Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis presents factors that the Company believes are relevant to an assessment and understanding of the Company’s financial position and results of operations for the three years ended December 31, 2021. This discussion and analysis should be read in conjunction with the consolidated financial statements and notes thereto and the selected consolidated financial data included herein.
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 likelihood the Durbin Amendment will impact non-interest income.
•
Political pressures could limit our ability to charge for NSF and overdraft fees.
•
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.
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•
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.
THE COVID-19 PANDEMIC
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. 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. The Company is closely monitoring its loan portfolio for effects related to COVID-19. See Item 1.A. Risk Factors for further discussion.
SUMMARY
The Company’s net income for 2021 was $167.6 million, or $5.03 per diluted share, compared to $99.6 million, or $3.00 per diluted share for 2020. The results for 2021 included a net benefit from reversal of provisions for credit losses of $8.7 million compared to a provision for credit losses of $62.6 million for the year-ended December 31, 2020.
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In 2021, net interest income was $315.7 million, compared to $306.7 million in 2020. Net interest income increased in 2021 due to an increase in PPP fee income of approximately $20.9 million and a decrease in interest rates paid on deposits. The Company’s net interest margin decreased to 3.15% for 2021, compared to 3.57% for 2020. The Company recorded a net benefit from reversal of provisions for credit losses of $8.7 million in 2021 compared to a provision for credit losses of $62.6 million in 2020. The reversal of provisions for credit losses in 2021 related to a more benign credit environment than envisioned at the beginning of the year. The ratio of net charge-offs to average loans for 2021 was 0.11%, compared to 0.35% for 2020. Noninterest income totaled $170.0 million in 2021 compared to $137.2 million in 2020. The increase in noninterest income was mostly attributable to a bargain purchase gain of $4.8 million associated with The First National Bank and Trust Company of Vinita, Oklahoma, a gain from the sale of the Company’s Hugo, Oklahoma branch of $2.5 million, $3.3 million of income resulting from the application of equity method accounting related to an equity interest received in the process of a loan collection, $10.3 million in rental income from other real estate property, a $9.1 million increase in income from debit card interchange fees, and a $2.7 million increase in insurance commissions. Noninterest income was partially offset by a $4.7 million decrease in income from sweep fees. Noninterest expense was $286.0 million in 2021 compared to $257.7 million in 2020. The increase in noninterest expense in 2021 was due tothe increase in salaries and employee benefits of approximately $2.0 million, approximately $8.9 million related to other real estate property operating costs, $4.8 million in acquisition related expenses, approximately $4.4 million in net occupancy and depreciation primarily from the Company’s move to its new corporate headquarters, $3.1 million amortization of investment in tax credits, $1.1 million incentive to customers that participated in the year-end sweep program and a $1.4 million increase in deposit insurance.
The Company’s assets at year-end 2021 totaled $9.4 billion, an increase of $193.3 million from December 31, 2020. Loans totaled $6.2 billion a decrease of $254.0 million from year-end 2020 due to payoffs of approximately $572.3 million in PPP loans, which were partially offset by approximately $126 million of acquired loans from the First National Bank and Trust Company of Vinita, Oklahoma. Absent PPP loans and acquired loans, the Company’s loans increased $213.1 million or 3.7% in 2021. Total deposits were $8.1 billion at December 31, 2021 an increase of $27.2 million from December 31, 2020. The increase in assets and deposits was predominantly related to government stimulus payments. At December 31, 2021, the remaining balance of PPP loans held by the Company was $80.4 million, net of unamortized processing fees of $2.0 million, compared to $652.7 million, net of unamortized processing fees of $14.5 million at December 31, 2020. The Company’s total stockholders’ equity was $1.2 billion, an increase of $103.8 million over December 31, 2020. Off-balance sheet sweep accounts totaled $5.1 billion at December 31, 2021, which included a temporary sweep amount of approximately $2.3 billion, compared to a sweep account total of $2.8 billion at December 31, 2020. Our sweep accounts affect the balances of our year-end assets and deposits.
Nonaccrual loans represented 0.34% of total loans at December 31, 2021, down from 0.58% at December 31, 2020. The allowance for credit losses to total loans was 1.36% at December 31, 2021, compared to 1.42% at December 31, 2020. The allowance for credit losses to nonaccrual loans was 401.76% at December 31, 2021 compared to 243.35% at December 31, 2020. At December 31, 2021, the Company’s nonaccrual loans were $20.9 million compared to $37.5 million at year-end 2020. At December 31, 2021, the Company’s other real estate owned (OREO) increased $7.3 million from 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.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The Company’s significant accounting policies are described in Note (1) to the consolidated financial statements. The preparation of financial statements in conformity with accounting principles generally accepted in the United States inherently involves the use of estimates and assumptions, which affect the amounts reported in the financial statements and the related disclosures. These estimates relate principally to the allowance for credit losses, income taxes, intangible assets and the fair value of financial instruments. Such estimates and assumptions may change over time and actual amounts realized may differ from those reported. The following is a summary of the accounting policies and estimates that management believes are the most critical.
Allowance for Credit losses
On January 1, 2020, the Company adopted Accounting Standards Codification (“ASC”) 326, which replaced the incurred loss methodology for determining its provision for credit losses and allowance for credit losses with an expected loss methodology that is referred to as ("CECL"). The allowance for credit losses is management’s estimate of the expected credit losses on financial assets measured at amortized cost.
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The allowance for credit losses is increased by provisions charged to operating expense and is reduced by net loan charge-offs. The amount of the allowance for credit losses is measured using relevant information about past events, including historical credit loss experience on financial assets with similar risk characteristics, current conditions, and reasonable and supportable forecasts that affect the collectability of the remaining cash flows over the contractual term of the financial assets. A loan is considered collateral-dependent when the repayment is expected to be provided substantially through the operation or sale of the collateral when the borrower is experiencing financial difficulty based on the entity's assessment as of the reporting date. For collateral dependent loans, the standard allows institutions to use, as a practical expedient, the fair value of the collateral to measure expected credit losses on collateral-dependent financial assets. This amount is included in the allowance for credit losses.
The amount of the allowance for credit losses is first estimated by each business unit’s management based on its evaluation of the unit’s portfolio. This evaluation involves identifying collateral dependent and adversely classified loans. Specific allowances for losses are determined for collateral dependent loans based on either the loans’ estimated discounted cash flows or the fair values of the collateral. An allowance is estimated for loans using a historical loss percentage based on losses arising specifically from each respective loan category, adjusted for various economic and environmental factors that are considered reasonable and supportable related to the underlying loans. Each month the Company’s Senior Loan Committee reviews each business unit’s allowance, and the aggregate allowance for the Company and, on a quarterly basis, adjusts and approves the appropriateness of the allowance. In addition, annually or more frequently as needed, the Senior Loan Committee evaluates and establishes the loss percentages used in the estimates of the allowance based on historical loss data, and giving consideration to their assessment of current economic and environmental conditions and reasonable and supportable forecasts. To facilitate the Senior Loan Committee’s evaluation, the Company’s Asset Quality Department performs periodic reviews of each of the Company’s business units and reports on the adequacy of management’s identification of collateral dependent and adversely classified loans, and their adherence to the Company’s loan policies and procedures.
The process of evaluating the appropriateness of the allowance for credit losses necessarily involves the exercise of judgment and consideration of numerous subjective factors and, accordingly, there can be no assurance that the estimate of expected losses will not change in light of future developments and economic conditions. Changes in assumptions and conditions could result in a materially different amount for the allowance for credit losses.
Income Taxes
The Company files a consolidated income tax return. Deferred taxes are recognized under the balance sheet method based upon the future tax consequences of temporary differences between the carrying amounts and tax basis of assets and liabilities, using the tax rates expected to apply to taxable income in the periods when the related temporary differences are expected to be realized.
The amount of accrued current and deferred income taxes is based on estimates of taxes due or receivable from taxing authorities either currently or in the future. Changes in these accruals are reported as tax expense, and involve estimates of the various components included in determining taxable income, tax credits, other taxes and temporary differences. Changes periodically occur in the estimates due to changes in tax rates, tax laws and regulations and implementation of new tax planning strategies. The process of determining the accruals for income taxes necessarily involves the exercise of considerable judgment and consideration of numerous subjective factors.
Management performs an analysis of the Company’s tax positions annually and believes it is more likely than not that all of its tax positions will be utilized in future years.
Intangible Assets and Goodwill
Core deposit intangibles are amortized on a straight-line basis over the estimated useful lives of seven to ten years and customer relationship intangibles are amortized on a straight-line basis over the estimated useful life of three to eighteen years. Goodwill is not amortized, but is evaluated at a reporting unit level at least annually for impairment or more frequently if other indicators of impairment are present. At least annually in the fourth quarter, intangible assets, are evaluated for possible impairment. Impairment losses are measured by comparing the fair values of the intangible assets with their recorded amounts. Any impairment losses are reported in the statement of comprehensive income.
The evaluation of remaining core deposit intangibles for possible impairment involves reassessing the useful lives and the recoverability of the intangible assets. The evaluation of the useful lives is performed by reviewing the levels of core deposits of the respective branches acquired. The actual life of a core deposit base may be longer than originally estimated due to more successful retention of customers, or may be shorter due to more rapid runoff. Amortization of core deposit intangibles would be adjusted, if necessary, to amortize the remaining net book values over the remaining lives of the core deposits. The evaluation for recoverability is only performed if events or changes in circumstances indicate that the carrying amount of the intangibles may not be recoverable.
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The evaluation of goodwill for possible impairment is performed by comparing the fair values of the related reporting units with their carrying amounts including goodwill. The fair values of the related business units are estimated using market data for prices of recent acquisitions of banks and branches.
The evaluation of intangible assets and goodwill for the year ended December 31, 2021 and 2020 resulted in no impairments.
Fair Value of Financial Instruments
Debt securities that are being held for indefinite periods of time, or that may be sold as part of the Company’s asset/liability management strategy, to provide liquidity or for other reasons, are classified as available for sale and are stated at estimated fair value. Unrealized gains or losses on debt securities available for sale are reported as a component of stockholders’ equity, net of income tax.
The Company reviews its portfolio of debt securities in an unrealized loss position at least quarterly. The Company first assesses whether it intends to sell, or it is more-likely-than-not that it will be required to sell, the securities before recovery of the amortized cost basis. If either of these criteria is met, the securities amortized cost basis is written down to fair value as a current period expense. If either of the above criteria is not met, the Company evaluates whether the decline in fair value is the result of credit losses or other factors. In making this assessment, the Company considers, among other things, the period of time the security has been in an unrealized loss position, and performance of any underlying collateral and adverse conditions specifically related to the security. At December 31, 2021 and December 31, 2020 over 95% of the available for sale debt securities held by the Company were issued by the U.S. Treasury, or U.S. government-sponsored entities and agencies. The Company does not consider the unrealized position of these securities to be the result of credit factors, because the decline in fair value is attributable to changes in interest rates and illiquidity, and not credit quality, and the Company does not have the intent to sell these securities and it is likely that it will not be required to sell the securities before their anticipated recovery. Therefore, the Company has not recorded an allowance for credit losses against its debt securities portfolio, as the credit risk is not material.
The estimates of fair values of debt securities and other financial instruments are based on a variety of factors. In some cases, fair values represent quoted market prices for identical or comparable instruments. In other cases, fair values have been estimated based on assumptions concerning the amount and timing of estimated future cash flows and assumed discount rates reflecting varying degrees of risk. Accordingly, the fair values may not represent actual values of the financial instruments that could have been realized as of year-end or that will be realized in the future.
Future Application of Accounting Standards
See Note (1) of the Notes to Consolidated Financial Statements for a discussion of recently issued accounting pronouncements and their expected impact on the Company’s financial statements.
Segment Information
See Note (23) of the Notes to Consolidated Financial Statements for disclosure regarding the Company’s operating business segments.
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RESULTS OF OPERATIONS
Average Balances, Income Expenses and Rates
The following table depicts, 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.
CONSOLIDATED AVERAGE BALANCE SHEETS AND INTEREST MARGIN ANALYSIS
Taxable Equivalent Basis
(Dollars in thousands)
Interest Average Interest Average Interest Average
Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate Balance Expense Rate
ASSETS
Earning assets:
Nonearning assets:
LIABILITIES AND STOCKHOLDERS’ EQUITY
Interest-bearing liabilities:
Long-term borrowings — — — 1,107 — — — — —
Interest-free funds:
Effect of interest free funds 0.10 % 0.19 % 0.54 %
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The following table depicts, for the periods indicated, selected income statement data and other selected data:
BANCFIRST CORPORATION
SELECTED CONSOLIDATED FINANCIAL DATA
(Dollars in thousands, except per share data)
At and for the Year Ended December 31,
Income Statement Data
Per Common Share Data
Selected Financial Ratios
Performance ratios:
Net Interest Income
Net interest income, which is the Company’s principal source of operating revenue, increased in 2021 by $9.0 million, to a total of $315.7 million, compared to an increase of $24.7 million in 2020. Net interest income increased in 2021 as a result of an increase of $20.9 million in fee income from PPP loan forgiveness and the drop in average interest rates on deposits, offset by average rates on loans. Net interest income increased in 2020 due to a full year of net interest income from Pegasus Bank, loan growth, PPP fee income of approximately $15.5 million and a 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 decreased in 2021, compared to 2020, due to larger balances and lower average rates on interest-bearing deposits with banks during the year. The decrease in net interest margin in 2020 was due to the lower average rates on federal funds and securities during the year.
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 interest rates stemming from the Federal Reserve Federal Reserve's response to the COVID-19 pandemic. Our expectation is that interest rates will increase slightly in the upcoming year.
Changes in the volume of earning assets and interest-bearing liabilities and changes in interest rates, determine the changes in net interest income. The following volume/rate analysis summarizes the relative contribution of each of these components to the changes in net interest income in 2021 and 2020. See “Maturity and Rate Sensitivity of Loans” for additional discussion.
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VOLUME/RATE ANALYSIS
Taxable Equivalent Basis
Total Due toVolume(1) Due toRate Total Due toVolume(1) Due toRate
(Dollars in thousands)
INCREASE (DECREASE)
Interest Income:
Interest Expense:
Short-term borrowings (6 ) — (6 ) (24 ) 28 (52 )
Benefit from and Provision for Credit Losses
As shown in the selected consolidated financial table above, the Company recorded a net benefit from reversal of provision for credit losses for 2021, compared to a provision for credit losses for 2020 and 2019. The Company’s reversal of provision for 2021 was based on improvements in economic conditions and the Company’s outlook for certain economic indicators. The increase in the provision in 2020 was related to reserve build up for expected credit losses stemming from the COVID-19 pandemic and low energy prices. The Company’s provision in 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. 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 $7.0 million for 2021 compared to $22.8 million for 2020 and $5.4 million for 2019. The net charge-offs equated to 0.11%, 0.35% and 0.10% of average loans for 2021, 2020 and 2019, respectively. Net charge-offs were higher in 2020 primarily due to three loans. The rate of net charge-offs to average total loans continues to be at a low level. A more detailed discussion of the allowance for credit losses is provided under “Loans.”
Noninterest Income
Noninterest income is shown in the selected consolidated financial table above. Total noninterest income increased in 2021. The increase in noninterest income was mostly attributable to a bargain purchase gain of $4.8 million associated with The First National Bank and Trust Company of Vinita, Oklahoma, a gain from the sale of the Company’s Hugo, Oklahoma branch of $2.5 million, $3.3 million of income resulting from the application of equity method accounting related to an equity interest received in the process of a loan collection, $10.3 million in rental income from other real estate property, a $9.1 million increase in income from debit card interchange fees, and a $2.7 million increase in insurance commissions. Noninterest income was partially offset by a $4.7 million decrease in income from sweep fees. The Company’s operating noninterest income has generally increased due to enhanced product lines, acquisitions and internal deposit growth.
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The Company earned $7.3 million on the sale of loans in 2021 compared $6.1 million in 2020 and $3.4 million in 2019. The income from sales of loans increased in 2021 due to the increase in the volume of mortgage loans originated because of record low mortgage rates. The Company expects sales from mortgage loans during 2022 to be less than in 2021 due to the expected increase in interest rates.
The Company recognized a net gain of $1.0 million during 2021, a net loss of $389,000 during 2020, and a net gain of $812,000 during 2019, due to transactions of equity securities. These losses and gains were due to the Accounting Standard Update 2016-01, which requires the change in fair value of equity securities to be recognized through net income. The Company’s practice is to maintain a liquid portfolio of securities and not engage in trading activities. The Company has the ability and intent to hold debt securities classified as available for sale that were in an unrealized loss position until they mature or until fair value exceeds amortized cost.
The Company had non-sufficient funds fees totaling $25.0 million, $26.6 million and $33.5 million in 2021, 2020 and 2019, respectively. This represents 14.7%, 19.4%, and 24.4% of the Company’s noninterest income for the years 2021, 2020 and 2019, respectively. In addition, the Company had debit card interchange fees totaling $46.0 million, $36.9 million and $33.9 million for the years 2021, 2020 and 2019, respectively. This represents 27.1%, 26.9% and 24.7% of the Company’s noninterest income for the years 2021, 2020 and 2019, respectively. For 2021 compared to 2020, government assistance funds that flowed into the market, including PPP loans and stimulus payments to households, increased both customer liquidity and interchange volume resulting in higher debit card interchange fees and lower non-sufficient funds fees.
The Company is subject to political pressures that could limit our ability to charge for NSF and overdraft fees. The Company cannot estimate the impact of possible changes to our fees at this time.
Prior to the COVID-19 pandemic, there was minimal 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 and the effects of the aforementioned stimulus programs continue, it is likely the Company will exceed $10 billion in total assets at December 31, 2022. 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 $22 to $24 million beginning July 1, 2023. The Company will consider the use of our existing sweep product to reduce total assets below $10 billion at December 31, 2022.
Noninterest Expense
Total noninterest expense increased by $28.3 million, or 11.0% to $286.0 million for 2021. This compares to an increase of $16.4 million, or 6.8%, for 2020. The increase in noninterest expense in 2021 was due tothe increase in salaries and employee benefits of approximately $2.0 million, approximately $8.9 million related to other real estate property operating costs, $4.8 million in acquisition related expenses, approximately $4.4 million in net occupancy and depreciation primarily from the Company’s move to its new corporate headquarters, $3.1 million amortization of investment in tax credits, $1.1 million incentive to customers that participated in the year-end sweep program and a $1.4 million increase in deposit insurance. The increase in noninterest expense in 2020 was due to a full year of noninterest expenses of Pegasus Bank, which added approximately $9.0 million. In addition, noninterest expense increased in 2020 due to COVID-19 pandemic related salary expenses, net occupancy and depreciation from the Company’s new corporate headquarters, and acquisition expense related to the purchase of assets from Citizens, partially offset by $2.4 million in gains on sales of property carried in other real estate owned and a decrease in marketing and business promotions.
Noninterest expense included deposit insurance expense, which totaled $3.5 million for the year ended December 31, 2021, compared to $2.1 million for the year ended December 31, 2020 and $1.1 million for the year ended December 31, 2019. Deposit insurance expense was lower for the year ended December 31, 2019 due to a one-time credit given by the FDIC in 2019 upon reaching a reserve ratio in the insurance fund.
Income Taxes
Income tax expense totaled $40.8 million in 2021, compared to $23.9 million in 2020 and $34.7 million in 2019. The effective tax rates for 2021, 2020 and 2019 were 19.6%, 19.4% and 20.5% respectively. The primary 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.
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Certain financial information is prepared on a taxable equivalent basis to facilitate analysis of yields and changes in components of earnings. Average balance sheets, comprehensive income statements and other financial statistics are also presented on a taxable equivalent basis.
Impact of Inflation
The impact of inflation on financial institutions differs significantly from that of industrial or commercial companies. The assets of financial institutions are predominantly monetary, as opposed to fixed or nonmonetary assets such as premises, equipment and inventory. As a result, there is little exposure to inflated earnings by understated depreciation charges or significantly understated current values of assets. Although inflation can have an indirect effect by leading to higher interest rates, financial institutions are in a position to monitor the effects on interest costs and yields and respond to inflationary trends through management of interest rate sensitivity. Inflation can also have an impact on noninterest expenses such as salaries and employee benefits, occupancy, services and other costs.
Impact of Deflation
In a period of deflation, it would be reasonable to expect widely decreasing prices for real assets. In such an economic environment, assets of businesses and individuals, such as real estate, commodities or inventory, could decline. The inability of customers to repay or refinance their loans could result in credit losses incurred by the Company far in excess of historical experience due to deflated collateral values.
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FINANCIAL POSITION
BANCFIRST CORPORATION
SELECTED CONSOLIDATED FINANCIAL DATA
(Dollars in thousands, except per share data)
At and for the Year Ended December 31,
Balance Sheet Data
Tangible book value per shares (non-GAAP)(1) 30.80 27.47
Reconciliation of Tangible Book Value per Common Share (non-GAAP)(2)
Tangible book value per share (non-GAAP) $ 30.80 $ 27.47
Selected Financial Ratios
Performance Ratios:
Return on average assets 1.54 % 1.06 %
Return on average stockholders' equity 14.88 9.52
Balance Sheet Ratios:
Average loans to deposits 64.27 % 78.28 %
Average earning assets to total assets 91.96 91.90
Average stockholders’ equity to average assets 10.32 11.17
Asset Quality Ratios:
Nonaccrual loans to total loans 0.34 % 0.58 %
Nonperforming and restructured loans to total loans 0.48 0.78
Nonperforming and restructured assets to total assets 0.73 0.90
Allowance for credit losses to total loans 1.36 1.42
Allowance for credit losses to nonaccrual loans 401.76 243.35
Net charge-offs to average loans 0.11 0.35
Cash, Federal Funds Sold and Interest-Bearing Deposits with Banks
Cash consists of cash and cash items on hand, noninterest-bearing deposits and amounts due from other banks, reserves deposited with the Federal Reserve Bank, and interest-bearing deposits with other banks. Federal funds sold consist of overnight investments of excess funds with other financial institutions. Due to the Federal Reserve Bank’s intervention into the funds market that has resulted in a low overnight funds rate, the Company has continued to maintain the majority of its excess funds with the Federal Reserve Bank. The Federal Reserve Bank pays interest on these funds based upon the lowest target rate for the maintenance period, which was 0.25% during 2021 and decreased 1.50% during 2020 from 1.75% to 0.25%.
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The amount of cash, federal funds sold and interest-bearing deposits with the Federal Reserve Bank carried by the Company is a function of the availability of funds presented to other institutions for clearing, and the Company’s requirements for liquidity, operating cash and reserves, available yields and interest rate sensitivity management. Balances of these items can fluctuate widely based on these various factors. The aggregate of cash and due from banks, interest-bearing deposits with banks and federal funds sold increased $433.9 million from December 31, 2020 to December 31, 2021. The increase was primarily related to the increase in deposits from PPP and other government stimulus payments.
Securities
For the year ended December 31, 2021, total debt securities decreased $20.7 million, or 3.7%, to $534.5 million. Debt securities available for sale represented 99.4% of the total debt securities portfolio at December 31, 2021, compared to 99.5% of total debt securities portfolio at December 31, 2020. Debt securities available for sale had a net unrealized gain of $2.8 million at December 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 tax, in the amounts of a gain of $2.2 million and a gain of $7.4 million for December 31, 2021 and 2020, respectively.
The Company does not engage in securities trading activities. Any sales of debt securities are for the purpose of executing the Company’s asset/liability management strategy, eliminating a perceived credit risk in a specific security, or providing liquidity. Debt securities that are being held for indefinite periods of time, or that may be sold as part of the Company’s asset/liability management strategy, to provide liquidity, or for other reasons, are classified as available for sale and are stated at estimated fair value. Unrealized gains or losses on debt securities available for sale are reported as a component of stockholders’ equity, net of income tax. Debt securities for which the Company has the intent and ability to hold to maturity are classified as held for investment and are stated at cost, adjusted for amortization of premiums and accretion of discounts computed under the interest method.
Management has the ability and intent to hold the debt securities classified as held for investment until they mature, at which time the Company will receive full value for the securities. Furthermore, the Company also has the ability and intent to hold the debt securities classified as available for sale for a period of time sufficient for a recovery of cost. As of December 31, 2021, the Company had net unrealized gains largely due to decreases in market interest rates over the yields available at the time the underlying securities were purchased. The fair value of those securities having unrealized losses is expected to recover as the securities approach their maturity date or repricing date, or if market yields for similar investments decline. Furthermore, as of December 31, 2021, management had no intent or requirement to sell before the recovery of the unrealized loss.
See Note (4) of the Notes to Consolidated Financial Statements for disclosures regarding the Company’s Securities.
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WEIGHTED AVERAGE YIELD OF DEBT SECURITIES
The following table summarizes the maturity distribution schedule with corresponding weighted average taxable equivalent yields of the debt securities portfolio at December 31, 2021. The following table presents securities at their expected maturities, which may differ from contractual maturities. The Company manages its debt securities portfolio for liquidity, as a tool to execute its asset/liability management strategy, and for pledging requirements for public funds. For the interest rate sensitivity of debt securities see the table in item 7A.
Amount Yield* Amount Yield* Amount Yield* Amount Yield* Amount Yield*
(Dollars in thousands)
Held for Investment
Mortgage-backed securities $ 10 4.46 % $ 22 6.67 % $ — — % $ — — % $ 32 5.85 %
Available for Sale
* Yield is on a taxable-equivalent basis using a 21% tax rate.
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Loans
The Company has historically generated loan growth from both internal originations and bank acquisitions. Total loans held for investment decreased $225.1 million, or 3.5%, to $6.2 billion in 2021. The decrease in loans resulted from a net decrease of approximately $572.3 million in PPP loans. The decrease in loans were partially offset by the Company’s purchase of The First National Bank and Trust Company of Vinita, Oklahoma, which added approximately $126 million in loans as of December 31, 2021. At December 31, 2021, the balance of total PPP loans was $80.4 million, net of unamortized processing fees of $2.0 million compared to $652.7 million, net of unamortized processing fees of $14.5 million at December 31, 2020.
Composition
The Company’s loan portfolio was diversified among various types of commercial and individual borrowers. Commercial loans were comprised principally of loans to companies in real estate, light manufacturing, retail and service industries. Consumer non-real estate loans were comprised primarily of loans to individuals for automobiles.
LOANS HELD FOR INVESTMENT BY CATEGORY
December 31,
Amount % ofTotal Amount % ofTotal
(Dollars in thousands)
Real estate:
See Note (1) and Note (5) of the Notes to Consolidated Financial Statements for additional disclosures regarding the Company’s loans.
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MATURITY AND RATE SENSITIVITY OF LOANS
The following table presents the Maturity and Rate Sensitivity of Loans held for investment at December 31, 2021. Many of the loans with maturities of one year or less are renewed at existing or similar terms after scheduled principal reductions. Also approximately 44% of loans had adjustable interest rates at December 31, 2021.
Maturing
(Dollars in thousands)
Real estate:
The information relating to the maturity and rate sensitivity of loans is based upon contractual maturities and original loan terms. In the ordinary course of business, loans maturing within one year may be renewed, in whole or in part, at interest rates prevailing at the date of renewal.
NONPERFORMING AND RESTRUCTURED ASSETS
The following table summarizes nonperforming and restructured assets.
December 31,
(Dollars in thousands)
Past due 90 days or more and still accruing $ 4,964 $ 4,802
Total nonperforming and restructured loans 29,521 50,131
Other real estate owned and repossessed assets 39,553 32,480
Total nonperforming and restructured assets $ 69,074 $ 82,611
Nonperforming and Restructured Assets
During 2021, nonperforming and restructured assets decreased $13.5 million to $69.1 million. The Company’s level of nonperforming and restructured assets has continued to be relatively low, equating to 0.73% and 0.90% of total assets at December 31, 2021 and 2020, respectively.
Nonaccrual loans decreased $16.7 million in 2021 due to resolution of several loans, which were offset by $6.0 million of nonaccrual loans acquired from The First National Bank and Trust Company of Vinita, Oklahoma. The Company’s nonaccrual loans
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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 both interest and principal is in serious doubt. Interest income is not recognized until the principal balance is fully collected. However, if the full collection of the remaining principal balance is not in doubt, interest income is recognized on certain of these loans on a cash basis. Had nonaccrual loans performed in accordance with their original contractual terms, the Company would have recognized additional interest income of approximately $2.2 million for 2021, $2.8 million for 2020 and $1.7 million for 2019. Only a small amount of this interest is expected to be ultimately collected. Approximately $3.3 million of nonaccrual loans are guaranteed by government agencies as of December 31, 2021.
Restructured loans decreased $4.1 million in 2021 due primarily to the overall improvement in restructured loans. 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 troubled debt restructurings whose terms were modified during the period were not considered material.
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 declines. The above normal risk associated with nonperforming loans has been considered in the determination of the allowance for credit losses. At December 31, 2021, the allowance for credit losses as a percentage of nonperforming and restructured loans was 284.33%, compared to 182.26%, at the end of 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 increased $7.1 million in 2021 and included approximately $4.0 million from the repossession of one commercial real estate property, $2.4 million from the decommissioning of the Company’s previous headquarters, and approximately $600,000 of other real estate owned acquired from The First National Bank and Trust Company of Vinita, Oklahoma. As of both December 31, 2021 and December 31, 2020, other real estate owned included a commercial real estate property recorded at approximately $28 million. The Company's rental income from OREO was approximately $10.3 million in 2021 compared to approximately $16,000 in 2020 and 2019. In addition, the Company's OREO holding expense was approximately $9.2 million in 2021 compared to approximately $313,000 in 2020 and $350,000 in 2019. 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. These properties 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.
Allowance for Credit Losses/Fair Value Adjustments on Acquired Loans
On January 1, 2020, the Company adopted ASC 326, which replaced 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 December 31, 2021, the allowance for credit losses to total loans represented 1.36% of total loans, compared to 1.42% at December 31, 2020. The decrease in the allowance for credit loss during 2021 was primarily driven by a reversal of provision during 2021 based on sustained improvements in the economy, both nationally and in Oklahoma, which reduced the amount of expected credit loss within the loan portfolio. This reduction was partially offset by additional allowance for credit loss required by newly acquired loans purchased with credit deterioration.
The overall credit quality of the Company’s loan portfolio has remained strong. Net charge-offs were $7.0 million and $22.8 million for the years ended 2021 and 2020, respectively. The amount of net loan charge-offs is relatively low, equating to 0.11% and 0.35% of average total loans for the years ended December 31, 2021 and 2020, respectively. If unforeseen adverse changes occur in the national or local economy, or in the credit markets, it would be reasonable to expect that the allowance for credit losses would increase in future periods.
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ANALYSIS OF ALLOWANCE FOR CREDIT LOSSES
The following table is a break-out of the allowance for credit losses:
Year Ended December 31,
(Dollars in thousands)
Real estate:
Commercial real estate owner occupied $ 6,410 $ 6,911
Commercial real estate non-owner occupied 16,987 12,318
Construction and development < 60 months 3,490 2,723
Construction residential real estate < 60 months 1,092 726
Residential real estate first lien 3,076 2,822
Residential real estate all other 2,104 2,236
Commercial and agricultural non-real estate 26,073 33,020
The following table is a break-out of net charge-offs/(recoveries) and the break-out of the percent of average loans in each category:
Amount % ofAvg Loans Amount % ofAvg Loans
(Dollars in thousands)
Real estate:
Commercial real estate owner occupied $ (36 ) 0.00 % $ 763 0.01 %
Construction and development < 60 months (12 ) — (64 ) —
Construction residential real estate < 60 months — — 29 —
Residential real estate first lien 32 — 421 0.01
Residential real estate all other 469 0.01 72 —
The fair value adjustment on acquired loans consists of a credit component to adjust for estimated credit exposures in the acquired loans. The credit component of the adjustment was a $1.1 million discount at December 31, 2021 and a $3.0 million discount at December 31, 2020. These fair value adjustments will be accreted to income over the remaining life of the loans. The acquired loans outstanding were $312.0 million and $261.7 million, at December 31, 2021 and 2020, respectively.
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Intangible Assets, Goodwill and Other Assets
Identifiable intangible assets and goodwill totaled $167.5 million and $168.9 million at December 31, 2021 and December 31, 2020, respectively.
On May 20, 2021, the Company recorded a core deposit intangible of approximately $1.7 million because of the purchase of assets and assumption of liabilities from The First National Bank and Trust Company of Vinita, Oklahoma. See Note (2) of the Notes to Consolidated Financial Statements for disclosure regarding the Company’s recent developments, including mergers and acquisitions.
Other assets includes the cash surrender value of key-man life insurance policies totaling $81.4 million at December 31, 2021 and $80.7 million at December 31, 2020.
Equity securities are reported in other assets on the balance sheet. The Company invests in equity securities without readily determinable fair values. These equity securities are reported at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. The realized and unrealized gains and losses are reported as securities transactions in the noninterest income section of the consolidated statements of comprehensive income. The balance of equity securities was $10.6 million at December 31, 2021 and $10.1 million at December 31, 2020. The Company reviews its portfolio of equity securities for impairment at least quarterly.
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 for disclosures regarding these investments.
Liquidity and Funding
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.
Historically, BancFirst has more liquidity than its peers do. This liquidity positions BancFirst to respond to increased loan demand and other requirements for funds, or to decreases in funding sources. The liquidity of BancFirst Corporation, however, is dependent upon dividend payments from BancFirst and its ability to obtain financing. Banking regulations limit bank dividends based upon net earnings retained by BancFirst and minimum capital requirements. Dividends in excess of these limits require regulatory approval. At January 1, 2022, BancFirst had approximately $153.3 million of equity available for dividends to BancFirst Corporation without regulatory approval. During 2021, BancFirst declared four common stock dividends totaling $48.5 million and two preferred stock dividends totaling $1.9 million. While Pegasus Bank had net income of $6.6 million in 2021, the Company intends to provide additional capital to increase Pegasus Bank’s ability to approve larger loans and allow Pegasus Bank to continue to grow their assets.
Deposits
Total deposits increased $27.2 million to $8.1 billion, an increase of 0.3% in 2021. The increase in deposits during 2021 was predominantly related to 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 both December 31, 2021 and 2020, respectively. Noninterest-bearing deposits to total deposits were 46.7% at December 31, 2021, compared to 47.0% at December 31, 2020.
In addition, off-balance sheet sweep accounts totaled $5.1 billion at December 31, 2021, which included a temporary sweep amount of approximately $2.3 billion compared to a sweep account total of $2.8 billion at December 31, 2020. Our sweep accounts affect the balances of our year-end assets and deposits.
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ANALYSIS OF AVERAGE DEPOSITS
Year Ended December 31,
(Dollars in thousands)
Average Balances
PERCENTAGE OF TOTAL AVERAGE DEPOSITS AND AVERAGE RATES PAID
% of Total Rate % of Total Rate
Interest-bearing transaction deposits 8.77 0.07 % 9.06 0.13 %
Average rate paid on interest-bearing deposits 0.16 % 0.39 %
MATURITY OF TIME DEPOSITS
The following table shows the maturity of time deposits that are in excess of the Federal Deposit Insurance Corporation's insurance limit:
(Dollars in thousands)
Three months or less $ 38,574
Over three months through six months 29,371
Over six months through twelve months 44,907
At December 31, 2021, 78.4% of the Company’s time deposits greater than $250,000 mature in one year or less.
Subordinated Debt
On June 17, 2021, the Company completed a private placement, under Regulation D of the Securities Act of 1933, of $60 million aggregate principal amount of 3.50% Fixed-to-Floating Rate Subordinated Notes due 2036 ("Subordinated Notes") to various institutional accredited investors. See Note (11) of the Notes to Consolidated Financial Statements for a complete discussion of the Company’s subordinated debt.
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Short-Term Borrowings
See Note (9) of the Notes to Consolidated Financial Statements for a discussion of short-term borrowings.
Lines of Credit
See Note (10) of the Notes to Consolidated Financial Statements for a discussion of the Company’s lines of credit.
Capital Resources
Stockholders’ equity totaled $1.2 billion at December 31, 2021, compared to $1.1 billion at December 31, 2020. In addition to net income of $167.6 million, other changes in stockholders’ equity during the year ended December 31, 2021 included $2.3 million related to common stock issuances and $2.1 million related to stock-based compensation, that were partially offset by $45.8 million in dividends, a $5.3 million decrease in other comprehensive income, $5.5 million in net cash settlement of options, and $11.7 million in common stock repurchases. The Company’s average stockholders’ equity to average assets for 2021 was 10.32% compared to 11.17% for 2020. The Company’s leverage ratio and total risk-based capital ratios at December 31, 2021 were well in excess of the regulatory requirements. Banking institutions are generally expected to maintain capital well above the minimum levels. The Company’s trust preferred securities have continued to be included in Tier 1 capital, as the Company’s total assets do not exceed $15 billion. The Company’s Subordinated Notes have been structured to qualify as Tier 2 capital under bank regulatory guidelines.
See Note (15) of the Notes to Consolidated Financial Statements for a discussion of capital ratio requirements.
See Note (11) of the Notes to Consolidated Financial Statements for disclosures regarding the Company’s Subordinated Debt.
On January 20, 2017, the Company filed with the Securities and Exchange Commission (“SEC”) an automatic shelf registration statement on Form S-3, which became effective upon filing with the SEC. Under the shelf registration, the Company may offer and sell, from time to time, an indeterminate amount of its common stock in one or more future offerings.
The Company has had a Stock Repurchase Program (the “SRP”) since November 1999. The SRP may be used as a means to increase earnings per share and return on equity, to purchase treasury stock for the exercise of stock options or for distributions under the Deferred Stock Compensation Plan, to provide liquidity for optionees to dispose of stock from exercises of their stock options and to provide liquidity for stockholders wishing to sell their stock. All shares repurchased under the SRP have been retired and not held as treasury stock. The timing, price and amount of stock repurchases under the SRP may be determined by management and approved by the Company’s Executive Committee. During September 2021, the SRP was amended to permit the repurchase of an additional 650,000 shares. At December 31, 2021, up to 500,486 shares could be repurchased under the SRP. For the year ended December 31, 2021, the Company repurchased 212,296 shares of its common stock for $11.7 million at an average price of $54.94 per share under the SRP. For the year ended December 31, 2020, the Company repurchased 59,284 shares of its common stock for $3.1 million at an average price of $52.26 per share under the SRP. For the year ended December 31, 2019, the Company repurchased 26,670 shares of its common stock for $1.6 million at an average price of $60.04 per share under the SRP.
Future dividend payments will be determined by the Company’s Board of Directors considering the earnings, financial condition and capital needs of the Company, BancFirst, and Pegasus Bank, applicable governmental policies and regulations and such other factors as the Board of Directors deems appropriate. While no assurance can be given as to the Company’s ability to pay dividends, management believes that, based upon the anticipated performance of the Company, regular dividend payments will continue in 2022.
Related Party Transactions
See Note (18) of the Notes to Consolidated Financial Statements for disclosures regarding the Company’s related party transactions.
Liquidity Risk and Off-Balance Sheet Arrangements
Liquidity is the ability to meet financial obligations through the maturity or sale of existing assets or the acquisition of additional funds. Various financial obligations, including contractual obligations and commercial commitments, may require future cash payments by the Company. Certain obligations are recognized on the Consolidated Balance Sheets, while others are off-balance sheet under U.S. generally accepted accounting principles. The Company currently has 7.20% Junior Subordinated Debentures, Subordinated Notes, operating lease payments, time deposit payments and low income housing partnership commitments. The Company’s time deposits
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require the majority of cash obligations in the next twelve months. The Company’s 7.20% Junior Subordinated Debentures mature on March 31, 2034. The Company's Subordinated Notes mature on June 30, 2036. The Company has consistently generated positive net income and the Company currently expects to have positive net income for 2022. Management does not currently know of any trends that would cause the Company to be unable to provide for current obligations in the next twelve months.
Refer to Notes 6, 8, 11, 19 and 20 to the consolidated financial statements for further information regarding these contractual obligations.
The Company is a party to financial instruments with off balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include loan commitments and standby letters of credit, which involve elements of credit and interest-rate risk to varying degrees. The Company’s exposure to credit loss in the event of nonperformance by the other party to the instrument is represented by the instrument’s contractual amount. To control this credit risk, the Company uses the same underwriting standards as it uses for loans recorded on the balance sheet. The Company had $2.1 billion and $1.8 billion in loan commitments at December 31, 2021 and 2020, respectively. The Company had $82.8 million and $96.3 million in stand-by letters of credit at December 31, 2021 and 2020, respectively. Loan commitments are agreements to lend to a customer, as long as there is no violation of any condition established in the contract. Stand-by letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. These instruments generally have fixed expiration dates or other termination clauses. Since many of the instruments are expected to expire without being drawn upon, the total amounts do not necessarily represent commitments that will be funded in the future.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Market risk refers to the risk of loss arising from adverse changes in interest rates, foreign currency exchange rates, commodity prices and other relevant market rates and prices, such as equity prices. The risk of loss can be assessed from the perspective of adverse changes in fair values, cash flows and future earnings. Due to the nature of its operations, the Company is primarily exposed to interest rate risk arising principally from its lending, investing, deposit and borrowing activities and, to a lesser extent, liquidity risk.
Interest rate risk on the Company’s balance sheet consists of repricing, option and basis risks. Repricing risk results from the differences in the maturity or repricing of asset and liability portfolios. Option risk arises from “embedded options” present in many financial instruments such as loan prepayment options, deposit early withdrawal options and interest rate options. These options allow customers opportunities to benefit when market interest rates change, which typically results in higher costs or lower revenue for the Company. Basis risk refers to the potential for changes in the underlying relationship between market rates and indices, which subsequently result in a narrowing of the profit spread on an earning asset or liability. Basis risk is also present in administered rate liabilities, such as savings accounts, negotiable order of withdrawal accounts and money market accounts where historical pricing relationships to market rates may change due to the level or directional change in market interest rates.
The Company seeks to reduce volatility in its net interest margin and net interest income through periods of changing interest rates. Accordingly, the Company’s interest rate sensitivity and liquidity are monitored on an ongoing basis by its Asset and Liability Committee (“ALCO”). ALCO establishes risk measures, limits and policy guidelines for managing the amount of interest rate risk and its effect on net interest income and capital. A variety of tools are used to evaluate the magnitude of interest rate risk, the distribution of risk, the level of risk over time and the exposure to changes in certain interest rate relationships.
The ALCO also utilizes an earnings simulation model as a quantitative tool in measuring the amount of interest rate risk associated with changing market rates. The model quantifies the effects of various interest rate scenarios on projected net interest income over the next 12 months. These simulations incorporate assumptions regarding changes in interest rates and the maturity and repricing of earning assets and interest-bearing liabilities.
The ALCO uses gap analysis to monitor interest rate sensitivity based on the maturity and repricing frequencies of its earning assets and interest-bearing liabilities. This analysis indicates that the Company’s position is asset-sensitive, with a positive gap of $423 million for the zero to 12-month interval at December 31, 2021, which was 5.45% of total assets, compared to a positive gap of $611 million for the zero to 12-month interval at December 31, 2020, which was 7.69% of total assets.
The ALCO continuously monitors and manages the balance between interest rate-sensitive assets and liabilities. The objective is to manage the impact of fluctuating market rates on net interest income within acceptable levels. In order to meet this objective, management may lengthen or shorten the duration of assets or liabilities.
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As of December 31, 2021, the model simulations projected that a 100 and 200 basis point increase would result in positive variance in net interest income of 1.91% and 4.52%, respectively, relative to the base case over the next 12 months.
The following table presents the Company’s financial instruments that are sensitive to changes in interest rates, their expected maturities and their estimated fair values at December 31, 2021.
Avg. Expected Maturity / Principal Repayments at December 31,
(Dollars in thousands)
Interest Sensitive Assets
Interest Sensitive Liabilities
Off Balance Sheet Items
Loan commitments — — — — — — — 3,648
Letters of credit — — — — — — — 621
The expected maturities and principal repayments are based upon the contractual terms of the instruments. Debt securities are stated at par value. Prepayments have been estimated for certain instruments with predictable prepayment rates. Savings and transaction deposits are assumed to mature all in the first year as they are not subject to withdrawal restrictions and any assumptions regarding decay rates would be very subjective. The actual maturities and principal repayments for the financial instruments could vary substantially from the contractual terms and assumptions used in the analysis.
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Item 8. Financial Statements and Supplementary Data.
Report of Independent Registered Public Accounting Firm
Stockholders, Board of Directors and Audit Committee
BancFirst Corporation
Oklahoma City, Oklahoma
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of BancFirst Corporation (the Company) as of December 31, 2021 and 2020, the related consolidated statements of comprehensive income, stockholders' equity and cash flows for each of the years in the three-year period ended December 31, 2021, and the related notes (collectively referred to as the financial statements). In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2021, in conformity with accounting principles generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control – Integrated Framework (2013),issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated February 25, 2022, expressed an unqualified opinion thereon.
Adoption of New Accounting Standard
As discussed in Notes 1 and 5 to the financial statements, the Company has changed its method of accounting for credit losses in 2020, due to the adoption of Topic 326, Financial Instruments – Credit Losses.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits.
We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and preforming procedures that respond to those risks. Such procedure include examining, on a test basis, evidence regarding the amounts and disclosure in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
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Allowance for Credit losses - Loans
Description of the Matter
As more fully described in Notes 1 and 5 to the financial statements, the allowance for credit losses – loans (ACL) is an estimate of lifetime expected credit losses for loans. The estimate of ACL considers historic credit loss information that is adjusted for current conditions and reasonable and supportable forecasts. Loans that do not share risk characteristics are evaluated on an individual basis. Loans evaluated individually are not included in the collective evaluation.
The Company measures expected credit losses of loans on a pool basis when the loans share similar characteristics. Historical loss rates are analyzed and applied to their respective loan segments comprised of loans not subject to individual evaluation. The Company utilizes a methodology known as vintage loss analysis for substantially all of its loan portfolio. Vintage loss analysis measures impairment based on the age of the accounts and the historical asset performance of assets with similar risk characteristics. Vintage loss analysis accounts for expected losses by calculating the cumulative loss rates of a given loan pool over the expected pool’s life. Historical loss rates are adjusted for significant factors that, in management’s judgment, reflect the impact of any current conditions on loss recognition, as well as for certain known model limitations. Forecast factors are developed based on information obtained from external sources, as well as consideration of other internal information, and are included in the ACL model for a reasonable and supportable forecast period, with loss factors reverting back to historic loss rates. Management continually re-evaluates the other subjective and forecast factors included in its ACL analysis.
We identified the valuation of the ACL as a critical audit matter. The primary reason for our determination that the ACL is a critical audit matter is that auditing the estimated ACL involved significant judgment and complex review. Auditing the ACL involved a high degree of subjectivity in evaluating management’s estimates, such as segmentation, weighted average life calculations, assessment of economic conditions, and other environmental factors and assessment of forecast factors.
How We Addressed the Matter in Our Audit
We obtained an understanding of the Company’s process for establishing the ACL, which involves a high degree of subjectivity. We evaluated management's process to assess economic conditions and other environmental factors, adequacy of specific allowances associated with individually evaluated loans, and appropriateness of loan grades and other data used to calculate and estimate the various components of the ACL.
Our primary audit procedures related to the ACL included the following, among others:
•
Testing the design and operating effectiveness of controls, including those related to technology, over the ACL, including data completeness and accuracy; classifications of loans by loan pool; verification of historical net loss data and calculated net loss rates; the establishment of qualitative and economic forecast adjustments, loan grades, and risk classification of loans; and establishment of specific allowances associated with individually evaluated loans;
•
Testing of completeness and accuracy of the data utilized in the ACL;
•
Testing the model's computational accuracy;
•
Evaluating the relevance and reliability of data and assumptions used in the estimate;
•
Evaluating the qualitative and economic forecast adjustments to the historical loss rates, including assessing the basis for the adjustments and the reasonableness of the significant assumptions;
•
Testing the internal loan review function and evaluating the reasonableness of loan grades and specific allocations, if any;
•
Assessing the reasonableness of specific allocations associated with individually evaluated loans.
We have served as the Company's auditor since 2013.
/s/ BKD, LLP
Oklahoma City, Oklahoma
February 25, 2022
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BANCFIRST CORPORATION
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
December 31,
ASSETS
Federal funds sold 800 —
Debt securities available for sale at fair value 531,523 552,232
Loans held for investment (net of unearned interest) 6,169,442 6,394,506
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Short-term borrowings — 1,100
Accrued interest payable and other liabilities 55,977 51,864
Commitments and contingent liabilities (Note 19)
Stockholders' equity:
Senior preferred stock, $1.00 par; 10,000,000 shares authorized; none issued — —
The accompanying Notes are an integral part of these consolidated financial statements.
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BANCFIRST CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Dollars in thousands, except per share data)
Year Ended December 31,
INTEREST INCOME
Debt securities:
Federal funds sold — — 4
INTEREST EXPENSE
Short-term borrowings 2 8 32
NONINTEREST INCOME
Gain/(loss) on sale of other assets 2,762 130 (39 )
NONINTEREST EXPENSE
Net expense/(income) from other real estate owned 9,089 (1,531 ) (785 )
NET INCOME PER COMMON SHARE
OTHER COMPREHENSIVE (LOSS)/GAIN
Reclassification adjustment for gains included in net income — — —
The accompanying Notes are an integral part of these consolidated financial statements.
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BANCFIRST CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Dollars in thousands, except share data)
Year Ended December 31,
Shares Amount Shares Amount Shares Amount
COMMON STOCK
CAPITAL SURPLUS
Net cash settlement of options (958 ) — —
RETAINED EARNINGS
Net cash settlement of options (4,521 ) — —
ACCUMULATED OTHER COMPREHENSIVE INCOME
Unrealized gains/(losses) on securities:
The accompanying Notes are an integral part of these consolidated financial statements.
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BANCFIRST CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOW
(Dollars in thousands)
December 31,
CASH FLOWS FROM OPERATING ACTIVITIES
Adjustments to reconcile to net cash provided by operating activities:
Net amortization of securities premiums and discounts 4,409 (94 ) (4,282 )
Realized securities (gains) losses (1,047 ) 389 (812 )
Decrease/(increase) in interest receivable 4,214 (325 ) 887
Decrease in interest payable (617 ) (1,641 ) (17 )
Amortization of stock-based compensation arrangements 2,133 1,516 1,277
INVESTING ACTIVITIES
Net decrease/(increase) in federal funds sold 14,200 1,000 (1,000 )
Purchases of held for investment debt securities (845 ) (1,395 ) (1,010 )
Purchase of equity securities (904 ) (811 ) (3,966 )
Proceeds from paydowns and sales of equity securities 1,459 445 2,178
FINANCING ACTIVITIES
Net change in short-term borrowings (1,100 ) — (575 )
Proceeds from long-term borrowings — 3,000 —
Paydown of long-term borrowings — (3,000 ) —
Issuance of common stock in connection with stock options, net 2,260 1,790 2,484
Net cash settlement of options (5,479 ) — —
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Noncash investing and financing activities:
The accompanying Notes are an integral part of these consolidated financial statements.
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BANCFIRST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of BancFirst Corporation and its subsidiaries (the “Company”) conform to accounting principles generally accepted in the United States of America (U.S. GAAP) and general practice within the banking industry. A summary of the significant accounting policies follows.
Nature of Operations
BancFirst Corporation is an Oklahoma business corporation and a financial holding company under federal law. It conducts virtually all of its operating activities through its principal wholly-owned subsidiary, BancFirst (“BancFirst”), an Oklahoma state-chartered bank headquartered in Oklahoma City, Oklahoma. The Company also conducts operating activities through its wholly-owned subsidiary, Pegasus Bank (“Pegasus Bank”), a Texas state-chartered bank headquartered in Dallas, Texas. BancFirst and Pegasus Bank provide a wide range of retail and commercial banking services, including: commercial, real estate, agricultural and consumer lending; depository and funds transfer services; collections; safe deposit boxes; cash management services; and other services tailored for both individual and corporate customers. BancFirst also offers trust services and acts as executor, administrator, trustee, transfer agent and in various other fiduciary capacities. Through its Technology and Operations Center, BancFirst provides item processing, research and other correspondent banking services to financial institutions and governmental units. The Company’s wholly-owned subsidiary, BancFirst Insurance Services, Inc., an independent insurance agency, offers a variety of commercial and personal insurance products. In addition, the Company’s wholly-owned subsidiary, Council Oak Partners, LLC, an Oklahoma limited liability company, engages in investing activities.
Basis of Presentation
The accompanying consolidated financial statements include the accounts of BancFirst Corporation, Council Oak Partners, LLC, BancFirst Insurance Services, Inc., BancFirst Risk & Insurance Company (2019 and 2020 consolidated financials include a full year of operations for BancFirst Risk & Insurance Company; however it was dissolved as of December 31, 2020), Pegasus Bank, and BancFirst and its subsidiaries. The principal operating subsidiaries of BancFirst are Council Oak Investment Corporation, Council Oak Real Estate Inc., BFTower, LLC, BFC-PNC LLC, BF Brazito, LLC, and BancFirst Agency, Inc. All significant intercompany accounts and transactions have been eliminated. Assets held in a fiduciary or agency capacity are not assets of the Company and, accordingly, are not included in the consolidated financial statements. Certain amounts from 2020 and 2019 have been reclassified to conform to the 2021 presentation. These reclassifications were not material to the Company’s financial statements.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with U.S. GAAP inherently involves the use of estimates and assumptions that affect the amounts reported in the financial statements and the related disclosures. These estimates relate principally to the determination of the allowance for credit losses, income taxes, the fair value of financial instruments and the valuation of intangibles. Such estimates and assumptions may change over time and actual amounts realized may differ from those reported.
Securities
The Company invests in debt securities. Any sales of debt securities are for the purpose of executing the Company’s asset/liability management strategy, eliminating a perceived credit risk in a specific security or providing liquidity. Debt securities that are being held for indefinite periods of time, or that may be sold as part of the Company’s asset/liability management strategy, to provide liquidity or for other reasons, are classified as available for sale and are stated at estimated fair value. Unrealized gains or losses on debt securities available for sale are reported as a component of stockholders’ equity, net of income tax. Gains or losses from sales of debt securities are based upon the book values of the specific debt securities sold. Debt securities for which the Company has the intent and ability to hold to maturity are classified as held for investment and are stated at cost, adjusted for amortization of premiums and accretion of discounts computed under the interest method. The Company reviews its portfolio of debt securities in an unrealized loss position at least quarterly. The Company first assesses whether it intends to sell or it is more-likely-than-not that it will be required to sell the securities before recovery of the amortized cost basis. If either of these criteria is met, the securities amortized cost basis is written down to fair value as a current period expense. If either of the above criteria is not met, the Company evaluates whether the decline in fair value is the result of credit losses or other factors. In making this assessment, the Company considers, among other things, the period of
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time the security has been in an unrealized loss position, and performance of any underlying collateral and adverse conditions specifically related to the security. The Company does not consider the unrealized position of its debt securities to be the result of credit factors, because the decline in fair value is attributable to changes in interest rates and illiquidity, and not credit quality, and the Company does not have the intent to sell these securities and it is likely that it will not be required to sell the securities before their anticipated recovery. Therefore, the Company has not recorded an allowance for credit losses against its debt securities portfolio, as the credit risk is not material. The Company does not engage in securities trading activities.
The Company invests in equity securities without readily determinable fair values and utilizes Level 3 inputs. These securities are reported at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. The realized and unrealized gains and losses are reported as securities transactions in the noninterest income section of the consolidated statements of comprehensive income. Equity securities are reported in other assets on the balance sheet. The Company reviews its portfolio of equity securities for impairment at least quarterly.
Prior to the adoption of Accounting Standards Codification ("ASC") 326, declines in the fair value of held-to-maturity and available-for-sale securities below their cost that were deemed to be other than temporary were reflected in earnings as realized losses. In estimating other-than-temporary impairment losses prior to January 1, 2020, management considered, among other things, (i) the length of time and the extent to which the fair value had been less than cost, (ii) the financial condition and near-term prospects of the issuer and (iii) the intent and our ability to retain our investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value.
Loans
The lending function is governed by written policies and procedures, as determined by senior management and approved by the Board of Directors. The policies and procedures set the standards for lending in each major loan category by collateral type and use of loan proceeds. The objectives of these policies and procedures are to identify profitable markets, determine appropriate risk tolerance levels for each type of loan, establish limits for loan officer approval, set concentration limits, establish loan-to-value thresholds, set repayment terms and loan structure guidelines and adhere to documentation requirements. Interest rate risk is controlled by the use of variable rate provisions, the vast majority of which have a rate floor, limits on fixing rates for longer periods and the use of prepayment penalties.
Loans originated within the Company are stated at the principal amount outstanding, net of unearned interest, loan fees and allowance for credit losses. Interest on all performing loans is recognized, on a simple interest basis, based upon the principal amount outstanding. See Note (5) for loan disclosures.
Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at amortized cost. Amortized cost is the principal balance outstanding, net of purchase premiums and discounts. The Company has made the accounting policy election to exclude accrued interest receivable on loans from the estimate of credit losses. Interest income is accrued on the unpaid principal balance using the simple-interest method on the daily balances of the principal amounts outstanding.
Interest income on consumer and commercial loans is discontinued and placed on nonaccrual status at the time the loan is 90 days delinquent unless the loan is well secured and in process of collection. Consumer loans are charged off at 180 days past due and commercial loans are charged off to the extent principal or interest is deemed uncollectible. Past-due status is based on the contractual terms of the loan. In all cases, loans are placed on nonaccrual or charged off at an earlier date if collection of principal or interest is considered doubtful.
All interest accrued but not received for loans placed on nonaccrual is reversed against interest income. Interest received on such loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Under the cost-recovery method, interest income is not recognized until the loan balance is reduced to zero. Under the cash-basis method, interest income is recorded when the payment is received in cash. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.
Troubled debt restructurings are loans on which, due to the borrower’s financial difficulties, the Company has granted a concession that the Company would not otherwise consider for borrowers of similar credit quality. This may include a transfer of real estate or other assets from the borrower, a modification of loan terms, or a combination of the two. Modifications of terms that could potentially qualify as a restructuring include reduction of contractual interest rate, extension of the maturity date at a contractual interest rate lower than the current rate for new debt with similar risk, and a reduction of the face amount of debt or forgiveness of either principal
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or accrued interest. A loan continues to qualify as restructured until a consistent payment history or change in the borrower’s financial condition has been evidenced, generally for no less than twelve months. If the restructuring agreement specifies an interest rate at the time of the restructuring that is greater than or equal to the rate that the Company is willing to accept for a new extension of credit with comparable risk, then the loan is no longer considered a restructured loan if it is in compliance with the modified terms in calendar years after the year of restructure.
Residential real estate loans are made in accordance with underwriting policies and are fully documented. Credit worthiness is assessed based on significant credit characteristics including credit history and residential and employment stability. The Company does not engage in any hybrid loan programs. In addition, the Company does not have any exposure to loans with negative amortization, interest rate carryover or discounting of the initial rates (teaser rates).
An updated appraisal of the collateral is obtained when a loan is first identified as a problem loan. Appraisals are reviewed annually and are updated as needed, or are updated more frequently if significant changes are believed to have occurred in the collateral or market conditions. Appraisals of other real estate owned are also reviewed and updated consistent with this policy.
When a loan deteriorates to the point that the account officer or the Loan Committee concludes it no longer represents a viable asset, it will be charged off. Similarly, any portion of a loan that is deemed to no longer be a viable asset will be charged off. A loan will not be charged off unless such action has been approved by the branch President.
Acquired Loans
Loans acquired through business combinations are required to be carried at fair value as of the date of the combination. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date. The methodology of allowance for credit loss recorded for these acquired loans depends on whether the acquired loans are purchase credit deteriorated or non-purchase credit deteriorated. An allowance for credit loss for non-purchase credit deteriorated loans is determined and recorded in a manner consistent with originated loans. That is, the allowance for credit loss is calculated based on the loan’s amortized cost basis (i.e., the acquisition date fair value in a business combination) and is established through a charge to provision expense at the acquisition date. An allowance for credit loss for purchase credit deteriorated loans is recorded as an adjustment to the loans, in addition to the fair value amount recorded, as of the acquisition date, and not through provision expense. The acquisition date fair value plus the allowance for credit loss equals the loans new amortized cost basis as of the acquisition date. The difference between the new amortized cost basis and the unpaid principal balance of the loan represents the non-credit purchase discount/premium recorded. The difference between the fair value of loans which do not have specific evidence of deterioration of credit quality since origination and their principal balance is recognized in interest income on a level-yield method over the life of the loans. For loans which it is probable, at acquisition, that the Company will be unable to collect all contractually required payments (as determined by the present value of expected future cash flows), the difference between the undiscounted cash flows expected at acquisition and the investment in the loan, or the “accretable yield,” is recognized in interest income on a level-yield method over the life of the loan. Contractually required payments for interest and principal that exceed the undiscounted cash flows expected at acquisition, or the “nonaccretable difference,” are not recognized as yield adjustments or as loss accruals or valuation allowances. Increases in expected cash flows subsequent to the initial investment are recognized prospectively through adjustment of the yield on the loan over its remaining life. Decreases in expected cash flows are recognized as impairments. Any probable loss due to subsequent credit deterioration of the loans since acquisition is provided for in the allowance for credit losses.
Purchased Credit Deteriorated (PCD) Loans
The Company has purchased loans, some of which have experienced more than insignificant credit deterioration since origination. An allowance for credit losses is determined using the same methodology as other loans held for investment. The initial allowance for credit losses determined on a collective basis is allocated to individual loans. The sum of the loan’s purchase price and allowance for credit losses becomes its initial amortized cost basis. The difference between the initial amortized cost basis and the par value of the loan is a noncredit discount or premium, which is amortized into interest income over the life of the loan. Subsequent changes to the allowance for credit losses are recorded through provision expense.
Loans Held For Sale
The Company originates mortgage loans to be sold. At the time of origination, the acquiring bank has already been determined and the terms of the loan, including the interest rate, have already been set by the acquiring bank allowing the Company to originate the loan at fair value. Mortgage loans are generally sold within 30 days of origination. Loans held for sale are carried at the lower of cost or
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fair value. Gains or losses recognized upon the sale of the loans are determined on a specific identification basis. The Company does not sell residential mortgage loans with recourse other than obligations under standard representations and warranties or for fraud. These obligations relate to loan performance for the life of the loan. The amount of loans repurchased since the inception of the program is not considered to be material, and therefore, no reserve has been required. At December 31, 2020, loans held for sale included loans at its Hugo, Oklahoma branch that it had entered into an agreement to sell to AmeriState Bank in Atoka, Oklahoma.
Allowance for Credit Losses
The allowance for credit losses is a valuation account that is deducted from the loans amortized cost basis to present the net amount expected to be collected on the loans. Loans are charged off against the allowance when management believes the uncollectibility of a loan balance is confirmed. Expected recoveries do not exceed the aggregate of amounts previously charged-off and expected to be charged-off. The allowance for credit losses is increased by provisions charged to operating expense and is reduced by net loan charge-offs.
The Company considers various factors to monitor the credit risk in the loan portfolio including volume and severity of loan delinquencies, nonaccrual loans, internal grading of loans, historical loan loss experience and economic conditions.
Management estimates the allowance balance using relevant available information, from internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts. Historical credit loss experience provides the basis for the estimation of expected credit losses. Adjustments to historical loss information are made for differences in current loan-specific risk characteristics such as differences in underwriting standards, portfolio mix, delinquency level, or term as well as for changes in environmental conditions, such as the political, legal, and regulatory environment, technology and consumer preferences. Historical loss information is also adjusted for reasonable and supportable changes in national and local economic conditions, such as consumer loans 90 days past due and commercial bankruptcies. Economic conditions are forecast as "current conditions" over the forecast period. Forecast models were used to validate credit performance during the forecast period. Beyond the reasonable and supportable forecast, the economic expectation reverts to the historical average, which is determined by the weighted average life of each loan pool.
If a loan is individually evaluated a specific allowance is provided, if necessary, so that the loan is reported net, at the fair value of collateral. Interest payments on collateral dependent loans are typically applied to principal unless collectability of the principal amount is reasonably assured, in which case interest is recognized on a cash basis. Loans, or portions thereof, are charged off when deemed uncollectible. The allowance for credit losses is measured on a collective (pool) basis when similar risk characteristics exist.
Determining the Contractual Term
Expected credit losses are estimated over the contractual term of the loans, adjusted for expected prepayments when appropriate. The contractual term excludes expected extensions, renewals, and modifications unless either of the following applies: management has a reasonable expectation at the reporting date that a troubled debt restructuring will be executed with an individual borrower or the extension or renewal options are included in the original or modified contract at the reporting date and are not unconditionally cancellable by the Company.
Troubled Debt Restructurings (TDRs)
The allowance for credit loss on a TDR is measured using the same method as all other loans held for investment, except when the value of a concession cannot be measured using a method other than the discounted cash flow method. When the value of a concession is measured using the discounted cash flow method, the allowance for credit loss is determined by discounting the expected future cash flows at the original interest rate of the loan.
Allowance for Credit Losses on Off-Balance Sheet Credit Exposures
The Company estimates expected credit losses over the contractual period in which the Company is exposed to credit risk via a contractual obligation to extend credit, unless that obligation is unconditionally cancellable by the Company. The allowance for credit losses on off-balance sheet credit exposures is adjusted as a provision for credit loss expense. The estimate includes consideration of the likelihood that funding will occur and an estimate of expected credit losses on commitments expected to be funded over its estimated life. Based on a low likelihood that funding will occur and the Company’s ability to manage the extension of credit to our borrowers, the allowance for credit losses on off-balance sheet credit exposure is not material.
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Allowance for Credit Losses on Available-for-Sale Debt Securities
The Company reviews its portfolio of debt securities in an unrealized loss position at least quarterly. The Company first assesses whether it intends to sell or it is more-likely-than-not that it will be required to sell the securities before recovery of the amortized cost basis. If either of these criteria is met, the securities amortized cost basis is written down to fair value as a current period expense. If either of the above criteria is not met, the Company evaluates whether the decline in fair value is the result of credit losses or other factors. In making this assessment, the Company considers, among other things, the period of time the security has been in an unrealized loss position, and performance of any underlying collateral and adverse conditions specifically related to the security. At December 31, 2021 and December 31, 2020 approximately 95% of the available for sale debt securities held by the Company were issued by the U.S. Treasury, or U.S. government-sponsored entities and agencies. The Company does not consider the unrealized loss position of these securities to be the result of credit factors, because the decline in fair value is attributable to changes in interest rates and illiquidity, and not credit quality, and the Company does not have the intent to sell these securities and it is likely that it will not be required to sell the securities before their anticipated recovery. Therefore, the Company has not recorded an allowance for credit losses against its debt securities portfolio, as the credit risk is not material.
PPP Fee Income Policy
The Paycheck Protection Program (“PPP”), established as part of the Coronavirus Aid, Relief and Economic Security (“CARES”) Act, provides that the Small Business Administration ("SBA") will pay processing fees of up to 5% to lenders based on the volume of the PPP loans disbursed. The fee is based on the balance of each PPP loan outstanding at the time of full disbursement. The Company had received processing fees from the SBA of approximately $23.8 million in 2021 and $30.2 million in 2020. The unamortized balance of these fees on each loan is reported on the Company's balance sheet as part of the loan balance to which it relates and is recognized over the remaining life of the loan as an adjustment of yield. The unamortized balances of these fees was approximately $2.0 million and $14.5 million for the year ended December 31, 2021 and 2020, respectively. Upon notification from the SBA of the amount of the PPP loan to be forgiven the acceleration of recognition of deferred loan fee will occur for the percentage of the loan forgiven.
Nonaccrual Policy
A loan is placed on nonaccrual status when, in the opinion of management, the future collectability of both interest and principal is not probable. When interest accrual is discontinued, all unpaid accrued interest is reversed. 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.
The Company does not accrue interest on (1) any loan upon which a default of principal or interest has existed for a period of 90 days or over unless the collateral margin or guarantor support are such that full collection of principal and interest are not in doubt, and an orderly plan for collection is in process; and (2) any other loan for which it is expected full collection of principal and interest is not probable.
A nonaccrual loan may be restored to an accrual status when none of its principal and interest are past due and unpaid or otherwise becomes well secured and in the process of collection and when prospects for collection of future contractual payments are no longer in doubt. With the exception of a formal debt forgiveness agreement, no loan which has had principal charged-off shall be restored to accrual status unless the charged-off principal has been recovered.
Premises and Equipment
Premises and equipment are stated at cost, less accumulated depreciation. Depreciation is charged to operating expense and is computed using the straight-line method over the estimated useful lives of the assets. Maintenance and repairs are charged to expense as incurred while improvements are capitalized. Premises and equipment is tested for impairment if events or changes in circumstances occur that indicate that the carrying amount of any premises and equipment may not be recoverable. Impairment losses are measured by comparing the fair values of the premises and equipment with their recorded amounts. Premises that are identified to be sold are transferred to other real estate owned at the lower of their carrying amounts or their fair values less estimated costs to sell. Any losses on premises identified to be sold are charged to operating expense. When premises and equipment are transferred to other real estate owned, sold, or otherwise retired, the cost and applicable accumulated depreciation are removed from the respective accounts and any resulting gains or losses are reported in the statement of comprehensive income. Construction in progress includes all the costs of construction associated with the building of fixed long-term assets and is included in premises and equipment, net as an asset. When construction is completed, the asset is reclassified as a building or a leasehold improvement and depreciated over its applicable useful life.
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Leases
Certain operating leases are included as right of use lease assets in accrued interest receivable and other assets on the balance sheet and a related lease liability is included in accrued interest payable and other liabilities on the balance sheet. Right of use assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. The lease liability is measured as the present value of the unpaid lease payments, and the right of use assets value is derived from the calculation of the lease liability. To calculate the discount rate for each lease, the Company uses the rate implicit in the lease if available, otherwise an appropriate Federal Home Loan Bank ("FHLB") advance borrowing rate is used that correlates with the term of the lease.
Other Real Estate Owned
Other real estate owned ("OREO") consists of properties acquired through foreclosure proceedings or acceptance of a deed in lieu of foreclosure, and premises held for sale. These properties are carried at the lower of the book values of the related loans or fair values based upon appraisals, less estimated costs to sell. Losses arising at the time of reclassification of such properties from loans to OREO are charged directly to the allowance for credit losses. Any losses on premises identified to be sold are charged to operating expense at the time of transfer from premises to OREO. Losses from declines in value of the properties subsequent to classification as OREO are charged to operating expense. Revenues and expenses for OREO property are included in the income statement for the period in which they occur. Gross rental income for OREO is included in other non-interest income. The expenses of operating or holding OREO property are included in noninterest expense.
Intangible Assets and Goodwill
Core deposit intangibles are amortized on a straight-line basis over the estimated useful lives of seven to ten years and customer relationship intangibles are amortized on a straight-line basis over the estimated useful life of three to eighteen years. Goodwill is not amortized, but is evaluated at a reporting unit level at least annually for impairment, or more frequently if other indicators of impairment are present. At least annually in the fourth quarter, intangible assets are evaluated for possible impairment. Impairment losses are measured by comparing the fair values of the intangible assets with their recorded amounts. Any impairment losses are reported in the statement of comprehensive income.
Advertising Costs
Advertising costs are expensed as incurred. Advertising costs for the year ended December 31, 2021 were $3.0 million. Advertising costs for the years ended December 31, 2020 and 2019 were $3.3 million and $3.8 million, respectively.
Stock-based Compensation
The Company recognizes stock-based compensation as compensation expense in the statement of comprehensive income based on the fair value of the Company’s stock options on the measurement date, which, for the Company, is the date of the grant. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model and is based on certain assumptions including risk-free rate of return, dividend yield, stock price volatility and the expected term. The fair value of each option is expensed over its vesting period.
Income Taxes
The Company files a consolidated income tax return with its subsidiaries. Federal and state income tax expense or benefit has been allocated to subsidiaries on a separate return basis. Deferred taxes are recognized under the balance sheet method based upon the future tax consequences of temporary differences between the carrying amounts and tax basis of assets and liabilities, using the tax rates expected to apply to taxable income in the periods when the related temporary differences are expected to be realized. Realization of deferred tax assets is dependent upon the generation of a sufficient level of future taxable income and recoverable taxes paid in prior years. Although realization is not assured, management believes it is more likely than not that all of the deferred tax assets will be realized.
Earnings Per Common Share
Basic earnings per common share is computed by dividing net income, less any preferred dividends requirement, by the weighted average of common shares outstanding. Diluted earnings per common share reflects the potential dilution that could occur if options,
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convertible securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the Company.
Revenue Recognition
In addition to lending and related activities, the Company offers various services to customers that generate revenue. Contract performance typically occurs in one year or less. Incremental costs of obtaining a contract are expensed when incurred when the amortization period is one year or less.
Sales of real estate
The sale of real estate property is generally recognized, along with any associated gain or loss, when control of the property transfers to the buyer.
Service and transaction fees on depository accounts
Customers often pay certain fees to the bank to access the cash on deposit including certain non-transactional fees such as account maintenance or dormancy fees, and certain transaction based fees such as non-sufficient funds fees, overdraft, ATM, wire transfer, or foreign exchange fees. Revenue is recognized when the transactions occur or as services are performed over primarily monthly or quarterly periods. Payment is typically received in the period the transactions occur, or in some cases, within 90 days of the service period.
Interchange Fees
Interchange fees, or “swipe” fees, are charges that merchants pay to the processors who, in turn, share that revenue with us and other card-issuing banks for processing electronic payment transactions. Interchange fees represent the portion of the debit card transaction amount that the card issuer retains to compensate it for processing transactions and providing rewards. Interchange fees are settled and recognized on a daily or monthly basis.
Insurance Commissions and Fees
Insurance commissions are received on the sale of insurance products, and revenue is recognized upon the placement date of the insurance policies or when such commissions are received. Payment is normally received within the policy period. In addition to placement, the Company also provides insurance policy related risk management services. Revenue is recognized as these services are provided. Performance-based commissions are recognized when received or earlier when, upon consideration of past results and current condition, the revenue is deemed not probable of reversal.
For accounts billed by BancFirst Insurance Services, Inc., commission revenue is recognized at the later of the billing date or the effective date of the related insurance policies. Commission revenue, for accounts that are directly billed by the insurance company to the insured, is recognized when determinable by BancFirst Insurance Services, Inc., which is generally when such commissions are received.
BancFirst Insurance Services, Inc. also receives contingent commissions from insurance companies as additional incentive for achieving specified premium volume goals and/or loss experience parameters relating to the insurance they place. Contingent commissions from insurance companies are recognized when determinable, which is generally when such commissions are received.
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Trust
BancFirst offers trust services and acts as executor, administrator, trustee, transfer agent and in various other fiduciary capacities. There are four basic types of fees that are included in the trust department income. Administrative fees are assessed for managing trust accounts. Shareholder fees are received in connection with holding specific fund share classes. In return for these services, the mutual fund (or its distributor or investment advisor) pay a fee to BancFirst. Oil and gas fees are assessed for management of oil and gas related activities. There are also other types of fees charged on a one time basis such as those related to opening and closing trust accounts. BancFirst records trust fees on a monthly, quarterly or annual basis based on the size of the asset being managed. Fees may be fixed or, where applicable, based on a percentage of transaction size of managed assets. These fees are recorded as revenue at the time the fee is billed, according to the agreement with the customer.
Comprehensive Income
Comprehensive income includes all changes in stockholders’ equity during a period, except those resulting from transactions with stockholders. Besides net income, other components of the Company’s comprehensive income includes the after tax effect of changes in the net unrealized gain/loss on debt securities available for sale. The Company’s policy is to release material stranded tax effects included in accumulated other comprehensive income on a specific identification basis.
Statement of Cash Flows
For purposes of the statement of cash flows, the Company considers cash and due from banks and interest-bearing deposits with banks as cash equivalents.
(2) RECENT DEVELOPMENTS, INCLUDING MERGERS AND ACQUISITIONS
On June 17, 2021, the Company completed a private placement, under Regulation D of the Securities Act of 1933, of $60 million aggregate principal amount of 3.50% Fixed-to-Floating Rate Subordinated Notes due 2036 (the “Subordinated Notes”) to various institutional accredited investors. See Note (11) of the Notes to Consolidated Financial Statements for a complete discussion of the Company’s subordinated debt.
On May 20, 2021, the Company purchased approximately $284 million in total assets, which included approximately $195 million in loans, and assumed approximately $256 million in deposits and certain other obligations, from The First National Bank and Trust Company of Vinita, Oklahoma for a purchase price of approximately $21 million. The Company recorded a bargain purchase gain related to this purchase of approximately $4.8 million, which is included in other noninterest income on the statement of comprehensive income and other operating activities on the statement of cash flow. The bargain purchase gain is a noncash item on the statement of cash flow. In addition, the Company recorded expenses related to this purchase of approximately $4.8 million, which are included in noninterest expense. As a result of the purchase, the Company recorded a core deposit intangible of approximately $1.7 million. The effect of this purchase was included in the consolidated financial statement of the Company from the date of purchase forward. The purchase did not have a material effect on the Company’s consolidated financial statements. The First National Bank and Trust Company of Vinita was a nationally chartered bank with two banking locations in Vinita and Grove, Oklahoma.
On January 22, 2021, the Company sold approximately $21 million in loans and approximately $38 million in deposits from its Hugo, Oklahoma branch to AmeriState Bank in Atoka, Oklahoma. The Company recorded a gain on the transaction of $2.5 million, which is included in noninterest income.
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.
(3) CASH, DUE FROM BANKS, INTEREST-BEARING DEPOSITS AND FEDERAL FUNDS SOLD
The Company maintains accounts with the Federal Reserve Bank and various other financial institutions primarily for the purpose of holding excess liquidity and clearing cash items. It may also sell federal funds to certain of these institutions on an overnight basis.
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At December 31, 2021 and 2020, the Company had no significant concentrations of credit risk with other financial institutions. The Company maintained vault cash and funds on deposit with the Federal Reserve Bank, which is included in the following table:
December 31,
(Dollars in thousands)
(4) SECURITIES
The following table summarizes the amortized cost and estimated fair values of debt securities held for investment:
AmortizedCost GrossUnrealizedGains GrossUnrealizedLosses EstimatedFairValue
(Dollars in thousands)
Mortgage backed securities (1) $ 32 $ 1 $ — $ 33
States and political subdivisions 2,445 — — 2,445
Mortgage backed securities (1) $ 59 $ 3 $ — $ 62
The following table summarizes the amortized cost and estimated fair values of debt securities available for sale:
AmortizedCost GrossUnrealizedGains GrossUnrealizedLosses EstimatedFairValue
(Dollars in thousands)
(1)
Primarily consists of FHLMC, FNMA, GNMA and mortgage backed securities through U.S. agencies.
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The maturities of debt securities held for investment and available for sale are summarized in the following table using contractual maturities. Actual maturities may differ from contractual maturities due to obligations that are called or prepaid. For purposes of the maturity table, mortgage-backed securities, which are not due at a single maturity date, have been presented at their contractual maturity.
December 31,
AmortizedCost EstimatedFairValue AmortizedCost EstimatedFairValue
(Dollars in thousands)
Held for Investment
Contractual maturity of debt securities:
After five years but within ten years 4 4 65 64
After ten years — — 1 1
Available for Sale
Contractual maturity of debt securities:
There were no sales of securities and therefore no proceeds from sales or realized securities losses on available for sale debt securities for the years ended December 31, 2021, 2020 and 2019, respectively.
Realized gains/losses on debt and equity securities are reported as securities transactions within the noninterest income section of the consolidated statement of comprehensive income.
The following table is a summary of the Company’s book value of debt securities that were pledged as collateral for public funds on deposit, repurchase agreements and for other purposes as required or permitted by law:
December 31,
(Dollars in thousands)
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