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, 2020. 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 effect of governments’ stimulus programs.
• Impairment of the Company’s goodwill or other intangible assets.
• Changes in consumer spending, borrowing and savings habits.
• Technological changes.
• Acquisitions and integration of acquired businesses.
• The Company’s success at managing the risks involved in the foregoing items.
Actual results may differ materially from forward-looking statements.
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THE COVID-19 PANDEMIC
Since the latter half of the first quarter of 2020, the COVID-19 pandemic and actions taken in response to it have negatively impacted the global economy and all financial markets. Since March 31, 2020, these conditions and the related financial impact have continued and, in some cases, worsened. Although the Company is not able to estimate the impact of the COVID-19 pandemic and the resultant economic circumstances on a long-term basis at this time, the COVID-19 pandemic could materially affect the Company’s financial and operational results. See Item 1.A. Risk Factors for further discussion.
The Company is closely monitoring its loan portfolio for effects related to COVID-19. The decline in economic activity as a result of the COVID-19 pandemic caused volatility in crude oil prices since February 2020. This volatility could negatively impact the energy industry and the overall economies of our markets and could lead to increased credit stress in the Company’s energy portfolio, increased losses associated with that portfolio and reduced demand for energy lending.
If the negative impacts due to COVID-19 continue coupled with volatile energy prices, it is possible that the Company’s goodwill could become impaired in future periods.
SUMMARY
The Company’s net income for 2020 was $99.6 million, or $3.00 per diluted share, compared to $134.9 million, or $4.05 per diluted share for 2019 and $125.8 million, or $3.76 per diluted share for 2018. The results for 2020 were negatively impacted by a higher provision for credit losses. Net income for the year ended December 31, 2020 includes the entire year of net income of Pegasus Bank in Dallas, Texas, which was acquired on August 15, 2019, and the income and expenses associated with the purchase of assets and assumption of liabilities on March 5, 2020, from The Citizens State Bank of Okemah (“Citizens'”). The results for 2019 include Pegasus Bank acquisition related expenses of approximately $3.1 million. The results for 2018 include acquisitions related expenses of approximately $2.6 million.
In 2020, net interest income was $306.7 million, compared to $281.9 million in 2019 and $260.5 million in 2018. 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 $15.6 million and a decrease in interest rates paid on deposits. The Company’s net interest margin decreased to 3.57% for 2020, compared to 3.85% for 2019 and 3.70% for 2018. The provision for credit losses was $62.6 million in 2020 compared to $8.3 million in 2019 and $3.8 million in 2018. The increase in the provision for credit losses in 2020 related to reserve build up for expected credit losses stemming from the COVID-19 pandemic and low energy prices. The ratio of net charge-offs to average loans for 2020 was 0.35%, compared to 0.10% for 2019 and 0.08% for 2018. Noninterest income totaled $137.2 million in 2020 compared to $137.2 million in 2019 and $125.2 million in 2018. Noninterest expense was $257.7 million in 2020 compared to $241.3 million in 2019 and $222.1 million in 2018. 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.
The Company’s assets at year-end 2020 totaled $9.2 billion, compared to $8.6 billion at December 31, 2019. Debt securities were $555.2 million, an increase of $63.6 million from December 31, 2019. Loans totaled $6.4 billion compared to $5.7 billion for 2019. Total deposits were $8.1 billion for 2020 compared to $7.5 billion for 2019. The increase in assets, loans and deposits were primarily related to the PPP and other government stimulus. At December 31, 2020, the Company had PPP loans held for investment of $652.7 million, net of unamortized processing fees of $14.5 million. The Company’s total stockholders’ equity was $1.1 billion, an increase of $62.9 million over December 31, 2019.
Nonaccrual loans represented 0.58% of total loans at December 31, 2020, up from 0.32% at year-end 2019. Non-performing assets represented 0.90% of total assets at December 31, 2020, up from 0.63% at December 31, 2019 as a result of a migration from loans to other real estate owned during 2020. The allowance for credit losses to total loans was 1.42% at December 31, 2020, up from 0.96% at year-end 2019. The allowance for credit losses to nonaccrual loans was 243.35% compared to 301.91% at year-end 2019.
See Note (2) of the Notes to Consolidated Financial Statements for disclosure regarding the Company’s recent developments, including mergers and acquisitions.
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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 replaces the incurred loss methodology for determining its provision for credit losses and allowance for credit losses with an expected loss methodology that is referred to as the CECL model. The allowance for credit losses is management’s estimate of the expected credit losses on financial assets measured at amortized cost.
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.
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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.
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, 2019 resulted in an impairment of customer relationship intangibles of approximately $353,000 related to BancFirst Insurance Services, Inc. The evaluation of intangible assets and goodwill for the year ended December 31, 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, 2020 and December 31, 2019 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 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 (22) 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 0.19 % 0.54 % 0.44 %
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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 2020 by $24.7 million, to a total of $306.7 million, compared to an increase of $21.4 million in 2019. 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 $15.6 million and a decrease in interest rates paid on deposits. In 2019, net interest income increased primarily due to the higher average rates on federal funds and loans throughout 2019 compared to 2018 and loan growth during 2019, slightly offset by higher deposit rates throughout 2019 compared to 2018.
Net interest margin is the ratio of taxable-equivalent net interest income to average earning assets for the period. The Company’s net interest margin decreased to 3.57% for 2020, compared to 3.85% for 2019 and 3.70% for 2018. The decrease in the net interest margin in 2020 is primarily due to the lower average rates on federal funds and securities during the year. The increase in the net interest margin in 2019 is due to the increase in net interest income described above.
The Company’s net interest income and net interest margin have been, and the Company currently expects them to continue to be, impacted by the decreases in market interest rates and the expectation that interest rates will remain at these low levels for some period of time in light of the on-going response in Federal Reserve policy driven by the economic disruption arising from the COVID-19 pandemic.
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 2020 and 2019. See “Maturity and Rate Sensitivity of Loans” for additional discussion.
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VOLUME/RATE ANALYSIS
Taxable Equivalent Basis
Total Due to Volume(1) Due to Rate Total Due to Volume(1) Due to Rate
(Dollars in thousands)
INCREASE (DECREASE)
Interest Income:
Interest Expense:
Junior subordinated debentures — — — (205 ) (337 ) 132
Provision for Credit Losses
The Company’s provision for credit losses was $62.6 million for 2020, compared to $8.3 million for 2019 and $3.8 million for 2018. 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. To the extent the amount of time the economy remains adversely affected is more extended than the Company’s current projection, the Company could see a continuation of higher than normal provision in future periods. The Company establishes an allowance as an estimate of the expected credit losses in the loan portfolio at the balance sheet date. Management believes the allowance for credit losses is appropriate based upon management’s best estimate of expected losses within the existing loan portfolio. Should any of the factors considered by management in evaluating the appropriate level of the allowance for credit losses change, the Company’s estimate of expected credit losses could also change, which could affect the amount of future provisions for credit losses. Net loan charge-offs were $22.8 million for 2020 compared to $5.4 million for 2019 and $4.1 million for 2018. The net charge-offs equated to 0.35%, 0.10% and 0.08% of average loans for 2020, 2019 and 2018, respectively. Net charge-offs increased 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 was $137.2 million in 2020, compared to $137.2 million in 2019 and $125.2 million in 2018. Total noninterest income was flat in 2020. During 2020, the Company had an increase in sales of loans and debit card usage fees, which were primarily offset by a decrease in deposit service charges resulting from government stimulus. This compares to an increase of $12.0 million in 2019, or 9.6%. The increase in noninterest income in 2019 was due to growth in debit card usage fees, sweep fees, insurance commissions and equity security gains. The Company’s operating noninterest income has generally increased due to enhanced product lines, acquisitions and internal deposit growth. The Company had fees from debit card usage totaling $36.9 million, $33.9 million and $29.8 million for the years 2020, 2019 and 2018, respectively. This represents 26.9%, 24.7% and 23.8% of the Company’s noninterest income for the years 2020, 2019 and 2018, respectively. In addition, the Company had non-sufficient funds
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fees totaling $26.6million, $33.5 million and $31.3 million in 2020, 2019 and 2018, respectively. This represents 19.4%, 24.4%, and 25.0% of the Company’s noninterest income for the years 2020, 2019 and 2018, respectively.
Prior to the COVID-19 pandemic, there was little or no likelihood that the Company would surpass $10 billion in total assets for several years. However, with the CARES Act, including PPP loans, stimulus payments to households, and artificially high household savings rates, our deposits and assets have grown dramatically beyond reasonably foreseeable levels. To the extent the COVID-19 pandemic continues and the government response to it continues on the same or similar basis, the Company has an increasingly heightened possibility of exceeding $10 billion in total assets at December 31, 2021. Pursuant to the Durbin Amendment of the Dodd-Frank Act, this would trigger an approximate loss of income from debit card interchange fees between $17 to $20 million in subsequent years.
The Company recognized a net loss of $389,000 during 2020, a net gain of $812,000 during 2019, and a net gain of $47,000 during 2018, primarily due to transactions of equity securities. These losses and gains were primarily due to the Accounting Standard Update 2016-01 adopted on January 1, 2018, 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 earned $6.1 million on the sale of loans in 2020 compared $3.4 million in 2019 and $2.9 million in 2018. The income from sales of loans increased in 2020 due to the volume increase related to record low mortgage rates. The Company expects sales from mortgage loans during 2021 to be less than in 2020, but greater than in 2019.
Noninterest Expense
Total noninterest expense increased by $16.4 million, or 6.8% to $257.7 million for 2020. This compares to an increase of $19.2 million, or 8.6%, for 2019. 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. The increase in noninterest expense in 2019 was primarily due to salary increases and acquisition related expenses. Acquisition related expenses were $3.1 million in 2019.
Noninterest expense included deposit insurance expense, which totaled $2.1 million for the year ended December 31, 2020, compared to $1.1 million for the year ended December 31, 2019 and $2.4 million for the year ended December 31, 2018. 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 $23.9 million in 2020, compared to $34.7 million in 2019 and $33.9 million in 2018. The effective tax rates for 2020, 2019 and 2018 were 19.4%, 20.5% and 21.2% 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.
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.
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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.
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) 27.47 25.50
Reconciliation of Tangible Book Value per Common Share (non-GAAP)(2)
Tangible book value per share (non-GAAP) $ 27.47 $ 25.50
Selected Financial Ratios
Performance Ratios:
Return on average assets 1.06 % 1.69 %
Return on average stockholders' equity 9.52 14.04
Balance Sheet Ratios:
Average loans to deposits 78.28 % 76.06 %
Average earning assets to total assets 91.90 92.13
Average stockholders’ equity to average assets 11.17 12.06
Asset Quality Ratios:
Nonaccrual loans to total loans 0.58 % 0.32 %
Nonperforming and restructured loans to total loans 0.78 0.84
Nonperforming and restructured assets to total assets 0.90 0.63
Allowance for credit losses to total loans 1.42 0.96
Allowance for credit losses to nonaccrual loans 243.35 301.91
Net charge-offs to average loans 0.35 0.10
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
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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 decreased 1.50% during 2020 from 1.75% to 0.25% anddecreased 0.75% during 2019 from 2.50% to 1.75%.
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 decreased $252.4 million from December 31, 2019 to December 31, 2020. The decrease was primarily due to the funding of PPP loans.
Securities
For the year ended December 31, 2020, total debt securities increased $63.6 million, or 12.9%, to $555.2 million. Debt securities available for sale represented 99.5% of the total debt securities portfolio at December 31, 2020, compared to 99.6% of total debt securities portfolio at December 31, 2019. Debt securities available for sale had a net unrealized gain of $9.9 million at December 31, 2020, compared to a net unrealized gain of $4.6 million at December 31, 2019. These unrealized gains are included in the Company’s stockholders’ equity as accumulated other comprehensive income, net of income tax, in the amounts of a gain of $7.4 million and a gain of $3.5 million for December 31, 2020 and 2019, 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, 2020, 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, 2020, management had no intent or requirement to sell before the recovery of the unrealized loss.
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. Equity securities are reported in other assets on the balance sheet. The balance of equity securities was $10.1 million for December 31, 2020 and 2019, respectively. The Company reviews its portfolio of equity securities for impairment at least quarterly.
See Note (3) 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 weighted average taxable equivalent yields of the debt securities portfolio at December 31, 2020. 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*
Held for Investment
Mortgage-backed securities $ 59 5.58 %
State and political subdivisions 2,405 2.94
Available for Sale
State and political subdivisions 28,948 1.96
* Yield on a taxable equivalent basis
Loans
The Company has historically generated loan growth from both internal originations and bank acquisitions. Total loans held for investment increased $732.4 million, or 12.9%, to $6.4 billion in 2020. The increase in 2020 was primarily due to PPP loans.
Composition
BancFirst’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.
Pegasus Bank’s loan portfolio was diversified among various types of commercial and individual borrowers. Pegasus Bank’s loans were made up of approximately 49% in real estate loans, approximately 47% in commercial and agricultural non-real estate loans and approximately 4% in consumer non-real estate loans.
See Note (1) and Note (4) of the Notes to Consolidated Financial Statements for disclosures regarding the Company’s loan portfolio segments.
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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, 2020. Many of the loans with maturities of one year or less are renewed at existing or similar terms after scheduled principal reductions. Also approximately 36% of loans had adjustable interest rates at December 31, 2020.
Maturing
(Dollars in thousands)
BancFirst
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 $ 4,802 $ 11,834
Total nonperforming and restructured loans 50,131 47,809
Other real estate owned and repossessed assets 32,480 6,073
Total nonperforming and restructured assets $ 82,611 $ 53,882
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Nonperforming and Restructured Assets
During 2020, nonperforming and restructured assets increased $28.7 million to $82.6 million. The Company’s level of nonperforming and restructured assets has continued to be relatively low, equating to 0.90% and 0.63% of total assets at December 31, 2020 and 2019, respectively.
Nonaccrual loans increased $19.6 million in 2020 due to the impact of the COVID-19 pandemic and low energy prices. The Company’s nonaccrual loans are primarily commercial and agricultural non-real estate and farmland. Nonaccrual loans negatively impact the Company’s net interest margin. A loan is placed on nonaccrual status when, in the opinion of management, the future collectability of both interest and principal is in doubt. Interest income is recognized on certain of these loans on a cash basis if the full collection of the remaining principal balance is reasonably expected. Otherwise, interest income is not recognized until the principal balance is fully collected. Had nonaccrual loans performed in accordance with their original contractual terms, the Company would have recognized additional interest income of approximately $2.8 million for 2020, $1.7 million for 2019 and $2.3 million for 2018. Only a small amount of this interest is expected to be ultimately collected. Approximately $7.8 million of nonaccrual loans are guaranteed by government agencies as of December 31, 2020.
Restructured loans decreased $10.2 million in 2020 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 decline. The above normal risk associated with nonperforming loans has been considered in the determination of the allowance for credit losses. At December 31, 2020, the allowance for credit losses as a percentage of nonperforming and restructured loans was 182.26%, compared to 113.45%, at the end of 2019. The level of nonperforming loans and credit losses could rise over time as a result of adverse economic conditions.
Other real estate owned and repossessed assets totaled $32.5 million at December 31, 2020, compared to $6.1 million at December 31, 2019. Other real estate owned and repossessed assets increased during 2020 primarily due to the loan migration of one commercial real estate property valued at approximately $27.5 million. 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 replaces the incurred loss methodology with an expected loss methodology that is referred to as CECL. As a result, the Company recorded a decrease to the allowance for credit losses of $3.2 million at January 1, 2020. At December 31, 2020, the allowance for credit losses to total loans represented 1.42% of total loans, compared to 0.96% at December 31, 2019. The increase in the allowance for credit losses related to reserve build up for expected credit losses stemming from the COVID-19 pandemic and low energy prices.
The overall credit quality of the Company’s loan portfolio has remained strong. Net charge-offs were $22.8 million and $5.4 million for the years ended 2020 and 2019, respectively. The amount of net loan charge-offs is relatively low, equating to 0.35% and 0.10% of average total loans for the years ended December 31, 2020 and 2019, 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)
BancFirst
Real estate:
Commercial real estate owner occupied $ 7,035 $ 5,625
Commercial real estate non-owner occupied 11,842 8,358
Construction and development < 60 months 2,560 2,214
Construction residential real estate < 60 months 627 1,933
Residential real estate first lien 2,570 8,692
Residential real estate all other 2,230 2,767
Commercial and agricultural non-real estate 32,400 13,462
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 % of Avg Loans Amount % of Avg Loans
(Dollars in thousands)
BancFirst
Real estate:
Commercial real estate owner occupied $ 763 0.01 % $ 109 — %
Commercial real estate non-owner occupied 3,609 0.06 55 —
Construction and development < 60 months (64 ) — 19 —
Construction residential real estate < 60 months 29 — 230 —
Residential real estate all other 72 — 2,352 0.04
The fair value adjustment on BancFirst and Pegasus Bank acquired loans consists of an interest rate component to adjust the effective rates on the loans to market rates and a credit component to adjust for estimated credit exposures in the acquired loans. The interest rate component was fully accreted at December 31, 2020 and a $1.7 million premium at December 31, 2019. The credit component of the adjustment was a $1.7 million discount at December 31, 2020 and a $6.8 million discount at December 31, 2019. These fair value adjustments will be accreted to income over the remaining life of the loans. The BancFirst acquired loans outstanding
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were $6.3 million and $154.7million, at December 31, 2020 and 2019, respectively. The Pegasus Bank acquired loans were approximately $255.4 million at December 31, 2020 and $339.5 million at December 31, 2019.
Intangible Assets, Goodwill and Other Assets
Identifiable intangible assets and goodwill totaled $168.9 million and $171.2 million at December 31, 2020 and 2019, respectively.
Other assets includes the cash surrender value of key-man life insurance policies. The balance of cash surrender value of key-man life insurance policies was $80.7 million at December 31, 2020 and $78.2 million at December 31, 2019. In addition, other assets includes approximately $11.1 million in equity interest of a previous borrower in the oil and gas industry, which was received through bankruptcy proceedings in the fourth quarter of 2020. This asset is carried at cost less impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer.
Low Income Housing and New Market Tax Credit Commitments
See Note (6) of the Notes to Consolidated Financial Statements for disclosures regarding 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.
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, 2021, BancFirst had approximately $102.1 million of equity available for dividends to BancFirst Corporation without regulatory approval. During 2020, BancFirst declared four common stock dividends totaling $44.9 million and two preferred stock dividends totaling $1.9 million. While Pegasus Bank had net income of $4.7 million in 2020, 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 $581.1 million to $8.1 billion, an increase of 7.8% in 2020. The increase in deposits during 2020 was primarily related to deposits of proceeds from the PPP and inflow of existing customer deposits. The Company’s core deposits provide it with a stable, low-cost funding source. The Company’s core deposits as a percentage of total deposits were 98.2% and 98.4% at December 31, 2020 and 2019, respectively. Noninterest-bearing deposits to total deposits were 47.0% at December 31, 2020, compared to 39.5% at December 31, 2019.
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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
Average rate paid on interest-bearing deposits 0.39 % 1.25 %
MATURITY OF TIME DEPOSITS
The following table shows the maturity of time deposits greater than $250,000:
(Dollars in thousands)
Three months or less $ 33,212
Over three months through six months 27,026
Over six months through twelve months 56,452
At December 31, 2020, 81.7% of the Company’s time deposits greater than $250,000 mature in one year or less.
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 $1.1 billion at December 31, 2020, compared to $1.0 billion at December 31, 2019. In addition to net income of $99.6 million, other changes in stockholders’ equity during the year ended December 31, 2020 included $1.8 million related to common stock issuances, $1.5 million related to stock-based compensation, $2.3 million change in accounting principle related to CECL and a $4.0 million increase in other comprehensive income, that were partially offset by $43.1 million in dividends and $3.1 million in common stock repurchases. The Company’s average stockholders’ equity to average assets for 2020 was 11.17%
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compared to 12.06%for 2019. The Company’s leverage ratio and total risk-based capital ratios at December 31, 2020were well in excess of the regulatory requirements. Banking institutions are generally expected to maintain capital well above the minimum levels. Junior subordinated debentures are included in BancFirst Corporation’s Tier I capital.
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 Junior Subordinated Debentures.
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. At December 31, 2020, there were 62,782 shares remaining that could be repurchased 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. For the year ended December 31, 2018, the Company repurchased 151,264 shares of its common stock for $7.9 million at an average price of $52.32 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 2021.
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 junior subordinated debentures, operating lease payments, time deposit payments and low income housing partnership commitments. The Company’s time deposits require the majority of cash obligations in the next twelve months. The Company’s junior subordinated debentures mature on March 31, 2034. The Company has consistently generated positive net income and the Company currently expects to have positive net income for 2021. 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 $1.8 billion and $1.6 billion in loan commitments at December 31, 2020 and 2019, respectively. The Company had $96.3 million and $64.7 million in stand-by
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letters of credit at December 31, 2020 and 2019, 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 $611 million for the zero to 12-month interval at December 31, 2020, which was 7.69% of total assets, compared to a positive gap of $172 million for the zero to 12-month interval at December 31, 2019, which was 2.30% 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.
As of December 31, 2020, the model simulations projected that a 100 and 200 basis point increase would result in positive variance in net interest income of 1.10% and 2.91%, respectively, relative to the base case over the next 12 months.
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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, 2020.
Avg. Expected Maturity / Principal Repayments at December 31,
(Dollars in thousands)
Interest Sensitive Assets
Interest Sensitive Liabilities
Off Balance Sheet Items
Loan commitments — — — — — — — 3,115
Letters of credit — — — — — — — 722
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, 2020 and 2019, 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, 2020, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2020, 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, 2020, 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 26, 2021, 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 effective January 1, 2020, due to the adoption of Topic 326, Financial Instruments – Credit Losses. As discussed below, the allowance for credit losses is considered a critical audit matter.
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 performing procedures that respond to those risks. Such procedures include examining, on a test basis, evidence regarding the amounts and disclosures 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 Note 1 to the financial statements, the allowance for credit losses (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 elected to utilize 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 evaluating management’s model selections, 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, evaluated the 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 and adoption of Topic 326 included the following, among others:
• Testing of completeness and accuracy of the information utilized in ACL;
• Testing the model's computational accuracy;
We have served as the Company's auditor since 2013.
/s/ BKD, LLP
Oklahoma City, Oklahoma
February 26, 2021
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BANCFIRST CORPORATION
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
December 31,
ASSETS
Federal funds sold — 1,000
Debt securities available for sale at fair value 552,232 489,723
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Accrued interest payable and other liabilities 51,864 49,230
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 — 4 291
INTEREST EXPENSE
Short-term borrowings 8 32 95
NONINTEREST INCOME
Gain/(loss) on sale of other assets 130 (39 ) 575
NONINTEREST EXPENSE
Net (income)/expense from other real estate owned (1,531 ) (785 ) 239
NET INCOME PER COMMON SHARE
OTHER COMPREHENSIVE GAIN/(LOSS)
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
Shares issued for acquisitions — — — — 732,811 733
CAPITAL SURPLUS
Common stock issued for acquisitions — — 38,765
RETAINED EARNINGS
Common stock acquired and canceled (3,039 ) (1,574 ) (7,763 )
ACCUMULATED OTHER COMPREHENSIVE INCOME
Unrealized gains/(losses) on securities:
Cumulative effect of change in accounting principle — — 618
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 (94 ) (4,282 ) (421 )
Realized securities losses (gains) 389 (812 ) (47 )
(Increase)/decrease in interest receivable (325 ) 887 (3,390 )
(Decrease)/increase in interest payable (1,641 ) (17 ) 1,179
Amortization of stock-based compensation arrangements 1,516 1,277 1,352
INVESTING ACTIVITIES
Net cash received from acquisitions, net of cash paid 18,397 77,672 6,248
Net decrease/(increase) in federal funds sold 1,000 (1,000 ) 23,548
Purchases of held for investment debt securities (1,395 ) (1,010 ) (225 )
Proceeds from sales of available for sale debt securities — — 31,285
Proceeds from paydowns and sales of equity securities 445 2,178 1,484
FINANCING ACTIVITIES
Net change in short-term borrowings — (575 ) 775
Proceeds from long-term borrowings 3,000 — —
Paydown of long-term borrowings (3,000 ) — —
Issuance of common stock in connection with stock options, net 1,790 2,484 2,238
Redemption of Junior Subordinated debentures — — (5,155 )
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Noncash investing and financing activities:
Stock issued in acquisitions $ — $ — $ 39,498
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 (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, 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 2019 and 2018 have been reclassified to conform to the 2020 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 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
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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 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.
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).
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.
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. An allowance for credit loss is recorded for these acquired loans depending 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
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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 creditlosses.
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 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 has 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 allowance is estimated 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. 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.
Prior to the adoption of ASC 326, the allowance for credit losses on loans was a contra-asset valuation account established through a provision for loan losses charged to expense, which represented management’s best estimate of inherent losses that had been incurred within the existing portfolio of loans. The allowance for credit losses on loans included allowance allocations calculated in accordance with ASC Topic 310, “Receivables” and allowance allocations calculated in accordance with ASC Topic 450, “Contingencies.” Loans were reported as impaired when, based on then current information and events, it was probable we would be unable to collect all amounts due in accordance with the original contractual terms of the loan agreement, including scheduled principal and interest payments. Impairment was evaluated in total for smaller-balance loans of a similar nature and on an individual loan basis for other loans. If a loan was impaired, a specific valuation allowance was allocated, if necessary, so that the loan was reported net, at the present value of estimated future cash flows using the loan’s existing rate or at the fair value of collateral if repayment was expected solely from the collateral. Interest payments on impaired loans were typically applied to principal unless collectability of the principal amount was reasonably assured, in which case interest was recognized on a cash basis. Impaired loans, or portions thereof, were charged off when deemed uncollectible.
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.
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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 buildings or leasehold improvements and depreciated over its applicable useful life.
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 FHLB advance borrowing rate is used that correlates with the term of the lease.
Other Real Estate Owned
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. Losses 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 premises identified to be sold are charged to operating expense at the time of transfer from premises to other real estate owned. Losses from declines in value of the properties subsequent to classification as other real estate owned are charged to operating 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, 2020 were $3.3 million. Advertising costs for the years ended December 31, 2019 and 2018 were $3.8 million and $3.5 million, respectively.
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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, 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 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
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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.
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.
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.
Recent Accounting Pronouncements
Standards Adopted During Current Period:
In August 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2018-13, “Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement (Topic 820).” ASU 2018-13 modifies disclosure requirements on fair value measurements in Topic 820. ASU No. 2018-13 was adopted on January 1, 2020 and did not have a significant impact on the Company’s financial statements.
On January 1, 2020, the Company adopted ASU No. 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” Accounting Standards Codification (“ASC”) 326 replaces the incurred loss methodology with an expected loss methodology that is referred to as the current expected credit loss (“CECL”) methodology. The measurement of expected credit losses under the CECL methodology is applicable to financial assets measured at amortized cost, including loan receivables and held-to-maturity debt securities. It also applies to off-balance sheet credit exposures not accounted for as insurance (loan commitments, standby letters of credit, financial guarantees, and other similar instruments) and net investments in leases recognized by a lessor in accordance with Topic 842 on leases. In addition, ASC 326 made changes to the accounting for purchased loans and securities with credit deterioration and available-for-sale debt securities. In connection with the adoption of ASC 326, the Company revised certain accounting policies and implemented accounting policy elections.
The Company adopted ASC 326 using the modified retrospective method for all financial assets measured at amortized cost and off-balance sheet credit exposures. Operating results for periods from January 1, 2020 are presented in accordance with ASC 326 while prior period amounts continue to be reported in accordance with previously applicable standards and the accounting policies described in our 2019 Form 10-K. The Company recorded a net increase to retained earnings of $2.3 million, net of tax of $925,000, as of January 1, 2020 for the cumulative effect of adopting ASC 326. The Company’s results of operations were materially affected due to the increase in provisions related to the adoption of ASC 326 and the impact to the Company’s cash flows was not material.
The Company adopted ASC 326 using the prospective transition approach for financial assets purchased with credit deterioration (PCD) that were previously classified as purchased credit impaired (PCI) and accounted for under ASC 310-30. In accordance with the standard, management did not reassess whether PCI assets met the criteria of PCD assets as of the date of adoption. On January 1,
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2020, the amortized cost basis of the PCD assets was adjusted to reflect the addition of approximately $1.2 million to the allowance for credit losses.
The Company has not recorded an allowance for credit losses against its available-for-sale securities, as the credit risk is not material. The following table illustrates the impact of ASC 326 on the allowance for credit losses on the Company’s loans as of January 1, 2020.
As Reported Under ASC 326 Pre ASC 326 Adoption Impact of ASC 326 Adoption
(Dollars in thousands)
BancFirst
Real estate:
Commercial real estate owner occupied $ 2,819 $ 5,625 $ (2,806 )
Commercial real estate non-owner occupied 2,851 8,358 (5,507 )
Construction residential real estate < 60 months 1,155 1,933 (778 )
The estimate of expected credit losses considers historical credit loss information that is adjusted for current conditions and reasonable and supportable forecasts. In order to estimate expected losses using historical loss information, the Company elected to utilize a methodology known as vintage loss analysis for substantially all of our loan portfolio. Vintage loss analysis measures impairment based on the age of the accounts and the historical asset performance of assets with similar risk characteristics. Vintage loss analysis accounts for expected losses by allowing the Company to calculate the cumulative loss rates of a given loan pool and in so doing, determine the loan pool’s lifetime expected loss experience. This includes a reasonable approximation of probable and estimable future losses determined by applying historical net charge off information to forward looking qualitative and environmental factors. First, the Company determined the appropriate type of financial assets that share similar risk characteristics, and then the Company developed a cumulative loss curve for the applicable financial assets based on historical data using different “vintages” analyzed by year of origination. This is done by dividing each year’s net charge-offs by the original principal balance. The respective vintage’s original principal balance remains the denominator in each annual calculation, as it references the specific vintage’s original balance. The loss experience of this original balance is tracked annually and summed over the life of the loan for each separate loan pool leaving a cumulative, life of credit loss rate based on historic averages weighted towards more recent loss experience. In addition to life of credit loss data, primary drivers like macroeconomic indicators of qualitative factors are used as adjustments to the expected loss calculation to reach a forecast supported by both quantitative and qualitative data points. The intent is to express the impact of changes in external factors while incorporating analysis of where the loan pool is in its loss history.
Loans that do not share risk characteristics are evaluated on an individual basis. Loans evaluated individually are not included in the collective evaluation. The Company has made the accounting policy election to use the fair value of the collateral to measure expected credit losses on collateral-dependent financial assets. When management determines that foreclosure is probable or when the borrower is experiencing financial difficulty at the reporting date and repayment is expected to be provided substantially through the operation or sale of the collateral, expected credit losses are based on the fair value of the collateral at the reporting date, adjusted for selling costs as appropriate.
In connection with the adoption of ASC 326, the Company revised certain accounting policies and implemented accounting policy elections. The revised accounting policies are described below.
Loans: Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at amortized cost. Amortized cost is the principal balance outstanding, net of purchase premiums and discounts. Accrued interest receivable totaled $26.0 million at December 31, 2020 and $24.5 million at December 31, 2019 and was reported in accrued interest receivable and other assets on the consolidated balance sheets. The Company has made the accounting policy election to
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exclude accrued interest receivable on loans from the estimate of credit losses. Interest income is accrued on the unpaid principal balance using the simple-interest method on the daily balances of the principal amounts outstanding.
Interest income on consumer and commercial loans is discontinued and placed on nonaccrual status at the time the loan is 90 days delinquent unless the loan is well secured and in process of collection. Consumer loans are charged off at 180 days past due and commercial loans are charged off to the extent principal or interest is deemed uncollectible. Past-due status is based on the contractual terms of the loan. In all cases, loans are placed on nonaccrual or charged off at an earlier date if collection of principal or interest is considered doubtful.
All interest accrued but not received for loans placed on nonaccrual is reversed against interest income. Interest received on such loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Under the cost-recovery method, interest income is not recognized until the loan balance is reduced to zero. Under the cash-basis method, interest income is recorded when the payment is received in cash. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.
Troubled debt restructurings are loans on which, due to the borrower’s financial difficulties, the Company has granted a concession that the Company would not otherwise consider for borrowers of similar credit quality. This may include a transfer of real estate or other assets from the borrower, a modification of loan terms, or a combination of the two. Modifications of terms that could potentially qualify as a restructuring include reduction of contractual interest rate, extension of the maturity date at a contractual interest rate lower than the current rate for new debt with similar risk, and a reduction of the face amount of debt or forgiveness of either principal or accrued interest. A loan continues to qualify as restructured until a consistent payment history or change in the borrower’s financial condition has been evidenced, generally for no less than twelve months. If the restructuring agreement specifies an interest rate at the time of the restructuring that is greater than or equal to the rate that the Company is willing to accept for a new extension of credit with comparable risk, then the loan is no longer considered a restructured loan if it is in compliance with the modified terms in calendar years after the year of restructure.
Purchased Credit Deteriorated (PCD) Loans: The Company has purchased loans, some of which have experienced more than insignificant credit deterioration since origination. An allowance for credit losses is determined using the same methodology as other loans held for investment. The initial allowance for credit losses determined on a collective basis is allocated to individual loans. The sum of the loan’s purchase price and allowance for credit losses becomes its initial amortized cost basis. The difference between the initial amortized cost basis and the par value of the loan is a noncredit discount or premium, which is amortized into interest income over the life of the loan. Subsequent changes to the allowance for credit losses are recorded through provision expense.
Allowance for Credit Losses - Loans: The allowance for credit losses is a valuation account that is deducted from the loans amortized cost basis to present the net amount expected to be collected on the loans. Loans are charged off against the allowance when management believes the uncollectibility of a loan balance is confirmed. Expected recoveries do not exceed the aggregate of amounts previously charged-off and expected to be charged-off.
The allowance for credit losses is measured on a collective (pool) basis when similar risk characteristics exist. In connection with our adoption of ASC 326, changes were made to our primary portfolio segments to align with the methodology applied in determining the allowance under CECL. The Company has identified the following portfolio segments, which includes the applicable weighted average remaining life, and measures the allowance for credit losses using the vintage loss analysis adjusted for qualitative factors:
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Loan Segment Life (in years)
BancFirst
Real estate:
Commercial real estate owner occupied 9
Commercial real estate non-owner occupied 6
Construction and development < 60 months 3
Construction residential real estate < 60 months 1
Residential real estate first lien 13
Residential real estate all other 6
Farmland 12
Commercial and agricultural non-real estate 3
Consumer non-real estate 4
Oil and gas 1
Other loans 8
Pegasus Bank 4
These portfolio segments are separately identified because they exhibit distinctive risk characteristics, such as financial asset types, loan purpose, collateral, and industry of the borrower. A summary of our primary portfolio segments is as follows:
Commercial real estate owner occupied. Commercial real estate owner occupied are nonresidential property loans for which the primary source of repayment is the cash flow from the ongoing operations and activities conducted by the entity, or an affiliate of the entity, who owns the property. This category includes, among other loans, loans secured by office buildings, garden office buildings, manufacturing facilities, warehouse and flex warehouse facilities, hospitals, and car washes unless the property is owned by an investor who leases the property to the operator who, in turn, is not related to or affiliated with the investor.
Commercial real estate non-owner occupied. Commercial real estate non-owner occupied are nonresidential property loans where the primary source of repayment is derived from rental income associated with the property or the proceeds of the sale, refinancing, or permanent financing of the property. This category includes, among other loans, loans secured by shopping centers, office buildings, hotels/motels, nursing homes, assisted-living facilities, mini-storage warehouse facilities, and similar properties.
Construction and development < 60 months. Residential development loans include loans to develop raw land into a residential development. Advances on the loans typically include land costs, hard costs (grading, utilities, roads, etc.), soft costs (engineering fees, development fees, entitlement fees, etc.) and carrying costs until the development is completed. Upon completion of the development, the loan is typically repaid through the sale of lots to homebuilders.
Construction residential real estate < 60 months.Residential construction includes loans to builders for speculative or custom homes, as well as direct loans to individuals for construction of their personal residence. Custom construction and self-construction loans typically will have commitments in place for long-term financing at the completion of construction. Speculative construction loans generally will have periodic curtailment plans beginning after completion of construction and a reasonable time for sales to have occurred.
Residential real estate first lien. Residential real estate first lien loans includes all closed-end loans secured by first liens on 1-to-4 family residential properties. This category includes property containing 1-to-4 dwelling units (including vacation homes) or more than four dwelling units if each is separated from other units by dividing walls that extend from ground to roof. This category also includes individual condominium dwelling units and loans secured by an interest in individual cooperative housing units, even if in a building with five or more dwelling units.
Residential real estate all other. Residential real estate all other loans includes loans secured by junior (i.e., other than first) liens on 1-to-4 family residential properties. This category includes loans secured by junior liens even if the Company also holds a loan secured by a first lien on the same 1-to-4 family residential property.
Farmland. This category includes loans secured by all land known to be used or usable for agricultural purposes, such as crop and livestock production. Farmland includes grazing or pasture land, whether tillable or not and whether wooded or not.
Commercial and agricultural non-real estate. Commercial and agricultural non-real estate represent loans for working capital, facilities acquisition or expansion, purchase of equipment and other needs of commercial customers primarily located within Oklahoma. Loans in this category include commercial and industrial, agriculture and state and political subdivisions.
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Consumer non-real estate. Consumer loans are loans to individuals for household, family and other personal expenditures. Commonly, such loans are made to finance purchases of consumer goods, such as automobiles, boats, household goods, vacations and education.
Oil and gas. Oil and gas loans represent loans for producing oil and gas properties and any other mineral interests that may be pumped, mined, quarried or otherwise extracted from the earth primarily located within Oklahoma.
Other loans. Other loans consist of loans approved by the Small Business Administration (“SBA”), which include loans funded through the Paycheck Protection Program (“PPP”). Since PPP loans are fully guaranteed by the SBA, there is no expected credit loss related to these loans.
Pegasus Bank. Pegasus Bank’s loans are commercial and consumer loans mostly to customers within Texas secured by real estate. Pegasus Bank also includes commercial and industrial loans, which includes loans to companies in the oil and gas industry.
The Company considers various factors to monitor the credit risk in the loan portfolio including volume and severity of loan delinquencies, nonaccrual loans, internal grading of loans, historical loan loss experience and economic conditions.
Management estimates the allowance balance using relevant available information, from internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts. Historical credit loss experience provides the basis for the estimation of expected credit losses. Adjustments to historical loss information are made for differences in current loan-specific risk characteristics such as differences in underwriting standards, portfolio mix, delinquency level, or term as well as for changes in environmental conditions, such as the political, legal, and regulatory environment, technology and consumer preferences. Historical loss information is also adjusted for reasonable and supportable changes in national and local economic conditions, such as oil and gas prices, national and local unemployment, real gross domestic product (“GDP”), house price index (“HPI”), consumer price index (“CPI”), rental vacancies, and retail sales. Economic conditions are forecast as "current conditions" over the forecast period. Forecast models were used to validate credit performance during the forecast period. Beyond the reasonable and supportable forecast, the economic expectation reverts to the historical average, which is determined by the weighted average life of each loan pool.
Determining the Contractual Term: Expected credit losses are estimated over the contractual term of the loans, adjusted for expected prepayments when appropriate. The contractual term excludes expected extensions, renewals, and modifications unless either of the following applies: management has a reasonable expectation at the reporting date that a troubled debt restructuring will be executed with an individual borrower or the extension or renewal options are included in the original or modified contract at the reporting date and are not unconditionally cancellable by the Company.
Troubled Debt Restructurings (TDRs): The allowance for credit loss on a TDR is measured using the same method as all other loans held for investment, except when the value of a concession cannot be measured using a method other than the discounted cash flow method. When the value of a concession is measured using the discounted cash flow method, the allowance for credit loss is determined by discounting the expected future cash flows at the original interest rate of the loan.
Allowance for Credit Losses on Off-Balance Sheet Credit Exposures: The Company estimates expected credit losses over the contractual period in which the Company is exposed to credit risk via a contractual obligation to extend credit, unless that obligation is unconditionally cancellable by the Company. The allowance for credit losses on off-balance sheet credit exposures is adjusted as a provision for credit loss expense. The estimate includes consideration of the likelihood that funding will occur and an estimate of expected credit losses on commitments expected to be funded over its estimated life. Based on a low likelihood that funding will occur and the Company’s ability to manage the extension of credit to our borrowers, the allowance for credit losses on off-balance sheet credit exposure is not material.
Allowance for Credit Losses - Available-for-Sale 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, 2020 and December 31, 2019 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.
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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 PPP, established as part of the Coronavirus Aid, Relief and Economic Security (“CARES”) Act, provides that the SBA will pay processing fees of up to 5% to lenders based on the volume of the PPP loans disbursed. The fee is based on the balance of each PPP loan outstanding at the time of full disbursement. As of December 31, 2020, the Company had received approximately $30.2 million in processing fees from the SBA. 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. 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.
(2) RECENT DEVELOPMENTS, INCLUDING MERGERS AND ACQUISITIONS
Section 4013 of the CARES Act and the Interagency Statement on Loan Modifications by Financial Institutions provides temporary relief from the accounting and reporting requirements for TDRs regarding certain loan modifications related to the Coronavirus Disease 2019 (“COVID-19”) that are offered by financial institutions.
Specifically, the CARES Act provides that a financial institution may elect to suspend (1) the requirements under U.S. GAAP for certain loan modifications that would otherwise be categorized as a TDR and (2) any determination that such loan modifications would be considered a TDR, including the related impairment for accounting purposes. The modifications that would qualify for this exception include any modification involving a loan that was not more than 30 days past due as of December 31, 2019, that occurs during the “applicable period,” including any of the following:
• A forbearance arrangement.
• An interest rate modification.
• A repayment plan.
The exception does not apply to any adverse impact on the credit of a borrower that is not related to the COVID-19 pandemic. Furthermore, even when the exception is applied, an entity may determine that it is appropriate to place the loan on nonaccrual status.
As of December 31, 2020, the Company has identified $81.7 million in loans that have been modified according to the CARES Act terms. As of December 31, 2020, these loans have not been deemed nonaccrual loans.
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.
On August 15, 2019 BancFirst Corporation acquired Pegasus Bank, for an aggregate cash purchase price of $123.5 million. Pegasus Bank is a Texas state-charted bank with three banking locations in Dallas, Texas. At acquisition, Pegasus Bank had approximately $651.1 million in total assets, $389.9 million in loans and $603.9 million in deposits. Pegasus Bank will continue to operate as “Pegasus Bank” under a separate Texas state-charter and remain an independent subsidiary of BancFirst Corporation. BancFirst Corporation intends to provide an appropriate amount of capital or other support to increase Pegasus Bank’s ability to approve larger loans and allow Pegasus to continue to grow their assets. As a result of the acquisition, the Company recorded a core deposit intangible of approximately $9.9 million and goodwill of approximately $68.9 million. The effect of this acquisition was included in the consolidated financial statements of the Company from the date of acquisition forward. The acquisition did not have a material effect on the Company’s consolidated financial statements. The acquisition of Pegasus Bank complements the Company by expanding into the high-growth Dallas market.
On August 31, 2018 BFTower, LLC, a wholly-owned subsidiary of BancFirstpurchased Cotter Ranch Tower in Oklahoma City for the Company’s corporate headquarters for $21.0 million. Cotter Ranch Tower was subsequently renamed BancFirst Tower. BancFirst Tower consists of an aggregate of 507,000 square feet, has 36 floors and is the second tallest building in Oklahoma City.
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The BancFirst Tower will remain an income producing property as approximately 55% is currently, and is intended to continue to be, leased to outside tenants. BancFirst Tower will allow the Company to consolidate operations from three locations to one and will improve operational efficiencies.Upon consolidation, the Company expects to occupy approximately 35% of BancFirst Tower, resulting in approximately 90% total occupancy. Renovations on BancFirst Tower are expected to be completed by the fourth quarter of2022 and are expected to cost approximately $70 million. The renovation costs include substantial deferred maintenance including HVAC, plumbing, electrical, elevators, building skin and roof while also including much needed improvements to both the interior and exterior common areas including the lobby, underground and outdoor plaza.The Company started depreciating certain components of the renovation in December 2019 and has started depreciating other components of the renovation as they are put into service. The Company estimates spending approximately $10 million on tenant improvements for the approximate 165,000 square feet that the Company will occupy. The total purchase price, renovation costs, and Company tenant improvement costs were determined to be favorable to other alternatives, such as constructing a new corporate headquarter or leasing space. On December 14, 2018, BFTower LLC, purchased a 42.6% ownership interest in SFPG, LLC, which is the owner of a parking garage adjacent to BancFirst Tower. During 2020, BFTower LLC increased its ownership interest in SFPG, LLC to 49%. The total amount paid for the interest in SFPG, LLC was $11.3 million. In addition, on December 31, 2019, BFTower LLC, purchased a 50% ownership interest in ParcFirst@Bricktown, LLC, which is the owner of an outdoor surface parking lot in close proximity to BancFirst Tower, for $1.5 million.
On January 11, 2018, the Company acquired First Wagoner Corp. and its subsidiary bank, First Bank & Trust Company, with locations in Carney, Grove, Ketchum, Luther, Tulsa and Wagoner. First Bank & Trust Company had approximately $290 million in total assets, $247 million in loans and $251 million in deposits. First Bank & Trust Company operated as a subsidiary of BancFirst Corporation until it was merged into BancFirst on February 16, 2018. As a result of the acquisition, the Company recorded a core deposit intangible of approximately $6.3 million and goodwill of approximately $19.1 million. The effect of this acquisition was included in the consolidated financial statements of the Company from the date of acquisition forward. The acquisition did not have a material effect on the Company’s consolidated financial statements. The acquisition of First Wagoner Corp. and its subsidiary bank, First Bank & Trust Company complements the Company’s community banking strategy by adding an additional five communities to its banking network in Oklahoma.
On January 11, 2018, the Company acquired First Chandler Corp. and its subsidiary bank, First Bank of Chandler, with two locations in Chandler. First Bank of Chandler had approximately $88 million in total assets, $66 million in loans and $79 million in deposits. First Bank of Chandler operated as a subsidiary of BancFirst Corporation until it was merged into BancFirst on September 7, 2018. As a result of the acquisition, the Company recorded a core deposit intangible of approximately $2.2 million and goodwill of approximately $6.6 million. The effect of this acquisition was included in the consolidated financial statements of the Company from the date of acquisition forward. The acquisition did not have a material effect on the Company’s consolidated financial statements. The acquisition of First Chandler Corp. and its subsidiary bank, First Bank of Chandler complements the Company’s community banking strategy by increasing its banking network in Oklahoma.
(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. At December 31, 2020 and 2019, 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 table below.
On March 26, 2020, the Federal Reserve Board reduced reserve requirement ratios to zero percent, effectively eliminating reserve requirements for all depository institutions. Prior to this date, the Company was required, as a matter of law, to maintain a reserve balance in the form of vault cash or cash on deposit with the Federal Reserve Bank. The average amount of required reserves for December 31, 2019 is included in the following table:
December 31,
(Dollars in thousands)
Average required reserves — 63,842
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(4) SECURITIES
The following table summarizes the amortized cost and estimated fair values of debt securities held for investment:
(Dollars in thousands)
Mortgage backed securities (1) $ 59 $ 3 $ — $ 62
Mortgage backed securities (1) $ 93 $ 4 $ — $ 97
States and political subdivisions 1,310 1 (5 ) 1,306
The following table summarizes the amortized cost and estimated fair values of debt securities available for sale:
(Dollars in thousands)
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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,
Amortized Cost Estimated Fair Value Amortized Cost Estimated Fair Value