BANCFIRST CORP /OK/ 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations. 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 The Company may make forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 with respect to earnings, credit quality, corporate objectives, interest rates and other financial and business matters. Forward-looking statements include estimates and give management’s current expectations or forecasts of future events. The Company cautions readers that these forward-looking statements are subject to numerous assumptions, risks and uncertainties, including economic conditions; the performance of financial markets and interest rates; legislative and regulatory actions and reforms; competition; as well as other factors, all of which change over time. Examples of forward-looking statements include, but are not limited to: (i) projections of revenues, expenses, income or loss, earnings or loss per share, the payment or nonpayment of dividends, capital structure and other financial items; (ii) statements of plans, objectives and expectations, including those relating to products or services; (iii) statements of future economic performance; and (iv) statements of assumptions underlying such statements. Words such as “believes”, “anticipates”, “expects”, “intends”, “targeted”, “continue”, “remain”, “will”, “should”, “may” and other similar expressions are intended to identify forward-looking statements but are not the exclusive means of identifying such statements. Forward-looking statements involve risks and uncertainties that may cause actual results to differ materially from those in such statements. Factors that could cause actual results to differ from those discussed in the forward-looking statements include, but are not limited to: • The COVID-19 pandemic’s adverse effects on us and our customers, employees and third-party service providers; the adverse impacts of the pandemic on our business, financial position, operations and prospects may be material. It is not possible to accurately predict the extent, severity or duration of the pandemic or when normal economic and operation conditions will return. • The effect of governments’ stimulus programs. • Local, regional, national and international economic conditions and the impact they may have on the Company and its customers and the Company’s assessment of that impact. • Changes in the mix of loan geographies, sectors and types or the level of non-performing assets and charge-offs. • Inflation, interest rates, energy prices, securities markets and monetary fluctuations. • The effect of changes in laws and regulations (including laws and regulations concerning taxes, banking, securities and insurance) with which the Company must comply. • Impairment of the Company’s goodwill or other intangible assets. • Changes in consumer spending, borrowing and savings habits. • Changes in the financial performance and/or condition of the Company’s borrowers. • Technological changes. • Acquisitions and integration of acquired businesses. • The effect of changes in accounting policies and practices, as may be adopted by the regulatory agencies, as well as the Public Company Accounting Oversight Board, the Financial Accounting Standards Board and other accounting standard setters. • The Company’s success at managing the risks involved in the foregoing items. Actual results may differ materially from forward-looking statements. 33 THE COVID-19 PANDEMIC Since the latter half of the first quarter of 2020, the COVID-19 pandemic and actions taken in response to it have negatively impacted the global economy and all financial markets. Since March 31, 2020, these conditions and the related financial impact have continued and, in some cases, worsened. The Company believes that it is premature to determine the magnitude of the impact at this point. Although the Company is not able to estimate the impact of the COVID-19 pandemic and the resultant economic circumstances on a long-term basis at this time, the COVID-19 pandemic could materially affect the Company’s financial and operational results. See Item 1.A. Risk Factors for further discussion. The Company is closely monitoring its loan portfolio for effects related to COVID-19. 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. SUMMARY 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 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 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. The decrease in noninterest income is primarily due to a decrease in deposit charges resulting from lower economic activity. 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 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 $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) 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 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. 34 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 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 the first quarter of 2020, the Company repurchased 59,284 shares of its common stock for $3.1 million at an average price of $52.26 per shares under the Company’s stock repurchase program. On August 15, 2019 the Company acquired Pegasus Bank as described in the Company’s form 10-K for the year ended December 31, 2019. FUTURE APPLICATION OF ACCOUNTING STANDARDS See Note (1) of the Notes to Consolidated Financial Statements for a discussion of recently issued accounting pronouncements. SEGMENT INFORMATION See Note (11) of the Notes to Consolidated Financial Statements for disclosures regarding business segments. RESULTS OF OPERATIONS Selected income statement data and other selected data for the comparable periods were as follows: BANCFIRST CORPORATION SELECTED CONSOLIDATED FINANCIAL DATA (Unaudited) (Dollars in thousands, except per share data) Three Months Ended September 30, Nine Months Ended September 30, 2020 2019 2020 2019 Income Statement Data Net interest income $ 75,852 $ 72,287 $ 227,133 $ 207,982 Provision for credit losses 18,740 2,758 57,656 6,875 Securities transactions — — (545 ) 821 Total noninterest income 34,575 35,627 101,802 101,705 Salaries and employee benefits 41,995 40,354 123,977 112,649 Total noninterest expense 66,083 62,191 192,119 175,005 Net income 20,890 33,368 64,228 99,372 Per Common Share Data Net income – basic $ 0.64 $ 1.02 $ 1.97 $ 3.04 Net income – diluted 0.63 1.00 1.94 2.98 Cash dividends 0.34 0.32 0.98 0.92 Performance Data Return on average assets 0.86 % 1.65 % 0.93 % 1.71 % Return on average stockholders’ equity 7.89 13.80 8.24 14.14 Cash dividend payout ratio 53.13 31.37 49.75 30.26 Net interest spread 3.27 3.34 3.36 3.30 Net interest margin 3.40 3.89 3.58 3.88 Efficiency ratio 59.84 57.63 58.41 56.51 Net charge-offs to average loans 0.03 0.04 0.05 0.05 35 Net Interest Income 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 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 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 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 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. Management believes the allowance for credit losses is appropriate based upon management’s best estimate of expected losses within the existing loan portfolio. 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 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 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 $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 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 little or no likelihood that the Company would surpass $10 billion in 36 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 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 $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. Income Taxes 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. 37 FINANCIAL POSITION BANCFIRST CORPORATION SELECTED CONSOLIDATED FINANCIAL DATA (Dollars in thousands, except per share data) September 30, December 31, 2020 2019 (unaudited) Balance Sheet Data Total assets $ 9,618,868 $ 8,565,758 Total loans (net of unearned interest) 6,660,694 5,673,144 Allowance for credit losses 106,126 54,238 Debt securities 596,941 491,626 Deposits 8,495,891 7,483,635 Stockholders' equity 1,043,752 1,004,989 Book value per share 31.94 30.74 Tangible book value per share (non-GAAP)(1) 26.74 25.50 Balance Sheet Ratios Average loans to deposits (year-to-date) 78.73 % 76.06 % Average earning assets to total assets (year-to-date) 91.92 92.13 Average stockholders’ equity to average assets (year-to-date) 11.26 12.06 Asset Quality Data Loans past due 90 days and still accruing $ 6,412 $ 11,834 Nonaccrual loans (5) 82,385 17,965 Restructured loans 2,837 18,010 Total nonperforming and restructured loans 91,634 47,809 Other real estate owned and repossessed assets 4,939 6,073 Total nonperforming and restructured assets 96,573 53,882 Nonaccrual loans to total loans 1.24 % 0.32 % Nonaccrual loans to total Non-PPP loans (non-GAAP)(3) 1.41 0.32 Nonperforming and restructured loans to total loans 1.38 0.84 Nonperforming and restructured loans to total Non-PPP loans (non-GAAP)(3) 1.57 0.84 Nonperforming and restructured assets to total assets 1.00 0.63 Allowance for credit losses to total loans 1.59 0.96 Allowance for credit losses to total Non-PPP loans (non-GAAP)(3) 1.82 0.96 Allowance for credit losses to nonaccrual loans 128.82 301.91 Reconciliation of Tangible Book Value per Common Share (non-GAAP)(2) Stockholders' equity $ 1,043,752 $ 1,004,989 Less goodwill 149,922 148,604 Less intangible assets, net 19,914 22,608 Tangible stockholders' equity (non-GAAP) $ 873,916 $ 833,777 Common shares outstanding 32,679,191 32,694,268 Tangible book value per share (non-GAAP) $ 26.74 $ 25.50 (1) Refer to the “Reconciliation of Tangible Book Value per Common Share (non-GAAP)” Table. (2) Tangible book value per common share is stockholders’ equity less goodwill and intangible assets, net, divided by common shares outstanding. This amount is a non-GAAP financial measure but has been included as it is considered to be a critical metric with which to analyze and evaluate the financial condition and capital strength of the Company. This measure should not be considered a substitute for operating results determined in accordance with GAAP. Reconciliation of Non-PPP loan ratios (non-GAAP)(4) Total Loans (net of unearned interest) $ 6,660,694 $ 5,673,144 Less total PPP loans 831,703 — Total Non-PPP loans (non-GAAP) $ 5,828,991 $ 5,673,144 Nonaccrual loans (5) $ 82,385 $ 17,965 Nonaccrual loans to total Non-PPP loans (non-GAAP) 1.41 % 0.32 % Total nonperforming and restructured loans $ 91,634 $ 47,809 Nonperforming and restructured loans to total Non-PPP loans (non-GAAP) 1.57 % 0.84 % Allowance for credit losses $ 106,126 $ 54,238 Allowance for credit losses to total Non-PPP loans (non-GAAP) 1.82 % 0.96 % (3) Refer to the “Reconciliation of Non-PPP loan ratios (non-GAAP)” Table. (4) Nonaccrual loans to total Non-PPP loans is nonaccrual loans, divided by total loans less Paycheck Protection Program (PPP) loans. Nonperforming and restructured loans to total Non-PPP loans is nonperforming and restructured loans, divided by total loans less PPP loans. Allowance for credit losses to total Non-PPP loans is allowance for credit losses, divided by total loans less PPP loans. These amounts are non-GAAP financial measures but have been included as they are considered critical metrics with which to analyze and evaluate the financial condition and capital strength of the Company. These measures should not be considered substitutes for operating results determined in accordance with GAAP. (5) Approximately $8.4 million of nonaccrual loans are guaranteed by government agencies. 38 Cash and Interest-Bearing Deposits with Banks 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. Securities 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 $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 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 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 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 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 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 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. Allowance for Credit Losses/Fair Value Adjustments on Acquired Loans On January 1, 2020, the Company adopted ASC 326, which replaces the incurred loss methodology with an expected loss methodology that is referred to as CECL. As a result, the Company recorded a decrease to the allowance for credit losses of $3.2 million at January 1, 2020. 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 $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 $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. Nonaccrual loans negatively impact the Company’s net interest margin. A loan is placed on nonaccrual status when, in the opinion of management, the future collectability of interest or principal or both is in serious doubt. Interest income is recognized on certain of these loans on a cash basis if the full collection of the remaining principal balance is 39 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 $ 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 $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. The Company charges interest on principal balances outstanding during deferral periods. 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 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 $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. In general, these loans are adequately collateralized and have no specific identifiable loss. Loans which are considered to have identifiable loss potential are placed on nonaccrual status, are allocated a specific allowance for loss or are directly charged-down, and are reported as nonperforming. Liquidity and Funding 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 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 Short-term borrowings, consisting primarily of federal funds purchased and repurchase agreements are another source of funds for the Company. The level of these borrowings is determined by various factors, including customer demand and the Company’s ability to earn a favorable spread on the funds obtained. Short-term borrowings were $300,000 at September 30, 2020, compared to $1.1 million at December 31, 2019. Long-Term Borrowings The Company has a line of credit from the Federal Home Loan Bank (“FHLB”) of Topeka, Kansas to use for liquidity or to match-fund certain long-term fixed-rate loans. The Company’s assets, including residential first mortgages of $836.6 million, are pledged as collateral for the borrowings under the line of credit. 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 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. 40 CONTRACTUAL OBLIGATIONS There have not been any material changes in the resources required for scheduled repayments of contractual obligations from the table of Contractual Cash Obligations included in Management’s Discussion and Analysis which was included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019. BANCFIRST CORPORATION CONSOLIDATED AVERAGE BALANCE SHEETS AND INTEREST MARGIN ANALYSIS (Unaudited) Taxable Equivalent Basis (Dollars in thousands) Three Months Ended September 30, 2020 2019 Interest Average Interest Average Average Income/ Yield/ Average Income/ Yield/ Balance Expense Rate Balance Expense Rate ASSETS Earning assets: Loans (1) $ 6,671,344 $ 76,744 4.56 % $ 5,376,278 $ 75,446 5.57 % Securities – taxable 591,933 2,032 1.36 427,152 2,361 2.19 Securities – tax exempt 33,785 166 1.95 17,399 130 2.96 Federal funds sold and interest-bearing deposits with banks 1,567,437 422 0.11 1,577,446 8,705 2.19 Total earning assets 8,864,499 79,364 3.55 7,398,275 86,642 4.65 Nonearning assets: Cash and due from banks 241,160 178,862 Interest receivable and other assets 619,570 500,067 Allowance for credit losses (88,823 ) (56,056 ) Total nonearning assets 771,907 622,873 Total assets $ 9,636,406 $ 8,021,148 LIABILITIES AND STOCKHOLDERS’ EQUITY Interest-bearing liabilities: Transaction deposits $ 678,447 $ 125 0.07 % $ 737,162 $ 646 0.35 % Savings deposits 3,393,158 890 0.10 2,835,855 10,127 1.42 Time deposits 699,074 1,839 1.04 690,867 2,871 1.65 Short-term borrowings 3,117 — 0.05 1,063 7 2.72 Long-term borrowings 2,119 — — — — — Junior subordinated debentures 26,804 491 7.27 26,804 491 7.27 Total interest-bearing liabilities 4,802,719 3,345 0.28 4,291,751 14,142 1.31 Interest-free funds: Noninterest-bearing deposits 3,722,973 2,720,830 Interest payable and other liabilities 60,574 49,262 Stockholders’ equity 1,050,140 959,305 Total interest free funds 4,833,687 3,729,397 Total liabilities and stockholders’ equity $ 9,636,406 $ 8,021,148 Net interest income $ 76,019 $ 72,500 Net interest spread 3.27 % 3.34 % Effect of interest free funds 0.13 % 0.55 % Net interest margin 3.40 % 3.89 % (1) Nonaccrual loans are included in the average loan balances and any interest on such nonaccrual loans is recognized on a cash basis. 41 BANCFIRST CORPORATION CONSOLIDATED AVERAGE BALANCE SHEETS AND INTEREST MARGIN ANALYSIS (Unaudited) Taxable Equivalent Basis (Dollars in thousands) Nine Months Ended September 30, 2020 2019 Interest Average Interest Average Average Income/ Yield/ Average Income/ Yield/ Balance Expense Rate Balance Expense Rate ASSETS Earning assets: Loans (1) $ 6,376,221 $ 232,380 4.85 % $ 5,158,737 $ 215,462 5.58 % Securities – taxable 556,557 6,665 1.60 613,365 10,551 2.30 Securities – tax exempt 28,579 485 2.26 19,687 439 2.98 Federal funds sold and interest-bearing deposits with banks 1,509,493 5,586 0.49 1,397,739 24,590 2.35 Total earning assets 8,470,850 245,116 3.85 7,189,528 251,042 4.67 Nonearning assets: Cash and due from banks 210,558 178,826 Interest receivable and other assets 603,167 469,615 Allowance for credit losses (69,603 ) (53,814 ) Total nonearning assets 744,122 594,627 Total assets $ 9,214,972 $ 7,784,155 LIABILITIES AND STOCKHOLDERS’ EQUITY Interest-bearing liabilities: Transaction deposits $ 755,835 $ 809 0.14 % $ 743,158 $ 1,967 0.35 % Savings deposits 3,230,145 8,482 0.35 2,700,393 30,852 1.53 Time deposits 699,211 6,713 1.28 688,056 8,164 1.59 Short-term borrowings 3,306 8 0.33 1,650 29 2.31 Long-term borrowings 1,478 — — — — — Junior subordinated debentures 26,804 1,474 7.33 26,804 1,474 7.35 Total interest-bearing liabilities 4,716,779 17,486 0.49 4,160,061 42,486 1.37 Interest-free funds: Noninterest-bearing deposits 3,414,106 2,643,189 Interest payable and other liabilities 46,175 41,138 Stockholders’ equity 1,037,912 939,767 Total interest free funds 4,498,193 3,624,094 Total liabilities and stockholders’ equity $ 9,214,972 $ 7,784,155 Net interest income $ 227,630 $ 208,556 Net interest spread 3.36 % 3.30 % Effect of interest free funds 0.22 % 0.58 % Net interest margin 3.58 % 3.88 % (1) Nonaccrual loans are included in the average loan balances and any interest on such nonaccrual loans is recognized on a cash basis.