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Item 2. Management’s Discussion and Analysis

2021-05-05 compared with 2020-11-09 · 169 added, 249 removed, 125 unchanged (77% 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 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.

The following discussion and analysis of our financial condition as of March 31, 2021 and December 31, 2020 and results of operations for the three months ended March 31, 2021 should be read in conjunction with our consolidated financial statements and notes to the financial statements for the year ended December 31, 2020, and the other information included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020.

Certain risks, uncertainties and other factors, including those set forth under "Risk Factors" in Part I, Item 1A of the 2020 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.

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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 likelihood the Durbin Amendment will impact non-interest income.

The effect of governments’ stimulus programs.

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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.

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.

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.

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.

See Item 1.A.

Risk Factors in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020, for further discussion.

The Company’s net income for the first quarter of 2021 was $42.5 million, compared to $22.6 million for the first quarter of 2020.

Diluted net income per common share was $1.27 and $0.68 for the first quarter of 2021 and 2020, respectively.

For the first quarter of 2021, no provision for credit losses was recorded compared to a provision for credit losses of $19.6 million for the first quarter of 2020;

the absence of a provision in the first quarter of 2021 was due to improvements in economic conditions and the outlook for certain economic indicators.

The Company’s net interest income for the first quarter of 2021 increased to $77.2 million, compared to $74.1 million for the first quarter of 2020.

Net interest income increased for the first quarter of 2021 due to loan growth, PPP fee income of approximately $9.8 million and the decrease in interest rates paid on deposits.

The net interest margin for the quarter was 3.36%, compared to 3.82% 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.

Noninterest income for the first quarter of 2021 totaled $39.9 million, compared to $35.1 million for the first quarter of 2020.

The increase in noninterest income was due to a gain from the sale of the Company’s Hugo, Oklahoma branch of $2.5 million, $2.4 million in rental income from a real estate property foreclosed on in the fourth quarter of 2020, and a $1.2 million increase in income from sales of mortgage loans, which were partially offset by a $1.3 million decrease in treasury management income.

Noninterest expense for the first quarter of 2021 increased to $65.0 million, compared to $61.4 million for the first quarter of 2020 because of $1.4 million of expenses related to such foreclosed property, and a $2.2 million gain on the sale of other real estate owned in the first quarter of 2020 that reduced noninterest expense.

The Company’s effective tax rate was 18.5% for the first quarter of 2021 compared to 20.0% for the first quarter of 2020.

At March 31, 2021, the Company’s total assets were $10.5 billion, an increase of $1.3 billion from December 31, 2020.

Debt securities of $520.5 million at March 31, 2021 were down $34.7 million from December 31, 2020.

Loans totaled $6.4 billion, a decrease of $68.1 million from December 31, 2020 partially due to approximately $21 million of loans that were sold with the Company’s Hugo, Oklahoma branch.

Deposits totaled $9.4 billion, an increase of $1.3 billion from the December 31, 2020 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.

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.

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

At March 31, 2021, the Company had PPP loans held for investment of $713.7 million, net of unamortized processing fees of $23.3 million.

The Company’s total stockholders’ equity at March 31, 2021 was $1.1 billion, an increase of $26.8 million over December 31, 2020.

Off-balance sweep accounts were $2.2 billion at March 31, 2021 compared to $2.7 billion at December 31, 2020.

Nonaccrual loans represent 0.55% of total loans at March 31, 2021, down from 0.58% at December 31, 2020.

Net charge-offs for the quarter were 0.01% of average loans for the first quarter of 2021, compared to 0.02% of average loans for the first quarter of 2020.

The allowance for credit losses to total loans was 1.42% at both March 31, 2021 and December 31, 2020, and the allowance for credit losses to nonaccrual loans was 257.20% compared to 243.35% at December 31, 2020.

See Note (2) of the Notes to Consolidated Financial Statements for disclosure regarding the Company’s recent developments, including mergers and acquisitions.

FUTURE APPLICATION OF ACCOUNTING STANDARDS

See Note (1) of the Notes to Consolidated Financial Statements for a discussion of recently issued accounting pronouncements.

There have been no changes in the Registrant’s disclosures regarding recently issued accounting pronouncements since December 31, 2020, the date of its most recent annual report to stockholders.

SEGMENT INFORMATION

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RESULTS OF OPERATIONS

Average Balances, Income, Expenses and Rates

The following table presents, for the periods indicated, certain information related to our average balance sheet and our average yields on assets and average costs of liabilities.

Such yields are derived by dividing income or expense by the average balance of the corresponding assets or liabilities.

Average balances are derived from daily averages.

BANCFIRST CORPORATION

CONSOLIDATED AVERAGE BALANCE SHEETS AND INTEREST MARGIN ANALYSIS

Taxable Equivalent Basis

(Dollars in thousands)

Three Months Ended March 31,

Earning assets:

Deb securities – taxable

Debt securities – tax exempt

Federal funds sold and interest-bearing deposits with banks

Total earning assets

Nonearning assets:

Cash and due from banks

Interest receivable and other assets

Allowance for credit losses

Total nonearning assets

LIABILITIES AND STOCKHOLDERS’ EQUITY

Interest-bearing liabilities:

Transaction deposits

Savings deposits

Time deposits

Short-term borrowings

Junior subordinated debentures

Total interest-bearing liabilities

Interest-free funds:

Noninterest-bearing deposits

Interest payable and other liabilities

Stockholders’ equity

Total interest free funds

Total liabilities and stockholders’ equity

Net interest income

Net interest spread

Effect of interest free funds

Net interest margin

For these computations, information is shown on a taxable-equivalent basis assuming a 21% tax rate.

(1) Nonaccrual loans are included in the average loan balances and any interest on such nonaccrual loans is recognized on a cash basis.

Selected income statement data and other selected data for the comparable periods were as follows:

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Three Months Ended

September 30,

Nine Months Ended

September 30,

Income Statement Data

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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.

For the three months ended March 31, 2021, net interest income, which is the Company’s principal source of operating revenue, increased $3.1 million or 4.2% compared to the three months ended March 31, 2020.

Net interest income increased for the first quarter of 2021 due to loan growth, PPP fee income of approximately $9.8 million and the decrease in interest rates paid 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.

As shown in the preceding table, the Company’s net interest margin for the first quarter of 2021 decreased compared to the first quarter of 2020, primarily due to the lower average rates on loans, 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.

The expectation is that interest rates will remain at these low levels for some period of time in light of the on-going response in Federal Reserve policy driven by the 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.

For the first quarter of 2021, no provision for credit losses was recorded, compared to a provision for credit losses of $19.6 million for the first quarter of 2020.

The Company’s lack of provision for the first quarter of 2021 was based on improvements in economic conditions and the Company’s outlook for certain economic indicators.

The elevated provision during the first quarter of 2020 was based on the Company’s evaluation of the level of 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.

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 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.

Net loan charge-offs were $506,000 for the first quarter of 2021, compared to net loan charge-offs of $1.0 million for the first quarter of 2020.

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

total assets for several years.

Noninterest income, as presented in the preceding table, increased by $4.8 million for first quarter of 2021 compared to the first quarter of 2020.

Noninterest income included non-sufficient funds fees totaling $5.5 million and $8.3 million for the three month periods ended March 31, 2021 and 2020, respectively.

This represents 13.8% and 23.5% of the Company’s noninterest income for the three month periods ended March 31, 2021 and 2020, respectively.

In addition, the Company had debit card interchange fees totaling $10.7 million and $8.2 million during the three month periods ended March 31, 2021 and 2020, respectively.

This represents 26.7% and 23.3% of the Company’s noninterest income for the three month periods ended March 31, 2021 and 2020, respectively.

For the first quarter of 2021 compared to the first quarter of 2020, government assistance funds that flowed into the market, including PPP loans and stimulus payments to households, increased customer liquidity and higher volume of transactions.

This activity resulted in lower non-sufficient funds fees and higher debit card interchange fees.

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 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.

To the extent the COVID-19 pandemic continues and the government response to it continues on the same or similar basis, it is likely the Company will exceed $10 billion in total assets at December 31, 2021.

Pursuant to the Durbin Amendment of the Dodd-Frank Act, based on current run rates, this would trigger an approximate reduction of annual pretax income from debit card interchange fees of between $17 to $20 million beginning July 1, 2022.

The Company earned $2.0 million on the sale of loans for first quarter of 2021 compared to $781,000 for first quarter of 2020.

The income from sales of loans increased due to the increase in volume of loans originated due to record low mortgage rates.

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.

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.

Noninterest expense, as presented in the preceding table, increased by $3.6 million for first quarter of 2021 compared to the first quarter of 2020.

The increase in noninterest expenses was due to $1.4 million of expenses related to a real estate property foreclosed on in the fourth quarter of 2020 and a $2.2 million gain on the sale of other real estate owned in the first quarter of 2020 that reduced noninterest expense.

The Company’s effective tax rate was 18.5% for the first quarter of 2021, compared to 20.0% for the first quarter of 2020.

The effective tax rate was lower for the first quarter of 2021 compared to the first quarter of 2020 primarily because of an increase in employee options exercised during the quarter.

The reasons for the difference between the Company’s effective tax rate and the federal statutory rate were tax-exempt income, nondeductible amortization, federal and state tax credits and state tax expense.

FINANCIAL POSITION

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(Dollars in thousands, except per share data)

September 30,

Balance Sheet Data

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Tangible book value per share (non-GAAP)(1)

Reconciliation of Tangible Book Value per Common Share (non-GAAP)(2)

Stockholders' equity

Less goodwill

Less intangible assets, net

Tangible stockholders' equity (non-GAAP)

Common shares outstanding

Tangible book value per share (non-GAAP)

Selected Financial Ratios

Balance Sheet Ratios:

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Total nonperforming and restructured assets

Asset Quality Ratios:

Nonaccrual loans to total loans

Nonaccrual loans to total Non-PPP loans (non-GAAP)(3)

Nonperforming and restructured loans to total loans

Nonperforming and restructured loans to total Non-PPP loans (non-GAAP)(3)

Nonperforming and restructured assets to total assets

Allowance for credit losses to total loans

Allowance for credit losses to total Non-PPP loans (non-GAAP)(3)

Allowance for credit losses to nonperforming and restructured loans

Allowance for credit losses to nonaccrual loans

Reconciliation of Tangible Book Value per Common Share (non-GAAP)(2)

Stockholders' equity

Less goodwill

Less intangible assets, net

Tangible stockholders' equity (non-GAAP)

Common shares outstanding

Tangible book value per share (non-GAAP)

(1) Refer to the “Reconciliation of Tangible Book Value per Common Share (non-GAAP)” Table.

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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)

Less total PPP loans

Total Non-PPP loans (non-GAAP)

Nonaccrual loans (5)

Nonaccrual loans to total Non-PPP loans (non-GAAP)

Total nonperforming and restructured loans

Nonperforming and restructured loans to total Non-PPP loans (non-GAAP)

Allowance for credit losses

Allowance for credit losses to total Non-PPP loans (non-GAAP)

(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.

(3) Government Agencies guarantee approximately $6.6 million of nonaccrual loans at March 31, 2021.

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.

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

The aggregate of cash and due from banks and interest-bearing deposits with banks increased by $1.4 billion or 89.4% to $3.1 billion, from December 31, 2020 to March 31, 2021.

The increase was primarily related to the increase in deposits from PPP and other government stimulus payments.

At March 31, 2021, total debt securities decreased $34.7 million, or 6.2% compared to December 31, 2020.

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

The net unrealized gain on debt securities available for sale, before taxes, was $8.6 million at March 31, 2021, compared to a net unrealized gain of $9.9 million

at December 31, 2020 .

These unrealized gains are included in the Company’s stockholders’ equity as accumulated other comprehensive income, net of income t ax , in the amounts of a gain of $ 6.4 million at March 31, 2021 and a gain of $ 7.4 million at December 31, 2020 .

See Note (3) of the Notes to Consolidated Financial Statements for disclosures regarding the Company’s Securities.

At March 31, 2021, total loans decreased $68.1 million or 1.1% compared to December 31, 2020.

The decrease in loans was partially due to approximately $21 million of loans that were sold with the Company’s Hugo, Oklahoma branch.

At March 31, 2021, the balance of total PPP loans was $713.7 million, net of unamortized processing fees of $23.3 million.

See Note (4) of the Notes to Consolidated Financial Statements for disclosures regarding the Company’s loan portfolio segments.

Allowance for Credit Losses

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.

At March 31, 2021 and December 31, 2020, the allowance for credit losses to total loans represented 1.42% of total loans.

Nonaccrual and Restructured Assets

At March 31, 2021, nonperforming and restructured assets decreased $3.9 million to $78.7 million compared to December 31, 2020.

The Company’s level of nonperforming and restructured assets has continued to be relatively low, equating to 0.75% of total assets at March 31, 2021 and 0.90% of total assets at December 31, 2020.

Nonaccrual loans totaled $35.3 million at March 31, 2021, compared to $37.5 million at December 31, 2020.

The Company’s nonaccrual loans are primarily commercial and agricultural non-real estate and farmland.

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

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.

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

Interest income is not recognized until the principal balance is fully collected.

However, interest income is recognized on certain of these loans on a cash basis if the full collection of the remaining principal balance is not in doubt.

Had nonaccrual loans performed in accordance with their original contractual terms, the Company would have recognized additional interest income of approximately $521,000 for the three months ended March 31, 2021 and $332,000 for the three months ended March 31, 2020.

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.

Approximately $6.6 million of nonaccrual loans were guaranteed by government agencies at March 31, 2021.

Restructured loans totaled $7.8 million at both March 31, 2021 and December 31 2020.

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.

The classification of a loan as nonperforming does not necessarily indicate that loan principal and interest will ultimately be uncollectible;

although, in an economic downturn, the Company’s experience has been that the level of collections decline.

The above normal risk associated with nonperforming loans has been considered in the determination of the allowance for credit losses.

At March 31, 2021, the allowance for credit losses as a percentage of nonperforming and restructured loans was 187.69%, compared to 182.26%, at December 31, 2020.

The level of nonperforming loans and credit losses could rise over time as a result of adverse economic conditions.

Other real estate owned and repossessed assets totaled $30.3 million at March 31, 2021, compared to $32.5 million at December 31, 2020.

Other real estate owned consists of properties acquired through foreclosure proceedings or acceptance of a deed in lieu of foreclosure and premises held for sale.

As of both March 31, 2021 and December 31, 2020, other real estate owned included a commercial real estate property recorded at approximately $28 million.

Other real estate owned and repossessed assets are carried at the lower of the book values of the related loans or fair values based upon appraisals, less estimated costs to sell.

Write-downs arising at the time of reclassification of such properties from loans to other real estate owned are charged directly to the allowance for credit losses.

Any losses on bank premises designated to be sold are charged to operating expense at the time of transfer from premises to other real estate owned.

Decreases in values of properties subsequent to their classification as other real estate owned are charged to operating expense.

Intangible Assets, Goodwill and Other Assets

Identifiable intangible assets and goodwill totaled $168.1 million and $168.9 million at March 31, 2021 and December 31, 2020, respectively.

Other assets includes the cash surrender value of key-man life insurance policies.

The balance of the cash surrender value of key-man life insurance policies was $81.3 million at March 31, 2021 and $80.7 million at December 31, 2020.

In addition, other assets includes approximately $11.1 million in equity interest of a previous borrower in the oil and gas industry, which was received through bankruptcy proceedings in the fourth quarter of 2020.

This asset is carried at cost less 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.

Low Income Housing and New Market Tax Credit Investments

During 2021, there have not been any material changes in the Company’s low income housing tax credit investments and new market tax credit investments, which are included in other assets on the Company’s balance sheet.

See Note (6) of the Notes to Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020, for disclosures regarding the Company’s low income housing tax credit investments and new market tax credit investments.

Liquidity and Funding

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 principal source of liquidity and funding is its broad deposit base generated from customer relationships.

The availability of deposits is affected by economic conditions, competition with other financial institutions and alternative investments available to customers.

Through interest rates paid, service charge levels and services offered, the Company can affect its level of deposits to a limited extent.

The level and maturity of funding necessary to support the Company’s lending and investment functions is determined through the Company’s asset/liability management process.

The Company currently does not rely heavily on long-term borrowings and does not utilize brokered CDs.

The Company maintains federal funds lines of credit with other banks and could also utilize the sale of loans, securities and liquidation of other assets as sources of liquidity and funding.

At March 31, 2021, deposits totaled $9.4 billion, an increase of $1.3 billion or 16.2% from the December 31, 2020 total.

The increase in deposits was primarily related to deposits of proceeds from the PPP and government stimulus payments.

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.

The Company’s core deposits as a percentage of total deposits were 98.6% at March 31, 2021 and 98.2% at December 31, 2020.

Noninterest-bearing deposits to total deposits were 45.6% at March 31, 2021, compared to 47.0% at December 31, 2020.

Short-Term Borrowings

1 unchanged sentence

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.

Short-term borrowings were $3.8 million at March 31, 2021, compared to $1.1 million at December 31, 2020.

Long-Term Borrowings

1 unchanged sentence

The Company’s assets, including residential first mortgages of $826.6 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.

As of March 31, 2021 and December 31, 2020, the Company had no advances outstanding under the line of credit from FHLB.

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, 2020.

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.

Stockholders’ equity totaled $1.1 billion at both March 31, 2021 and December 31, 2020.

In addition to net income of $42.5 million, other changes in stockholders’ equity during the three months ended March 31, 2021 included $1.3 million related to common stock issuances, and $576,00 related to stock-based compensation, that were partially offset by $11.1 million in dividends, $5.4 million in settlement of options in cash, and a $1.0 million decrease in other comprehensive income.

The Company’s leverage ratio and total risk-based capital ratios at March 31, 2021, 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.

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

Taxable Equivalent Basis

(Dollars in thousands)

Three Months Ended September 30,

Earning assets:

Securities – taxable

Securities – tax exempt

Federal funds sold and interest-bearing deposits with banks

Total earning assets

Nonearning assets:

Cash and due from banks

Interest receivable and other assets

Allowance for credit losses

Total nonearning assets

LIABILITIES AND STOCKHOLDERS’ EQUITY

Interest-bearing liabilities:

Transaction deposits

Savings deposits

Time deposits

Short-term borrowings

Long-term borrowings

Junior subordinated debentures

Total interest-bearing liabilities

Interest-free funds:

Noninterest-bearing deposits

Interest payable and other liabilities

Stockholders’ equity

Total interest free funds

Total liabilities and stockholders’ equity

Net interest income

Net interest spread

Effect of interest free funds

Net interest margin

Nonaccrual loans are included in the average loan balances and any interest on such nonaccrual loans is recognized on a cash basis.

BANCFIRST CORPORATION

CONSOLIDATED AVERAGE BALANCE SHEETS AND INTEREST MARGIN ANALYSIS

Taxable Equivalent Basis

(Dollars in thousands)

Nine Months Ended September 30,

Earning assets:

Securities – taxable

Securities – tax exempt

Federal funds sold and interest-bearing deposits with banks

Total earning assets

Nonearning assets:

Cash and due from banks

Interest receivable and other assets

Allowance for credit losses

Total nonearning assets

LIABILITIES AND STOCKHOLDERS’ EQUITY

Interest-bearing liabilities:

Transaction deposits

Savings deposits

Time deposits

Short-term borrowings

Long-term borrowings

Junior subordinated debentures

Total interest-bearing liabilities

Interest-free funds:

Noninterest-bearing deposits

Interest payable and other liabilities

Stockholders’ equity

Total interest free funds

Total liabilities and stockholders’ equity

Net interest income

Net interest spread

Effect of interest free funds

Net interest margin

Nonaccrual loans are included in the average loan balances and any interest on such nonaccrual loans is recognized on a cash basis.

Liquidity Risk and Off-Balance Sheet Arrangements

There have not been any material changes in the Company’s liquidity and off-balance sheet arrangements 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, 2020.

Quantitative and Qualitative Disclosures About Market Risk.

There have been no significant changes in the Registrant’s disclosures regarding market risk since December 31, 2020, the date of its most recent annual report to stockholders.

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