The increase in noninterest expenses was primarily due to salary increases in 2020 related to annual merit increases and the acquisition of Pegasus Bank.

The Company’s effective tax rate was 18.4% compared to 22.3% for the third quarter of 2019.

At September 30, 2020, the Company’s total assets were $9.6 billion, an increase of $1.1 billion from December 31, 2019.

Debt securities of $596.9 million were up $105.3 million from December 31, 2019.

Loans totaled $6.7 billion, an increase of $1.0 billion from December 31, 2019.

Loans totaled $6.7 billion, an increase of $987.6 million from December 31, 2019.

Deposits totaled $8.5 billion, an increase of $1.0 billion from the December 31, 2019 total.

The increase in assets, loans and deposits were primarily related to the Paycheck Protection Program (PPP) .

At June 30, 2020, the balance of the PPP loans was $825.1 million, net of unamortized processing fees of $26.2 million.

The increase in assets, loans and deposits were primarily related to the Paycheck Protection Program (PPP) and other government stimulus .

At September 30, 2020, the Company had PPP loans held for investment of $830.3 million, net of unamortized processing fees of $22.5 million, and approximately $1.4 million in PPP loans held for sale.

The Company’s total stockholders’ equity was $1.0 billion, an increase of $38.8 million over December 31, 2019.

Nonaccrual loans represent 0.74% of total loans at June 30, 2020, up from 0.32% at year-end 2019.

The increase in nonaccrual loans was due to further downgrades of energy loans.

Nonaccrual loans represent 1.24% of total loans at September 30, 2020, up from 0.32% at year-end 2019.

The allowance to total loans was 1.59% up from 0.96% at year-end 2019.

The allowance to nonaccrual loans was 128.82% compared to 301.91% at year-end 2019.

T he Company ’s principal subsidiary bank, BancFirst, has entered into an agreement to sell approximately $2 1.5 million in loans and $38 .0 million in deposits from its Hugo, Oklahoma branch to AmeriState Bank in Atoka, Oklahoma.

The transaction is scheduled to be completed during the first quarter of 2021 and is subject to regulatory approval.

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 th e Company from the date of purchase forward.

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.

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Three Months Ended

Six Months Ended

September 30,

Nine Months Ended

September 30,

Income Statement Data

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Net Interest Income

For the three months ended June 30, 2020, net interest income, which is the Company’s principal source of operating revenue, increased $8.4 million or 12.2% compared to the three months ended June 30, 2019.

For the three months ended September 30, 2020, net interest income, which is the Company’s principal source of operating revenue, increased $3.6 million or 4.9% compared to the three months ended September 30, 2019.

Net interest income increased due to loan growth, PPP fee income and the drop in interest rates on deposits.

Net interest margin is the ratio of taxable-equivalent net interest income to average earning assets for the period.

As shown in the preceding table, the Company’s net interest margin for the second quarter of

20 20 decrease d compared to the second quarter of 201 9, primarily due to the lower average rates on federal funds and securit ies during the quarter .

Net interest income for the six months ended June 30, 2020 increased $15.6 million or 11.5% compared to the six months ended June 30, 2019.

As shown in the preceding table, the Company’s net interest margin for the third quarter of 2020 decreased compared to the third quarter of 2019, primarily due to the lower average rates on federal funds and securities during the quarter.

Net interest income for the nine months ended September 30, 2020 increased $19.2 million or 9.2% compared to the nine months ended September 30, 2019.

Net interest income increased due to loan growth, PPP fee income and the drop in interest rates on deposits.

As shown in the preceding table, the Company’s net interest margin for the six months ended June 30, 2020 decreased compared to the six months ended June 30, 2019, primarily due to the lower average rates on federal funds and securities during the quarter.

As shown in the preceding table, the Company’s net interest margin for the nine months ended September 30, 2020 decreased compared to the nine months ended September 30, 2019, primarily due to the lower average rates on federal funds and securities during the quarter.

The Company’s net interest income and net interest margin have been, and the Company currently expects them to continue to be, impacted by the decreases in market interest rates and the expectation that interest rates will remain at these low levels for some period of time in light of the on-going economic disruption arising from the COVID-19 pandemic.

Provision for Credit Losses

The Company’s provision for credit losses for the second quarter of 2020 was $19.3 million compared to $2.4 million a year ago.

The Company’s provision for credit losses for the third quarter of 2020 was $18.7 million compared to $2.8 million a year ago.

The increase in the provision was related to reserve build up for expected credit losses stemming from the COVID-19 pandemic and low energy prices.

The Company’s provision this quarter is based on a modestly optimistic assumption on the timing of an end to the COVID-19 pandemic, as well as the magnitude of the government’s stimulus response to it.

To the extent the amount of time the economy remains adversely affected is more extended than the Company’s current base projection, the Company will see a continuation of higher than normal provision in future periods.

The Company’s provision this quarter is based on the Company’s quarterly evaluation of the continued uncertainty and lack of clarity of the timing of an end to the COVID-19 pandemic, as well as the magnitude of the government’s stimulus response to it.

To the extent the amount of time the economy remains adversely affected is more extended than the Company’s current projection, the Company expects to see a continuation of higher than normal provision in future periods.

The Company establishes an allowance as an estimate of the expected credit losses in the loan portfolio at the balance sheet date.

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Should any of the factors considered by management in evaluating the appropriate level of the allowance for credit losses change, the Company’s estimate of expected credit losses could also change, which could affect the amount of future provisions for credit losses.

Net loan recoveries were $87,000 for the second quarter of 2020, compared to net loan charge-offs of $240,000 for the second quarter of 2019.

Net loan charge-offs were $2.1 million for the third quarter of 2020, compared to net loan charge-offs of $1.9 million for the third quarter of 2019.

The rate of net charge-offs to average total loans, as presented in the preceding table, continues to be at a low level.

For the six months ended June 30, 2020, the Company’s provision for credit losses was $38.9 million compared to $4.1 million for the six months ended June 30, 2019.

Net loan charge-offs were $961,000, compared to $398,000 for the same period of the prior year.

For the nine months ended September 30, 2020, the Company’s provision for credit losses was $57.7 million compared to $6.9 million for the nine months ended September 30, 2019.

Net loan charge-offs were $3.1 million, compared to $2.3 million for the same period of the prior year.

Noninterest Income

Noninterest income, as presented in the preceding table, decreased by $2.0 million for second quarter of 2020 compared to the second quarter of 2019.

The decrease in noninterest income is primarily due to a decrease in deposit service charges resulting from lower economic activity and equity security losses.

Noninterest income included non-sufficient funds fees totaling $5.0 million and $8.1 million for the three month periods ended June 30, 2020 and 2019, respectively.

This represents 15.6% and 23.8% of the Company’s noninterest income for the three month periods ended June 30, 2020 and 2019, respectively.

In addition, the Company had fees from debit card usage totaling $9.1 million and $8.7 million during the three month periods ended June 30, 2020 and 2019, respectively.

This represents 28.5% and 25.6% of the Company’s noninterest income for the three month periods ended June 30, 2020 and 2019, respectively.

Noninterest income for the six months ended June 30, 2020 totaled $67.2 million compared to $66.1 million for the six months ended June 30, 2019.

The increase in noninterest income was primarily due to growth in debit card usage fees and sweep fees, partially offset by decreased service charges on deposits and equity security losses.

Noninterest income included fees from debit card usage totaling $17.3 million and $16.5 million during the six months ended June 30, 2020 and 2019, respectively.

This represents 25.7% and 25.0% of the Company’s noninterest income for the six month periods ended June 30, 2020 and 2019, respectively.

In addition, the Company had non-sufficient fund fees totaling $13.3 million and $15.7 million during the six months ended June 30, 2020 and 2019, respectively.

This represents 19.7% and 23.8% of the Company’s noninterest income for the six month periods ended June 30, 2020 and 2019, respectively.

Noninterest income, as presented in the preceding table, decreased by $1.1 million for third quarter of 2020 compared to the third quarter of 2019.

The decrease in noninterest income is primarily due to a decrease in deposit service charges resulting from lower economic activity and government stimulus.

Noninterest income included non-sufficient funds fees totaling $6.4 million and $8.8 million for the three month periods ended September 30, 2020 and 2019, respectively.

This represents 18.6% and 24.6% of the Company’s noninterest income for the three month periods ended September 30, 2020 and 2019, respectively.

In addition, the Company had fees from debit card usage totaling $9.7 million and $8.7 million during the three month periods ended September 30, 2020 and 2019, respectively.

This represents 27.9% and 24.3% of the Company’s noninterest income for the three month periods ended September 30, 2020 and 2019, respectively.

Noninterest income for the nine months ended September 30, 2020 totaled $101.8 million compared to $101.7 million for the nine months ended September 30, 2019.

The increase in noninterest income was primarily due to growth in debit card usage fees, partially offset by decreased service charges on deposits and equity security losses.

Noninterest income included fees from debit card usage totaling $27.0 million and $25.1 million during the nine months ended September 30, 2020 and 2019, respectively.

This represents 26.5% and 24.6% of the Company’s noninterest income for the nine month periods ended September 30, 2020 and 2019, respectively.

In addition, the Company had non-sufficient fund fees totaling $19.7 million and $24.5 million during the nine months ended September 30, 2020 and 2019, respectively.

This represents 19.3% and 24.1% of the Company’s noninterest income for the nine month periods ended September 30, 2020 and 2019, respectively.

The Durbin Amendment is a provision in the larger Dodd-Frank Act that gave the Federal Reserve the authority to establish rates on debit card transactions.

The Durbin Amendment aims to control debit card interchange fees and restrict anti-competitive practices.

The Durbin Amendments’ intent is to control debit card interchange fees and restrict anti-competitive practices.

The law applies to banks with over $10 billion in assets and limits these banks on what they charge for debit card interchange fees.

Prior to the COVID-19 pandemic, there was no likelihood that the Company would surpass $10 billion in total assets for several years.

Prior to the COVID-19 pandemic, there was little or no likelihood that the Company would surpass $10 billion in

total assets for several years.

However, with the CARES Act, including PPP loans, stimulus payments to households, and artificially high household savings rates, our deposits and assets have grown dramatically beyond reasonably foreseeable levels.

To the extent the COVID-19 pandemic continues and the government response to it continues on the same or similar basis, the Company has a heightened possibility of exceeding $10 billion in total assets at December 31, 2020.

Pursuant to the Durbin amendment of the Dodd-Frank Act, this would trigger an approximate loss of income from debit card interchange fees between $16 and $18 million in subsequent years.

To the extent the COVID-19 pandemic continues and the government response to it continue s on the same or similar basis , the Company has a n increasingly heightened possibility of exceeding $10 billion in total assets at December 31, 2020.

Pursuant to the Durbin A mendment of the Dodd-Frank Act, this would trigger an approximate loss of income from debit card interchange fees between $16 and $ 18 million in subsequent years.

The Company is developing strategies to avoid exceeding $10 billion in assets and the loss of interchange income, but the success of these strategies is uncertain.

Noninterest Expense

Noninterest expense as presented in the preceding table, increased by $8.0 million for second quarter of 2020 compared to the second quarter of 2019.

The increase in noninterest expenses was primarily due to salary increases in 2020 related to annual merit increases, noninterest expenses of Pegasus Bank and COVID-19 pandemic related salary expenses.

For the six months ended June 30, 2020, noninterest expense increased by $13.2 million compared to the six months ended June 30, 2019.

The increase in noninterest expenses was primarily due to salary increases in 2020 related to annual merit increases, pandemic related salary expenses, noninterest expenses of Pegasus Bank and acquisition expenses related to the purchase of assets from Citizens, which were partially offset by a $2.1 million gain on a sale of property carried in other real estate owned.

The Company’s effective tax rate on income before taxes was 18.1% for the second quarter of 2020, compared to 22.0% for the second quarter of 2019.

The decrease in the effective tax rate for the second quarter of 2020 was due to a greater effect of tax credits resulting from lower income.

The Company’s effective tax rate on income before taxes was 19.1% for the first six months of 2020, compared to 22.2% for the first six months of 2019.

The decrease in the effective tax rate for the first six months of 2020 was due to a greater effect of tax credits resulting from lower income.

Noninterest expense as presented in the preceding table, increased by $3.9 million for third quarter of 2020 compared to the third quarter of 2019.

The increase in noninterest expenses was primarily due to salary increases in 2020 related to annual merit increases and noninterest expenses of Pegasus Bank.

For the nine months ended September 30, 2020, noninterest expense increased by $17.1 million compared to the nine months ended September 30, 2019.

The increase in noninterest expenses was primarily due to salary increases in 2020 related to annual merit increases, pandemic related salary expenses, noninterest expenses of Pegasus Bank and acquisition expenses related to the purchase of assets from Citizens, which were partially offset by $2.3 million in net gains on sales of property carried in other real estate owned.

The Company’s effective tax rate on income before taxes was 18.4% for the third quarter of 2020, compared to 22.3% for the third quarter of 2019.

The decrease in the effective tax rate for the third quarter of 2020 was due to a greater effect of tax credits resulting from lower income.

The Company’s effective tax rate on income before taxes was 18.9% for the first nine months of 2020, compared to 22.3% for the first nine months of 2019.

The decrease in the effective tax rate for the first nine months of 2020 was due to a greater effect of tax credits resulting from lower income.

FINANCIAL POSITION

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(Dollars in thousands, except per share data)

September 30,

Balance Sheet Data

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Asset Quality Data

Past due loans

Loans past due 90 days and still accruing

Nonaccrual loans (5)

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Reconciliation of Non-PPP loan ratios (non-GAAP)(4)

Less PPP loans

Total Loans (net of unearned interest)

Less total PPP loans

Total Non-PPP loans (non-GAAP)

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Cash and Interest-Bearing Deposits with Banks

The aggregate of cash and due from banks and interest-bearing deposits with banks decreased by $79.9 million or 4.3% to $1.8 billion, from December 31, 2019 to June 30, 2020.

The aggregate of cash and due from banks and interest-bearing deposits with banks decreased by $32.8 million or 1.8% to $1.8 billion, from December 31, 2019 to September 30, 2020.

As shown on the Company’s cash flow statement, the primary use of cash was due to the increase in loans.

At June 30, 2020, total debt securities increased $116.4 million, or 23.7% compared to December 31, 2019.

At September 30, 2020, total debt securities increased $105.3 million, or 21.4% compared to December 31, 2019.

The size of the Company’s securities portfolio is determined by the Company’s liquidity and asset/liability management.

The net unrealized gain on securities available for sale, before taxes, was $13.0 million at June 30, 2020, compared to a net unrealized gain of $4.6 million at December 31, 2019.

These unrealized gains are included in the Company’s stockholders’ equity as accumulated other comprehensive income, net of income tax, in the amounts of a gain of $9.7 million at June 30, 2020 and a gain of $3.5 million at December 31, 2019.

The net unrealized gain on securities available for sale, before taxes, was $11.7 million at September 30, 2020, compared to a net unrealized gain of $4.6 million at December 31, 2019.

These unrealized gains are included in the Company’s stockholders’ equity as accumulated other comprehensive income, net of income tax, in the amounts of a gain of $8.7 million at September 30, 2020 and a gain of $3.5 million at December 31, 2019.

The net unrealized gains increased in 2020 due to the Federal Reserve decreasing interest rates to near zero in March 2020 because of the economic effects of the COVID-19 pandemic.

As the effects on the economy due to the COVID-19 pandemic became more apparent late in the first quarter, monetary flows were directed to high quality fixed income instruments such as short-term Treasury securities.

Over the six-month period, the yield on the three-year Treasury note decreased 144 basis points with a corresponding increase in valuations.

Over the nine-month period, the yield on the three-year Treasury note decreased 146 basis points with a corresponding increase in valuations.

Loans (Including Acquired Loans)

At June 30, 2020, loans totaled $6.7 billion, an increase of $1.0 billion from December 31, 2019.

At September 30, 2020, loans totaled $6.7 billion, an increase of $987.6 million from December 31, 2019.

The increase in loans was primarily related to the PPP, internal growth and the purchase of loans from Citizens.

At June 30, 2020, the balance of the PPP loans was $825.1 million, net of unamortized processing fees of $26.2 million.

At September 30, 2020, the balance of total PPP loans was $831.7 million, net of unamortized processing fees of $22.5 million.

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.

At June 30, 2020, the Company had the following exposures to industries adversely impacted by the COVID-19 pandemic:

At September 30, 2020, the Company had the following exposures to industries adversely impacted by the COVID-19 pandemic:

energy $456.9 million, medical $154.7 million, hotels/motels $128.4 million and restaurants $83.8 million.

In total, these industries represented approximately 13% of the loan portfolio.

In addition, 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.

In addition, due to the impacts of the COVID-19 pandemic, the Company has approximately $104.5 million in modified loans, most of which are secured by commercial real estate, as of September 30, 2020.

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 deteriorated and restructured loans.

Consequently, it is reasonable to expect that when temporary regulatory accounting relief and payment modifications cease, there could be a marked increase in credit deteriorated 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.

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As a result, the Company recorded a decrease to the allowance for credit losses of $3.2 million at January 1, 2020.

At June 30, 2020, the allowance for credit losses to total loans represented 1.34% of total loans, compared to 0.96% at December 31, 2019.

At September 30, 2020, the allowance for credit losses to total loans represented 1.59% of total loans, compared to 0.96% at December 31, 2019.

The increase in the allowance for credit losses related to reserve build up for expected credit losses stemming from the COVID-19 pandemic and low energy prices.

The fair value adjustment on acquired loans consists of an interest rate component to adjust the effective rates on the loans to market rates and a credit component to adjust for estimated credit exposures in the acquired loans.

The interest rate component was $875,000 at June 30, 2020 and $1.7 million at December 31, 2019.

The credit component of the adjustment was $4.4 million at June 30, 2020 and $6.8 million at December 31, 2019.

The interest rate component was $846,000 at September 30, 2020 and $1.7 million at December 31, 2019.

The credit component of the adjustment was $2.8 million at September 30, 2020 and $6.8 million at December 31, 2019.

These fair value adjustments will be accreted to income over the remaining life of the loans.

Nonaccrual and Restructured Loans

Nonaccrual loans totaled $49.5 million at June 30, 2020, compared to $18.0 million at the end of 2019.

The increase in nonaccrual loans was due to further downgrades of energy loans.

Nonaccrual loans totaled $82.4 million at September 30, 2020, compared to $18.0 million at the end of 2019.

The increase in nonaccrual loans was due to further deterioration of the financial condition of commercial loans.

The Company’s nonaccrual loans are primarily commercial and real estate loans.

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A loan is placed on nonaccrual status when, in the opinion of management, the future collectability of interest or principal or both is in serious doubt.

Interest income is recognized on certain of these loans on a cash basis if the full collection of the remaining principal balance is reasonably expected.

Interest income is recognized on certain of these loans on a cash basis if the full collection of the remaining principal balance is

reasonably expected.

Otherwise, interest income is not recognized until the principal balance is fully collected.

Had nonaccrual loans performed in accordance with their original contractual terms, the Company would have recognized additional interest income of approximately $983,000 for the six

months ended June 30, 2020 and $1.0 million for the six months ended June 30, 2019.

Had nonaccrual loans performed in accordance with their original contractual terms, the Company would have recognized additional interest income of approximately $ 2.1 million for the nine months ended September 30, 2020 and $1.

4 million for the nine months ended September 30, 2019.

Only a small amount of this interest is expected to be ultimately collected.

Troubled debt restructured loans totaled $3.2 million at June 30, 2020, compared to $18.0 million at the end of 2019.

Troubled debt restructured loans totaled $2.8 million at September 30, 2020, compared to $18.0 million at the end of 2019.

The decrease in troubled debt restructurings was due primarily to a review of troubled debt restructurings during the period and the related performance of the borrowers.

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As a result, the current and future financial effects of the recorded balance of loans considered to be troubled debt restructurings whose terms were modified during the period were not considered to be material.

Other real estate owned and repossessed assets totaled $4.9 million at June 30, 2020, compared to $6.1 million at December 31, 2019.

Other real estate owned and repossessed assets totaled $4.9 million at September 30, 2020, compared to $6.1 million at December 31, 2019.

Other real estate owned and repossessed assets decreased during 2020 primarily due to the sale of one property.

Potential problem loans are performing loans to borrowers with a weakened financial condition, or which are experiencing unfavorable trends in their financial condition, which causes management to have concerns as to the ability of such borrowers to comply with the existing repayment terms.

The Company had approximately $8.0 million of these loans at June 30, 2020, compared to $13.7 million at December 31, 2019.

The Company had approximately $9.6 million of these loans at September 30, 2020, compared to $13.7 million at December 31, 2019.

Potential problem loans are not included in nonperforming and restructured loans.

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Liquidity and Funding

At June 30, 2020, deposits totaled $8.5 billion, an increase of $1.0 billion or 13.4% from the December 31, 2019 total.

The increase in deposits were primarily related to deposits of proceeds from the PPP and inflow of existing customer deposits.

At September 30, 2020, deposits totaled $8.5 billion, an increase of $1.0 billion or 13.5% from the December 31, 2019 total.

The increase in deposits was primarily related to deposits of proceeds from the PPP and inflow of existing customer deposits.

The Company’s core deposits provide it with a stable, low-cost funding source.

The Company’s core deposits as a percentage of total deposits were 98.2% at June 30, 2020 and 98.4% at December 31, 2019.

Noninterest-bearing deposits to total deposits were 43.7% at June 30, 2020, compared to 39.5% at December 31, 2019.

The Company’s core deposits as a percentage of total deposits were 98.2% at September 30, 2020 and 98.4% at December 31, 2019.

Noninterest-bearing deposits to total deposits were 44.3% at September 30, 2020, compared to 39.5% at December 31, 2019.

Short-Term Borrowings

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The level of these borrowings is determined by various factors, including customer demand and the Company’s ability to earn a favorable spread on the funds obtained.

Short-term borrowings were $8.1 million at June 30, 2020, compared to $1.1 million at December 31, 2019.

Short-term borrowings were $300,000 at September 30, 2020, compared to $1.1 million at December 31, 2019.

Long-Term Borrowings

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The Company’s assets, including residential first mortgages of $836.6 million, are pledged as collateral for the borrowings under the line of credit.

As of June 30, 2020 the Company had $3.0 million advanced under the line of credit from FHLB, compared to no advances outstanding as of December 31, 2019.

The current $3.0 million advance is for six-months at 0%.

In addition, the Company has a revolving line of credit with another financial institution with the ability to draw up to $10.0 million with no advances outstanding.

This line of credit has a variable rate based on prime rate minus 25 basis points and matures in the third quarter of 2020.

As of September 30, 2020 and December 31, 2019, the Company had no advances outstanding under the line of credit from FHLB.

In addition, the Company had a revolving line of credit with another financial institution with the ability to draw up to $10.0 million with no advances outstanding.

This line of credit had a variable rate based on prime rate minus 25 basis points and matured in the third quarter of 2020.

There have not been any other material changes from the liquidity and funding discussion included in Management’s Discussion and Analysis in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.

Capital Resources

Stockholders’ equity totaled $1.0 billion at June 30, 2020, compared to $1.0 billion at December 31, 2019.

In addition to net income of $43.3 million, other changes in stockholders’ equity during the six months ended June 30, 2020 included $534,000 related to common stock issuances, $832,000 related to stock-based compensation, $2.3 million change in accounting principle related to CECL and a $6.2 million increase in other comprehensive income, that were partially offset by $20.9 million in dividends and $3.1 million in common stock repurchases.

The Company’s leverage ratio and total risk-based capital ratios at June 30, 2020, were well in excess of the regulatory requirements.

Stockholders’ equity totaled $1.0 billion at both September 30, 2020 and December 31, 2019.

In addition to net income of $64.2 million, other changes in stockholders’ equity during the nine months ended September 30, 2020 included $858,000 related to common stock issuances, $1.3 million related to stock-based compensation, $2.3 million change in accounting principle related to CECL and a $5.3 million increase in other comprehensive income, that were partially offset by $32.0 million in dividends and $3.1 million in common stock repurchases.

The Company’s leverage ratio and total risk-based capital ratios at September 30, 2020, were well in excess of the regulatory requirements.

See Note (8) of the Notes to Consolidated Financial Statements for a discussion of capital ratio requirements.

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(Dollars in thousands)

Three Months Ended June 30,

Three Months Ended September 30,

Earning assets:

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(Dollars in thousands)

Six Months Ended June 30,

Nine Months Ended September 30,

Earning assets:

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis