BANCFIRST CORP /OK/ (BANF) FY 2021 MD&A
This page reproduces the company's own Item 7 MD&A text from the linked SEC filing. It is filer text, not grepcent analysis, scoring, or investment advice.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis presents factors that the Company believes are relevant to an assessment and understanding of the Company’s financial position and results of operations for the three years ended December 31, 2021. This discussion and analysis should be read in conjunction with the consolidated financial statements and notes thereto and the selected consolidated financial data included herein.
FORWARD-LOOKING STATEMENTS
The Company may make forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 with respect to earnings, credit quality, corporate objectives, interest rates and other financial and business matters. Forward-looking statements include estimates and give management’s current expectations or forecasts of future events. The Company cautions readers that these forward-looking statements are subject to numerous assumptions, risks and uncertainties, including economic conditions; the performance of financial markets and interest rates; legislative and regulatory actions and reforms; competition; as well as other factors, all of which change over time. Examples of forward-looking statements include, but are not limited to: (i) projections of revenues, expenses, income or loss, earnings or loss per share, the payment or nonpayment of dividends, capital structure and other financial items; (ii) statements of plans, objectives and expectations, including those relating to products or services; (iii) statements of future economic performance; and (iv) statements of assumptions underlying such statements. Words such as “believes”, “anticipates”, “expects”, “intends”, “targeted”, “continue”, “remain”, “will”, “should”, “may” and other similar expressions are intended to identify forward-looking statements but are not the exclusive means of identifying such statements.
Forward-looking statements involve risks and uncertainties that may cause actual results to differ materially from those in such statements. Factors that could cause actual results to differ from those discussed in the forward-looking statements include, but are not limited to:
•
The COVID-19 pandemic’s adverse effects on us and our customers, employees and third-party service providers; the adverse impacts of the pandemic on our business, financial position, operations and prospects may be material. It is not possible to accurately predict the extent, severity or duration of the pandemic or when normal economic and operation conditions will return.
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The likelihood the Durbin Amendment will impact non-interest income.
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Political pressures could limit our ability to charge for NSF and overdraft fees.
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The effect of governments’ stimulus programs.
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Local, regional, national and international economic conditions and the impact they may have on the Company and its customers and the Company’s assessment of that impact.
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Changes in the mix of loan geographies, sectors and types or the level of non-performing assets and charge-offs.
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Inflation, interest rates, energy prices, securities markets and monetary fluctuations.
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The effect of changes in laws and regulations (including laws and regulations concerning taxes, banking, securities and insurance) with which the Company must comply.
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Impairment of the Company’s goodwill or other intangible assets.
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Changes in consumer spending, borrowing and savings habits.
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Changes in the financial performance and/or condition of the Company’s borrowers.
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Technological changes.
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Acquisitions and integration of acquired businesses.
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The effect of changes in accounting policies and practices, as may be adopted by the regulatory agencies, as well as the Public Company Accounting Oversight Board, the Financial Accounting Standards Board and other accounting standard setters.
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The Company’s success at managing the risks involved in the foregoing items.
Actual results may differ materially from forward-looking statements.
THE COVID-19 PANDEMIC
The COVID-19 pandemic and actions taken in response to it have negatively impacted the global economy and all financial markets since March 31, 2020. Although the Company is not able to estimate the impact of the COVID-19 pandemic and the resultant economic circumstances on a long-term basis at this time, the COVID-19 pandemic could materially affect the Company’s financial and operational results. The Company is closely monitoring its loan portfolio for effects related to COVID-19. See Item 1.A. Risk Factors for further discussion.
SUMMARY
The Company’s net income for 2021 was $167.6 million, or $5.03 per diluted share, compared to $99.6 million, or $3.00 per diluted share for 2020. The results for 2021 included a net benefit from reversal of provisions for credit losses of $8.7 million compared to a provision for credit losses of $62.6 million for the year-ended December 31, 2020.
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In 2021, net interest income was $315.7 million, compared to $306.7 million in 2020. Net interest income increased in 2021 due to an increase in PPP fee income of approximately $20.9 million and a decrease in interest rates paid on deposits. The Company’s net interest margin decreased to 3.15% for 2021, compared to 3.57% for 2020. The Company recorded a net benefit from reversal of provisions for credit losses of $8.7 million in 2021 compared to a provision for credit losses of $62.6 million in 2020. The reversal of provisions for credit losses in 2021 related to a more benign credit environment than envisioned at the beginning of the year. The ratio of net charge-offs to average loans for 2021 was 0.11%, compared to 0.35% for 2020. Noninterest income totaled $170.0 million in 2021 compared to $137.2 million in 2020. The increase in noninterest income was mostly attributable to a bargain purchase gain of $4.8 million associated with The First National Bank and Trust Company of Vinita, Oklahoma, a gain from the sale of the Company’s Hugo, Oklahoma branch of $2.5 million, $3.3 million of income resulting from the application of equity method accounting related to an equity interest received in the process of a loan collection, $10.3 million in rental income from other real estate property, a $9.1 million increase in income from debit card interchange fees, and a $2.7 million increase in insurance commissions. Noninterest income was partially offset by a $4.7 million decrease in income from sweep fees. Noninterest expense was $286.0 million in 2021 compared to $257.7 million in 2020. The increase in noninterest expense in 2021 was due to the increase in salaries and employee benefits of approximately $2.0 million, approximately $8.9 million related to other real estate property operating costs, $4.8 million in acquisition related expenses, approximately $4.4 million in net occupancy and depreciation primarily from the Company’s move to its new corporate headquarters, $3.1 million amortization of investment in tax credits, $1.1 million incentive to customers that participated in the year-end sweep program and a $1.4 million increase in deposit insurance.
The Company’s assets at year-end 2021 totaled $9.4 billion, an increase of $193.3 million from December 31, 2020. Loans totaled $6.2 billion a decrease of $254.0 million from year-end 2020 due to payoffs of approximately $572.3 million in PPP loans, which were partially offset by approximately $126 million of acquired loans from the First National Bank and Trust Company of Vinita, Oklahoma. Absent PPP loans and acquired loans, the Company’s loans increased $213.1 million or 3.7% in 2021. Total deposits were $8.1 billion at December 31, 2021 an increase of $27.2 million from December 31, 2020. The increase in assets and deposits was predominantly related to government stimulus payments. At December 31, 2021, the remaining balance of PPP loans held by the Company was $80.4 million, net of unamortized processing fees of $2.0 million, compared to $652.7 million, net of unamortized processing fees of $14.5 million at December 31, 2020. The Company’s total stockholders’ equity was $1.2 billion, an increase of $103.8 million over December 31, 2020. Off-balance sheet sweep accounts totaled $5.1 billion at December 31, 2021, which included a temporary sweep amount of approximately $2.3 billion, compared to a sweep account total of $2.8 billion at December 31, 2020. Our sweep accounts affect the balances of our year-end assets and deposits.
Nonaccrual loans represented 0.34% of total loans at December 31, 2021, down from 0.58% at December 31, 2020. The allowance for credit losses to total loans was 1.36% at December 31, 2021, compared to 1.42% at December 31, 2020. The allowance for credit losses to nonaccrual loans was 401.76% at December 31, 2021 compared to 243.35% at December 31, 2020. At December 31, 2021, the Company’s nonaccrual loans were $20.9 million compared to $37.5 million at year-end 2020. At December 31, 2021, the Company’s other real estate owned (OREO) increased $7.3 million from December 31, 2020.
See Note (2) of the Notes to Consolidated Financial Statements for disclosure regarding the Company’s recent developments, including mergers and acquisitions.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The Company’s significant accounting policies are described in Note (1) to the consolidated financial statements. The preparation of financial statements in conformity with accounting principles generally accepted in the United States inherently involves the use of estimates and assumptions, which affect the amounts reported in the financial statements and the related disclosures. These estimates relate principally to the allowance for credit losses, income taxes, intangible assets and the fair value of financial instruments. Such estimates and assumptions may change over time and actual amounts realized may differ from those reported. The following is a summary of the accounting policies and estimates that management believes are the most critical.
Allowance for Credit losses
On January 1, 2020, the Company adopted Accounting Standards Codification (“ASC”) 326, which replaced the incurred loss methodology for determining its provision for credit losses and allowance for credit losses with an expected loss methodology that is referred to as ("CECL"). The allowance for credit losses is management’s estimate of the expected credit losses on financial assets measured at amortized cost.
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The allowance for credit losses is increased by provisions charged to operating expense and is reduced by net loan charge-offs. The amount of the allowance for credit losses is measured using relevant information about past events, including historical credit loss experience on financial assets with similar risk characteristics, current conditions, and reasonable and supportable forecasts that affect the collectability of the remaining cash flows over the contractual term of the financial assets. A loan is considered collateral-dependent when the repayment is expected to be provided substantially through the operation or sale of the collateral when the borrower is experiencing financial difficulty based on the entity's assessment as of the reporting date. For collateral dependent loans, the standard allows institutions to use, as a practical expedient, the fair value of the collateral to measure expected credit losses on collateral-dependent financial assets. This amount is included in the allowance for credit losses.
The amount of the allowance for credit losses is first estimated by each business unit’s management based on its evaluation of the unit’s portfolio. This evaluation involves identifying collateral dependent and adversely classified loans. Specific allowances for losses are determined for collateral dependent loans based on either the loans’ estimated discounted cash flows or the fair values of the collateral. An allowance is estimated for loans using a historical loss percentage based on losses arising specifically from each respective loan category, adjusted for various economic and environmental factors that are considered reasonable and supportable related to the underlying loans. Each month the Company’s Senior Loan Committee reviews each business unit’s allowance, and the aggregate allowance for the Company and, on a quarterly basis, adjusts and approves the appropriateness of the allowance. In addition, annually or more frequently as needed, the Senior Loan Committee evaluates and establishes the loss percentages used in the estimates of the allowance based on historical loss data, and giving consideration to their assessment of current economic and environmental conditions and reasonable and supportable forecasts. To facilitate the Senior Loan Committee’s evaluation, the Company’s Asset Quality Department performs periodic reviews of each of the Company’s business units and reports on the adequacy of management’s identification of collateral dependent and adversely classified loans, and their adherence to the Company’s loan policies and procedures.
The process of evaluating the appropriateness of the allowance for credit losses necessarily involves the exercise of judgment and consideration of numerous subjective factors and, accordingly, there can be no assurance that the estimate of expected losses will not change in light of future developments and economic conditions. Changes in assumptions and conditions could result in a materially different amount for the allowance for credit losses.
Income Taxes
The Company files a consolidated income tax return. Deferred taxes are recognized under the balance sheet method based upon the future tax consequences of temporary differences between the carrying amounts and tax basis of assets and liabilities, using the tax rates expected to apply to taxable income in the periods when the related temporary differences are expected to be realized.
The amount of accrued current and deferred income taxes is based on estimates of taxes due or receivable from taxing authorities either currently or in the future. Changes in these accruals are reported as tax expense, and involve estimates of the various components included in determining taxable income, tax credits, other taxes and temporary differences. Changes periodically occur in the estimates due to changes in tax rates, tax laws and regulations and implementation of new tax planning strategies. The process of determining the accruals for income taxes necessarily involves the exercise of considerable judgment and consideration of numerous subjective factors.
Management performs an analysis of the Company’s tax positions annually and believes it is more likely than not that all of its tax positions will be utilized in future years.
Intangible Assets and Goodwill
Core deposit intangibles are amortized on a straight-line basis over the estimated useful lives of seven to ten years and customer relationship intangibles are amortized on a straight-line basis over the estimated useful life of three to eighteen years. Goodwill is not amortized, but is evaluated at a reporting unit level at least annually for impairment or more frequently if other indicators of impairment are present. At least annually in the fourth quarter, intangible assets, are evaluated for possible impairment. Impairment losses are measured by comparing the fair values of the intangible assets with their recorded amounts. Any impairment losses are reported in the statement of comprehensive income.
The evaluation of remaining core deposit intangibles for possible impairment involves reassessing the useful lives and the recoverability of the intangible assets. The evaluation of the useful lives is performed by reviewing the levels of core deposits of the respective branches acquired. The actual life of a core deposit base may be longer than originally estimated due to more successful retention of customers, or may be shorter due to more rapid runoff. Amortization of core deposit intangibles would be adjusted, if necessary, to amortize the remaining net book values over the remaining lives of the core deposits. The evaluation for recoverability is only performed if events or changes in circumstances indicate that the carrying amount of the intangibles may not be recoverable.
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The evaluation of goodwill for possible impairment is performed by comparing the fair values of the related reporting units with their carrying amounts including goodwill. The fair values of the related business units are estimated using market data for prices of recent acquisitions of banks and branches.
The evaluation of intangible assets and goodwill for the year ended December 31, 2021 and 2020 resulted in no impairments.
Fair Value of Financial Instruments
Debt securities that are being held for indefinite periods of time, or that may be sold as part of the Company’s asset/liability management strategy, to provide liquidity or for other reasons, are classified as available for sale and are stated at estimated fair value. Unrealized gains or losses on debt securities available for sale are reported as a component of stockholders’ equity, net of income tax.
The Company reviews its portfolio of debt securities in an unrealized loss position at least quarterly. The Company first assesses whether it intends to sell, or it is more-likely-than-not that it will be required to sell, the securities before recovery of the amortized cost basis. If either of these criteria is met, the securities amortized cost basis is written down to fair value as a current period expense. If either of the above criteria is not met, the Company evaluates whether the decline in fair value is the result of credit losses or other factors. In making this assessment, the Company considers, among other things, the period of time the security has been in an unrealized loss position, and performance of any underlying collateral and adverse conditions specifically related to the security. At December 31, 2021 and December 31, 2020 over 95% of the available for sale debt securities held by the Company were issued by the U.S. Treasury, or U.S. government-sponsored entities and agencies. The Company does not consider the unrealized position of these securities to be the result of credit factors, because the decline in fair value is attributable to changes in interest rates and illiquidity, and not credit quality, and the Company does not have the intent to sell these securities and it is likely that it will not be required to sell the securities before their anticipated recovery. Therefore, the Company has not recorded an allowance for credit losses against its debt securities portfolio, as the credit risk is not material.
The estimates of fair values of debt securities and other financial instruments are based on a variety of factors. In some cases, fair values represent quoted market prices for identical or comparable instruments. In other cases, fair values have been estimated based on assumptions concerning the amount and timing of estimated future cash flows and assumed discount rates reflecting varying degrees of risk. Accordingly, the fair values may not represent actual values of the financial instruments that could have been realized as of year-end or that will be realized in the future.
Future Application of Accounting Standards
See Note (1) of the Notes to Consolidated Financial Statements for a discussion of recently issued accounting pronouncements and their expected impact on the Company’s financial statements.
Segment Information
See Note (23) of the Notes to Consolidated Financial Statements for disclosure regarding the Company’s operating business segments.
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RESULTS OF OPERATIONS
Average Balances, Income Expenses and Rates
The following table depicts, for the periods indicated, certain information related to our average balance sheet and our average yields on assets and average costs of liabilities. Such yields are derived by dividing income or expense by the average balance of the corresponding assets or liabilities. Average balances are derived from daily averages.
| CONSOLIDATED AVERAGE BALANCE SHEETS AND INTEREST MARGIN ANALYSIS | ||||||||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Taxable Equivalent Basis | ||||||||||||||||||||||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||||||||||||||||||
| December 31, 2021 | December 31, 2020 | December 31, 2019 | ||||||||||||||||||||||||||||||||||
| 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: | ||||||||||||||||||||||||||||||||||||
| Loans (1) | $ | 6,220,192 | $ | 316,618 | 5.09 | % | $ | 6,432,455 | $ | 312,514 | 4.85 | % | $ | 5,273,632 | $ | 292,152 | 5.54 | % | ||||||||||||||||||
| Debt securities – taxable | 538,157 | 6,327 | 1.18 | 556,931 | 8,591 | 1.54 | 588,207 | 13,308 | 2.26 | |||||||||||||||||||||||||||
| Debt securities – tax exempt | 11,372 | 258 | 2.27 | 28,969 | 616 | 2.12 | 20,219 | 580 | 2.87 | |||||||||||||||||||||||||||
| Federal funds sold and interest-bearing deposits with banks | 3,268,443 | 4,366 | 0.13 | 1,562,383 | 6,049 | 0.39 | 1,455,799 | 31,372 | 2.15 | |||||||||||||||||||||||||||
| Total earning assets | 10,038,164 | 327,569 | 3.26 | 8,580,738 | 327,770 | 3.81 | 7,337,857 | 337,412 | 4.60 | |||||||||||||||||||||||||||
| Nonearning assets: | ||||||||||||||||||||||||||||||||||||
| Cash and due from banks | 271,004 | 220,995 | 180,339 | |||||||||||||||||||||||||||||||||
| Interest receivable and other assets | 694,191 | 611,966 | 500,487 | |||||||||||||||||||||||||||||||||
| Allowance for credit losses | (88,028 | ) | (76,501 | ) | (53,975 | ) | ||||||||||||||||||||||||||||||
| Total nonearning assets | 877,167 | 756,460 | 626,851 | |||||||||||||||||||||||||||||||||
| Total assets | $ | 10,915,331 | $ | 9,337,198 | $ | 7,964,708 | ||||||||||||||||||||||||||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||||||||||||||||||||||||||||||
| Interest-bearing liabilities: | ||||||||||||||||||||||||||||||||||||
| Transaction deposits | $ | 848,535 | $ | 634 | 0.07 | % | $ | 744,632 | $ | 940 | 0.13 | % | $ | 751,140 | $ | 2,573 | 0.34 | % | ||||||||||||||||||
| Savings deposits | 3,736,901 | 4,055 | 0.11 | 3,273,903 | 9,385 | 0.29 | 2,782,086 | 39,170 | 1.41 | |||||||||||||||||||||||||||
| Time deposits | 654,801 | 3,543 | 0.54 | 695,637 | 8,147 | 1.17 | 690,636 | 10,995 | 1.59 | |||||||||||||||||||||||||||
| Short-term borrowings | 2,608 | 2 | 0.08 | 2,745 | 8 | 0.30 | 1,458 | 32 | 2.19 | |||||||||||||||||||||||||||
| Long-term borrowings | — | — | — | 1,107 | — | — | — | — | — | |||||||||||||||||||||||||||
| Subordinated debt | 56,793 | 3,130 | 5.51 | 26,804 | 1,966 | 7.31 | 26,804 | 1,966 | 7.34 | |||||||||||||||||||||||||||
| Total interest-bearing liabilities | 5,299,638 | 11,364 | 0.21 | 4,744,828 | 20,446 | 0.43 | 4,252,124 | 54,736 | 1.29 | |||||||||||||||||||||||||||
| Interest-free funds: | ||||||||||||||||||||||||||||||||||||
| Noninterest-bearing deposits | 4,437,352 | 3,503,187 | 2,709,510 | |||||||||||||||||||||||||||||||||
| Interest payable and other liabilities | 52,069 | 46,048 | 42,219 | |||||||||||||||||||||||||||||||||
| Stockholders’ equity | 1,126,272 | 1,043,135 | 960,855 | |||||||||||||||||||||||||||||||||
| Total interest free funds | 5,615,693 | 4,592,370 | 3,712,584 | |||||||||||||||||||||||||||||||||
| Total liabilities and stockholders’ equity | $ | 10,915,331 | $ | 9,337,198 | $ | 7,964,708 | ||||||||||||||||||||||||||||||
| Net interest income | $ | 316,205 | $ | 307,324 | $ | 282,676 | ||||||||||||||||||||||||||||||
| Net interest spread | 3.05 | % | 3.38 | % | 3.31 | % | ||||||||||||||||||||||||||||||
| Effect of interest free funds | 0.10 | % | 0.19 | % | 0.54 | % | ||||||||||||||||||||||||||||||
| Net interest margin | 3.15 | % | 3.57 | % | 3.85 | % | ||||||||||||||||||||||||||||||
| For these computations, information is shown on a taxable-equivalent basis assuming a 21% tax rate. | ||||||||||||||||||||||||||||||||||||
| (1) Nonaccrual loans are included in the average loan balances and any interest on such nonaccrual loans is recognized on a cash basis |
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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, | ||||||||||||
| 2021 | 2020 | 2019 | ||||||||||
| Income Statement Data | ||||||||||||
| Net interest income | $ | 315,657 | $ | 306,668 | $ | 281,921 | ||||||
| (Benefit from) provision for credit losses | (8,690 | ) | 62,648 | 8,287 | ||||||||
| Noninterest income | 170,032 | 137,222 | 137,229 | |||||||||
| Noninterest expense | 285,981 | 257,730 | 241,301 | |||||||||
| Net income | 167,630 | 99,586 | 134,879 | |||||||||
| Per Common Share Data | ||||||||||||
| Net income – basic | $ | 5.12 | $ | 3.05 | $ | 4.13 | ||||||
| Net income – diluted | 5.03 | 3.00 | 4.05 | |||||||||
| Cash dividends | 1.40 | 1.32 | 1.24 | |||||||||
| Selected Financial Ratios | ||||||||||||
| Performance ratios: | ||||||||||||
| Return on average assets | 1.54 | % | 1.06 | % | 1.69 | % | ||||||
| Return on average stockholders’ equity | 14.88 | 9.52 | 14.04 | |||||||||
| Cash dividends payout ratio | 27.34 | 43.28 | 30.02 | |||||||||
| Net interest spread | 3.05 | 3.38 | 3.31 | |||||||||
| Net interest margin | 3.15 | 3.57 | 3.85 | |||||||||
| Efficiency ratio | 58.88 | 58.06 | 57.57 |
Net Interest Income
Net interest income, which is the Company’s principal source of operating revenue, increased in 2021 by $9.0 million, to a total of $315.7 million, compared to an increase of $24.7 million in 2020. Net interest income increased in 2021 as a result of an increase of $20.9 million in fee income from PPP loan forgiveness and the drop in average interest rates on deposits, offset by average rates on loans. Net interest income increased in 2020 due to a full year of net interest income from Pegasus Bank, loan growth, PPP fee income of approximately $15.5 million and a decrease in interest rates paid on deposits.
Net interest margin is the ratio of taxable-equivalent net interest income to average earning assets for the period. As shown in the preceding table, the Company’s net interest margin decreased in 2021, compared to 2020, due to larger balances and lower average rates on interest-bearing deposits with banks during the year. The decrease in net interest margin in 2020 was due to the lower average rates on federal funds and securities during the year.
The Company’s net interest income and net interest margin have been, and the Company currently expects them to continue to be, impacted by the decreases in interest rates stemming from the Federal Reserve Federal Reserve's response to the COVID-19 pandemic. Our expectation is that interest rates will increase slightly in the upcoming year.
Changes in the volume of earning assets and interest-bearing liabilities and changes in interest rates, determine the changes in net interest income. The following volume/rate analysis summarizes the relative contribution of each of these components to the changes in net interest income in 2021 and 2020. See “Maturity and Rate Sensitivity of Loans” for additional discussion.
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VOLUME/RATE ANALYSIS
Taxable Equivalent Basis
| Change in 2021 | Change in 2020 | |||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Total | Due to Volume(1) | Due to Rate | Total | Due to Volume(1) | Due to Rate | |||||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||||||
| INCREASE (DECREASE) | ||||||||||||||||||||||||
| Interest Income: | ||||||||||||||||||||||||
| Loans | $ | 4,104 | $ | (7,641 | ) | $ | 11,745 | $ | 20,362 | $ | 67,533 | $ | (47,171 | ) | ||||||||||
| Investments—taxable | (2,264 | ) | (361 | ) | (1,903 | ) | (4,717 | ) | (677 | ) | (4,040 | ) | ||||||||||||
| Investments—tax exempt | (358 | ) | (402 | ) | 44 | 36 | 638 | (602 | ) | |||||||||||||||
| Interest-bearing deposits with banks and federal funds sold | (1,683 | ) | 6,663 | (8,346 | ) | (25,323 | ) | 2,351 | (27,674 | ) | ||||||||||||||
| Total interest income | (201 | ) | (1,741 | ) | 1,540 | (9,642 | ) | 69,845 | (79,487 | ) | ||||||||||||||
| Interest Expense: | ||||||||||||||||||||||||
| Transaction deposits | (306 | ) | 273 | (579 | ) | (1,633 | ) | 431 | (2,064 | ) | ||||||||||||||
| Savings deposits | (5,330 | ) | 1,025 | (6,355 | ) | (29,785 | ) | 5,124 | (34,909 | ) | ||||||||||||||
| Time deposits | (4,604 | ) | (500 | ) | (4,104 | ) | (2,848 | ) | (439 | ) | (2,409 | ) | ||||||||||||
| Short-term borrowings | (6 | ) | — | (6 | ) | (24 | ) | 28 | (52 | ) | ||||||||||||||
| Subordinated debt | 1,164 | (1 | ) | 1,165 | — | — | — | |||||||||||||||||
| Total interest expense | (9,082 | ) | 797 | (9,879 | ) | (34,290 | ) | 5,144 | (39,434 | ) | ||||||||||||||
| Net interest income | $ | 8,881 | $ | (2,538 | ) | $ | 11,419 | $ | 24,648 | $ | 64,701 | $ | (40,053 | ) | ||||||||||
| (1) The effects of changes in the mix of earning assets and interest-bearing liabilities have been combined with the changes due to volume. |
Benefit from and Provision for Credit Losses
As shown in the selected consolidated financial table above, the Company recorded a net benefit from reversal of provision for credit losses for 2021, compared to a provision for credit losses for 2020 and 2019. The Company’s reversal of provision for 2021 was based on improvements in economic conditions and the Company’s outlook for certain economic indicators. The increase in the provision in 2020 was related to reserve build up for expected credit losses stemming from the COVID-19 pandemic and low energy prices. The Company’s provision in 2020 was based on the Company’s evaluation of the level of uncertainty and lack of clarity of the timing of an end to the COVID-19 pandemic, as well as the magnitude of the government’s stimulus response to it. The Company establishes an allowance as an estimate of the expected credit losses in the loan portfolio at the balance sheet date. Management believes the allowance for credit losses is appropriate based upon management’s best estimate of expected losses within the existing loan portfolio. Should any of the factors considered by management in evaluating the appropriate level of the allowance for credit losses change, the Company’s estimate of expected credit losses could also change, which could affect the amount of future provisions for credit losses. Net loan charge-offs were $7.0 million for 2021 compared to $22.8 million for 2020 and $5.4 million for 2019. The net charge-offs equated to 0.11%, 0.35% and 0.10% of average loans for 2021, 2020 and 2019, respectively. Net charge-offs were higher in 2020 primarily due to three loans. The rate of net charge-offs to average total loans continues to be at a low level. A more detailed discussion of the allowance for credit losses is provided under “Loans.”
Noninterest Income
Noninterest income is shown in the selected consolidated financial table above. Total noninterest income increased in 2021. The increase in noninterest income was mostly attributable to a bargain purchase gain of $4.8 million associated with The First National Bank and Trust Company of Vinita, Oklahoma, a gain from the sale of the Company’s Hugo, Oklahoma branch of $2.5 million, $3.3 million of income resulting from the application of equity method accounting related to an equity interest received in the process of a loan collection, $10.3 million in rental income from other real estate property, a $9.1 million increase in income from debit card interchange fees, and a $2.7 million increase in insurance commissions. Noninterest income was partially offset by a $4.7 million decrease in income from sweep fees. The Company’s operating noninterest income has generally increased due to enhanced product lines, acquisitions and internal deposit growth.
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The Company earned $7.3 million on the sale of loans in 2021 compared $6.1 million in 2020 and $3.4 million in 2019. The income from sales of loans increased in 2021 due to the increase in the volume of mortgage loans originated because of record low mortgage rates. The Company expects sales from mortgage loans during 2022 to be less than in 2021 due to the expected increase in interest rates.
The Company recognized a net gain of $1.0 million during 2021, a net loss of $389,000 during 2020, and a net gain of $812,000 during 2019, due to transactions of equity securities. These losses and gains were due to the Accounting Standard Update 2016-01, which requires the change in fair value of equity securities to be recognized through net income. The Company’s practice is to maintain a liquid portfolio of securities and not engage in trading activities. The Company has the ability and intent to hold debt securities classified as available for sale that were in an unrealized loss position until they mature or until fair value exceeds amortized cost.
The Company had non-sufficient funds fees totaling $25.0 million, $26.6 million and $33.5 million in 2021, 2020 and 2019, respectively. This represents 14.7%, 19.4%, and 24.4% of the Company’s noninterest income for the years 2021, 2020 and 2019, respectively. In addition, the Company had debit card interchange fees totaling $46.0 million, $36.9 million and $33.9 million for the years 2021, 2020 and 2019, respectively. This represents 27.1%, 26.9% and 24.7% of the Company’s noninterest income for the years 2021, 2020 and 2019, respectively. For 2021 compared to 2020, government assistance funds that flowed into the market, including PPP loans and stimulus payments to households, increased both customer liquidity and interchange volume resulting in higher debit card interchange fees and lower non-sufficient funds fees.
The Company is subject to political pressures that could limit our ability to charge for NSF and overdraft fees. The Company cannot estimate the impact of possible changes to our fees at this time.
Prior to the COVID-19 pandemic, there was minimal likelihood that the Company would surpass $10 billion in total assets for several years. However, with the CARES Act, including PPP loans, stimulus payments to households, and artificially high household savings rates, our deposits and assets have grown dramatically beyond reasonably foreseeable levels. To the extent the COVID-19 pandemic and the effects of the aforementioned stimulus programs continue, it is likely the Company will exceed $10 billion in total assets at December 31, 2022. Pursuant to the Durbin Amendment of the Dodd-Frank Act, based on current run rates, this would trigger an approximate reduction of annual pretax income from debit card interchange fees of between $22 to $24 million beginning July 1, 2023. The Company will consider the use of our existing sweep product to reduce total assets below $10 billion at December 31, 2022.
Noninterest Expense
Total noninterest expense increased by $28.3 million, or 11.0% to $286.0 million for 2021. This compares to an increase of $16.4 million, or 6.8%, for 2020. The increase in noninterest expense in 2021 was due to the increase in salaries and employee benefits of approximately $2.0 million, approximately $8.9 million related to other real estate property operating costs, $4.8 million in acquisition related expenses, approximately $4.4 million in net occupancy and depreciation primarily from the Company’s move to its new corporate headquarters, $3.1 million amortization of investment in tax credits, $1.1 million incentive to customers that participated in the year-end sweep program and a $1.4 million increase in deposit insurance. The increase in noninterest expense in 2020 was due to a full year of noninterest expenses of Pegasus Bank, which added approximately $9.0 million. In addition, noninterest expense increased in 2020 due to COVID-19 pandemic related salary expenses, net occupancy and depreciation from the Company’s new corporate headquarters, and acquisition expense related to the purchase of assets from Citizens, partially offset by $2.4 million in gains on sales of property carried in other real estate owned and a decrease in marketing and business promotions.
Noninterest expense included deposit insurance expense, which totaled $3.5 million for the year ended December 31, 2021, compared to $2.1 million for the year ended December 31, 2020 and $1.1 million for the year ended December 31, 2019. Deposit insurance expense was lower for the year ended December 31, 2019 due to a one-time credit given by the FDIC in 2019 upon reaching a reserve ratio in the insurance fund.
Income Taxes
Income tax expense totaled $40.8 million in 2021, compared to $23.9 million in 2020 and $34.7 million in 2019. The effective tax rates for 2021, 2020 and 2019 were 19.6%, 19.4% and 20.5% respectively. The primary reasons for the difference between the Company’s effective tax rate and the federal statutory rate were tax-exempt income, nondeductible amortization, federal and state tax credits and state tax expense.
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Certain financial information is prepared on a taxable equivalent basis to facilitate analysis of yields and changes in components of earnings. Average balance sheets, comprehensive income statements and other financial statistics are also presented on a taxable equivalent basis.
Impact of Inflation
The impact of inflation on financial institutions differs significantly from that of industrial or commercial companies. The assets of financial institutions are predominantly monetary, as opposed to fixed or nonmonetary assets such as premises, equipment and inventory. As a result, there is little exposure to inflated earnings by understated depreciation charges or significantly understated current values of assets. Although inflation can have an indirect effect by leading to higher interest rates, financial institutions are in a position to monitor the effects on interest costs and yields and respond to inflationary trends through management of interest rate sensitivity. Inflation can also have an impact on noninterest expenses such as salaries and employee benefits, occupancy, services and other costs.
Impact of Deflation
In a period of deflation, it would be reasonable to expect widely decreasing prices for real assets. In such an economic environment, assets of businesses and individuals, such as real estate, commodities or inventory, could decline. The inability of customers to repay or refinance their loans could result in credit losses incurred by the Company far in excess of historical experience due to deflated collateral values.
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FINANCIAL POSITION
| BANCFIRST CORPORATION | ||||||||
|---|---|---|---|---|---|---|---|---|
| SELECTED CONSOLIDATED FINANCIAL DATA | ||||||||
| (Dollars in thousands, except per share data) | ||||||||
| At and for the Year Ended December 31, | ||||||||
| 2021 | 2020 | |||||||
| Balance Sheet Data | ||||||||
| Total assets | $ | 9,405,612 | $ | 9,212,357 | ||||
| Debt securities | 534,500 | 555,196 | ||||||
| Total loans (net of unearned interest) | 6,194,218 | 6,448,225 | ||||||
| Allowance for credit losses | 83,936 | 91,366 | ||||||
| Deposits | 8,091,914 | 8,064,704 | ||||||
| Subordinated debt | 85,987 | 26,804 | ||||||
| Stockholders’ equity | 1,171,734 | 1,067,885 | ||||||
| Book value per share | 35.94 | 32.64 | ||||||
| Tangible book value per shares (non-GAAP)(1) | 30.80 | 27.47 | ||||||
| Reconciliation of Tangible Book Value per Common Share (non-GAAP)(2) | ||||||||
| Stockholders’ equity | $ | 1,171,734 | $ | 1,067,885 | ||||
| Less goodwill | 149,922 | 149,922 | ||||||
| Less intangible assets, net | 17,566 | 18,999 | ||||||
| Tangible stockholders' equity (non-GAAP) | $ | 1,004,246 | $ | 898,964 | ||||
| Common shares outstanding | 32,603,118 | 32,719,852 | ||||||
| Tangible book value per share (non-GAAP) | $ | 30.80 | $ | 27.47 | ||||
| Selected Financial Ratios | ||||||||
| Performance Ratios: | ||||||||
| Return on average assets | 1.54 | % | 1.06 | % | ||||
| Return on average stockholders' equity | 14.88 | 9.52 | ||||||
| Cash dividends payout ratio | 27.34 | 43.28 | ||||||
| Net interest spread | 3.05 | 3.38 | ||||||
| Net interest margin | 3.15 | 3.57 | ||||||
| Efficiency ratio | 58.88 | 58.06 | ||||||
| Balance Sheet Ratios: | ||||||||
| Average loans to deposits | 64.27 | % | 78.28 | % | ||||
| Average earning assets to total assets | 91.96 | 91.90 | ||||||
| Average stockholders’ equity to average assets | 10.32 | 11.17 | ||||||
| Asset Quality Ratios: | ||||||||
| Nonaccrual loans to total loans | 0.34 | % | 0.58 | % | ||||
| Nonperforming and restructured loans to total loans | 0.48 | 0.78 | ||||||
| Nonperforming and restructured assets to total assets | 0.73 | 0.90 | ||||||
| Allowance for credit losses to total loans | 1.36 | 1.42 | ||||||
| Allowance for credit losses to nonperforming and restructured loans | 284.33 | 182.26 | ||||||
| Allowance for credit losses to nonaccrual loans | 401.76 | 243.35 | ||||||
| Net charge-offs to average loans | 0.11 | 0.35 | ||||||
| (1) Refer to the "Reconciliation of Tangible Book Value per Common Share (non-GAAP)" Table | ||||||||
| (2) Tangible book value per common share is stockholders' equity less goodwill and intangible assets, net, divided by common shares outstanding. | ||||||||
| This amount is a non-GAAP financial measure but has been included as it is considered to be a critical metric with which to analyze and | ||||||||
| evaluate the financial condition and capital strength of the Company. This measure should not be considered a substitute for operating results determined in accordance with GAAP. |
Cash, Federal Funds Sold and Interest-Bearing Deposits with Banks
Cash consists of cash and cash items on hand, noninterest-bearing deposits and amounts due from other banks, reserves deposited with the Federal Reserve Bank, and interest-bearing deposits with other banks. Federal funds sold consist of overnight investments of excess funds with other financial institutions. Due to the Federal Reserve Bank’s intervention into the funds market that has resulted in a low overnight funds rate, the Company has continued to maintain the majority of its excess funds with the Federal Reserve Bank. The Federal Reserve Bank pays interest on these funds based upon the lowest target rate for the maintenance period, which was 0.25% during 2021 and decreased 1.50% during 2020 from 1.75% to 0.25%.
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The amount of cash, federal funds sold and interest-bearing deposits with the Federal Reserve Bank carried by the Company is a function of the availability of funds presented to other institutions for clearing, and the Company’s requirements for liquidity, operating cash and reserves, available yields and interest rate sensitivity management. Balances of these items can fluctuate widely based on these various factors. The aggregate of cash and due from banks, interest-bearing deposits with banks and federal funds sold increased $433.9 million from December 31, 2020 to December 31, 2021. The increase was primarily related to the increase in deposits from PPP and other government stimulus payments.
Securities
For the year ended December 31, 2021, total debt securities decreased $20.7 million, or 3.7%, to $534.5 million. Debt securities available for sale represented 99.4% of the total debt securities portfolio at December 31, 2021, compared to 99.5% of total debt securities portfolio at December 31, 2020. Debt securities available for sale had a net unrealized gain of $2.8 million at December 31, 2021, compared to a net unrealized gain of $9.9 million at December 31, 2020. These unrealized gains are included in the Company’s stockholders’ equity as accumulated other comprehensive income, net of income tax, in the amounts of a gain of $2.2 million and a gain of $7.4 million for December 31, 2021 and 2020, respectively.
The Company does not engage in securities trading activities. Any sales of debt securities are for the purpose of executing the Company’s asset/liability management strategy, eliminating a perceived credit risk in a specific security, or providing liquidity. Debt securities that are being held for indefinite periods of time, or that may be sold as part of the Company’s asset/liability management strategy, to provide liquidity, or for other reasons, are classified as available for sale and are stated at estimated fair value. Unrealized gains or losses on debt securities available for sale are reported as a component of stockholders’ equity, net of income tax. Debt securities for which the Company has the intent and ability to hold to maturity are classified as held for investment and are stated at cost, adjusted for amortization of premiums and accretion of discounts computed under the interest method.
Management has the ability and intent to hold the debt securities classified as held for investment until they mature, at which time the Company will receive full value for the securities. Furthermore, the Company also has the ability and intent to hold the debt securities classified as available for sale for a period of time sufficient for a recovery of cost. As of December 31, 2021, the Company had net unrealized gains largely due to decreases in market interest rates over the yields available at the time the underlying securities were purchased. The fair value of those securities having unrealized losses is expected to recover as the securities approach their maturity date or repricing date, or if market yields for similar investments decline. Furthermore, as of December 31, 2021, management had no intent or requirement to sell before the recovery of the unrealized loss.
See Note (4) of the Notes to Consolidated Financial Statements for disclosures regarding the Company’s Securities.
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WEIGHTED AVERAGE YIELD OF DEBT SECURITIES
The following table summarizes the maturity distribution schedule with corresponding weighted average taxable equivalent yields of the debt securities portfolio at December 31, 2021. The following table presents securities at their expected maturities, which may differ from contractual maturities. The Company manages its debt securities portfolio for liquidity, as a tool to execute its asset/liability management strategy, and for pledging requirements for public funds. For the interest rate sensitivity of debt securities see the table in item 7A.
| Within One Year | After One Year But Within Five Years | After Five Years But Within Ten Years | After Ten Years | Total | ||||||||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Amount | Yield* | Amount | Yield* | Amount | Yield* | Amount | Yield* | Amount | Yield* | |||||||||||||||||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||||||||||||||||||||||
| Held for Investment | ||||||||||||||||||||||||||||||||||||||||
| Mortgage-backed securities | $ | 10 | 4.46 | % | $ | 22 | 6.67 | % | $ | — | — | % | $ | — | — | % | $ | 32 | 5.85 | % | ||||||||||||||||||||
| State and political subdivisions | 575 | 2.69 | 1,870 | 1.96 | — | — | — | — | 2,445 | 2.13 | ||||||||||||||||||||||||||||||
| Other securities | — | — | 500 | 0.10 | — | — | — | — | 500 | 0.10 | ||||||||||||||||||||||||||||||
| Total | $ | 585 | 2.72 | $ | 2,392 | 1.61 | $ | — | — | $ | — | — | $ | 2,977 | 1.83 | |||||||||||||||||||||||||
| Percentage of total | 19.6 | % | 80.4 | % | — | % | — | % | 100.0 | % | ||||||||||||||||||||||||||||||
| Available for Sale | ||||||||||||||||||||||||||||||||||||||||
| U.S. Treasury, other federal agencies and mortgage-backed securities | $ | 57,887 | 1.75 | % | $ | 442,163 | 1.08 | % | $ | 7,580 | 1.18 | % | $ | 1,223 | 2.30 | % | $ | 508,853 | 1.16 | % | ||||||||||||||||||||
| State and political subdivisions | 1,521 | 2.50 | 2,658 | 3.44 | 1,437 | 4.33 | 703 | 3.04 | 6,319 | 3.37 | ||||||||||||||||||||||||||||||
| Asset backed securities | — | — | — | — | 13,357 | 0.91 | — | — | 13,357 | 0.91 | ||||||||||||||||||||||||||||||
| Other securities | — | — | — | — | 2,994 | 3.13 | — | — | 2,994 | 3.13 | ||||||||||||||||||||||||||||||
| Total | $ | 59,408 | 1.77 | $ | 444,821 | 1.10 | $ | 25,368 | 1.45 | $ | 1,926 | 2.54 | $ | 531,523 | 1.19 | |||||||||||||||||||||||||
| Percentage of total | 11.2 | % | 83.6 | % | 4.8 | % | 0.4 | % | 100.0 | % | ||||||||||||||||||||||||||||||
| Total debt securities | $ | 59,993 | 1.78 | % | $ | 447,213 | 1.10 | % | $ | 25,368 | 1.45 | % | $ | 1,926 | 2.54 | % | $ | 534,500 | 1.20 | % | ||||||||||||||||||||
| Percentage of total | 11.2 | % | 83.6 | % | 4.8 | % | 0.4 | % | 100.0 | % | ||||||||||||||||||||||||||||||
| * Yield is on a taxable-equivalent basis using a 21% tax rate. |
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Loans
The Company has historically generated loan growth from both internal originations and bank acquisitions. Total loans held for investment decreased $225.1 million, or 3.5%, to $6.2 billion in 2021. The decrease in loans resulted from a net decrease of approximately $572.3 million in PPP loans. The decrease in loans were partially offset by the Company’s purchase of The First National Bank and Trust Company of Vinita, Oklahoma, which added approximately $126 million in loans as of December 31, 2021. At December 31, 2021, the balance of total PPP loans was $80.4 million, net of unamortized processing fees of $2.0 million compared to $652.7 million, net of unamortized processing fees of $14.5 million at December 31, 2020.
Composition
The Company’s loan portfolio was diversified among various types of commercial and individual borrowers. Commercial loans were comprised principally of loans to companies in real estate, light manufacturing, retail and service industries. Consumer non-real estate loans were comprised primarily of loans to individuals for automobiles.
LOANS HELD FOR INVESTMENT BY CATEGORY
| December 31, | ||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2021 | 2020 | |||||||||||||||
| Amount | % of Total | Amount | % of Total | |||||||||||||
| (Dollars in thousands) | ||||||||||||||||
| Real estate: | ||||||||||||||||
| Commercial real estate owner occupied | $ | 684,739 | 11.10 | % | $ | 659,762 | 10.32 | % | ||||||||
| Commercial real estate non-owner occupied | 1,095,324 | 17.75 | 1,050,739 | 16.43 | ||||||||||||
| Construction and development 60 months | 415,466 | 6.73 | 275,096 | 4.30 | ||||||||||||
| Construction residential real estate 60 months | 254,524 | 4.13 | 230,193 | 3.60 | ||||||||||||
| Residential real estate first lien | 937,006 | 15.19 | 930,576 | 14.55 | ||||||||||||
| Residential real estate all other | 161,018 | 2.61 | 172,883 | 2.70 | ||||||||||||
| Farmland | 272,179 | 4.41 | 254,330 | 3.98 | ||||||||||||
| Commercial and agricultural non-real estate | 1,256,487 | 20.37 | 1,193,719 | 18.67 | ||||||||||||
| Consumer non-real estate | 413,370 | 6.70 | 376,264 | 5.88 | ||||||||||||
| Oil and gas | 428,908 | 6.95 | 428,866 | 6.71 | ||||||||||||
| Other loans | 250,421 | 4.06 | 822,078 | 12.86 | ||||||||||||
| Total loans | $ | 6,169,442 | 100.00 | % | $ | 6,394,506 | 100.00 | % |
See Note (1) and Note (5) of the Notes to Consolidated Financial Statements for additional disclosures regarding the Company’s loans.
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MATURITY AND RATE SENSITIVITY OF LOANS
The following table presents the Maturity and Rate Sensitivity of Loans held for investment at December 31, 2021. Many of the loans with maturities of one year or less are renewed at existing or similar terms after scheduled principal reductions. Also approximately 44% of loans had adjustable interest rates at December 31, 2021.
| Maturing | ||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Within One Year | After One But Within Five Years | After Five Years through Fifteen Years | After Fifteen Years | Total | ||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||
| Real estate: | ||||||||||||||||||||
| Commercial real estate owner occupied | $ | 71,473 | $ | 245,126 | $ | 295,336 | $ | 72,804 | $ | 684,739 | ||||||||||
| Commercial real estate non-owner occupied | 199,720 | 428,077 | 411,588 | 55,939 | 1,095,324 | |||||||||||||||
| Construction and development 60 months | 154,794 | 205,454 | 46,270 | 8,948 | 415,466 | |||||||||||||||
| Construction residential real estate 60 months | 242,288 | 9,976 | 1,789 | 471 | 254,524 | |||||||||||||||
| Residential real estate first lien | 96,388 | 173,040 | 330,827 | 336,751 | 937,006 | |||||||||||||||
| Residential real estate all other | 41,609 | 63,850 | 34,720 | 20,839 | 161,018 | |||||||||||||||
| Farmland | 47,638 | 55,371 | 73,553 | 95,617 | 272,179 | |||||||||||||||
| Commercial and agricultural non-real estate | 592,969 | 515,620 | 126,021 | 21,877 | 1,256,487 | |||||||||||||||
| Consumer non-real estate | 38,877 | 282,378 | 90,077 | 2,038 | 413,370 | |||||||||||||||
| Oil and gas | 230,675 | 159,545 | 36,371 | 2,317 | 428,908 | |||||||||||||||
| Other loans | 100,584 | 17,559 | 85,769 | 46,509 | 250,421 | |||||||||||||||
| Total loans | $ | 1,817,015 | $ | 2,155,996 | $ | 1,532,321 | $ | 664,110 | $ | 6,169,442 | ||||||||||
| Loans with predetermined interest rates | $ | 784,895 | $ | 1,255,680 | $ | 773,194 | $ | 617,043 | $ | 3,430,812 | ||||||||||
| Loans with adjustable interest rates | 1,032,120 | 900,316 | 759,127 | 47,067 | 2,738,630 | |||||||||||||||
| Total | $ | 1,817,015 | $ | 2,155,996 | $ | 1,532,321 | $ | 664,110 | $ | 6,169,442 | ||||||||||
| Percentage of total | 29.5 | % | 34.9 | % | 24.8 | % | 10.8 | % | 100.0 | % |
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, | |||||||
|---|---|---|---|---|---|---|---|
| 2021 | 2020 | ||||||
| (Dollars in thousands) | |||||||
| Past due 90 days or more and still accruing | $ | 4,964 | $ | 4,802 | |||
| Nonaccrual | 20,892 | 37,545 | |||||
| Restructured | 3,665 | 7,784 | |||||
| Total nonperforming and restructured loans | 29,521 | 50,131 | |||||
| Other real estate owned and repossessed assets | 39,553 | 32,480 | |||||
| Total nonperforming and restructured assets | $ | 69,074 | $ | 82,611 |
Nonperforming and Restructured Assets
During 2021, nonperforming and restructured assets decreased $13.5 million to $69.1 million. The Company’s level of nonperforming and restructured assets has continued to be relatively low, equating to 0.73% and 0.90% of total assets at December 31, 2021 and 2020, respectively.
Nonaccrual loans decreased $16.7 million in 2021 due to resolution of several loans, which were offset by $6.0 million of nonaccrual loans acquired from The First National Bank and Trust Company of Vinita, Oklahoma. The Company’s nonaccrual loans
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are primarily commercial and agricultural non-real estate and farmland. Nonaccrual loans negatively impact the Company’s net interest margin. A loan is placed on nonaccrual status when, in the opinion of management, the future collectability of both interest and principal is in serious doubt. Interest income is not recognized until the principal balance is fully collected. However, if the full collection of the remaining principal balance is not in doubt, interest income is recognized on certain of these loans on a cash basis. Had nonaccrual loans performed in accordance with their original contractual terms, the Company would have recognized additional interest income of approximately $2.2 million for 2021, $2.8 million for 2020 and $1.7 million for 2019. Only a small amount of this interest is expected to be ultimately collected. Approximately $3.3 million of nonaccrual loans are guaranteed by government agencies as of December 31, 2021.
Restructured loans decreased $4.1 million in 2021 due primarily to the overall improvement in restructured loans. The Company charges interest on principal balances outstanding during deferral periods. As a result, the current and future financial effects of the recorded balance of loans considered troubled debt restructurings whose terms were modified during the period were not considered material.
The classification of a loan as nonperforming does not necessarily indicate that loan principal and interest will ultimately be uncollectible; although, in an economic downturn, the Company’s experience has been that the level of collections declines. The above normal risk associated with nonperforming loans has been considered in the determination of the allowance for credit losses. At December 31, 2021, the allowance for credit losses as a percentage of nonperforming and restructured loans was 284.33%, compared to 182.26%, at the end of 2020. The level of nonperforming loans and credit losses could rise over time as a result of adverse economic conditions.
Other real estate owned and repossessed assets increased $7.1 million in 2021 and included approximately $4.0 million from the repossession of one commercial real estate property, $2.4 million from the decommissioning of the Company’s previous headquarters, and approximately $600,000 of other real estate owned acquired from The First National Bank and Trust Company of Vinita, Oklahoma. As of both December 31, 2021 and December 31, 2020, other real estate owned included a commercial real estate property recorded at approximately $28 million. The Company's rental income from OREO was approximately $10.3 million in 2021 compared to approximately $16,000 in 2020 and 2019. In addition, the Company's OREO holding expense was approximately $9.2 million in 2021 compared to approximately $313,000 in 2020 and $350,000 in 2019. Other real estate owned consists of properties acquired through foreclosure proceedings or acceptance of a deed in lieu of foreclosure and premises held for sale. These properties are carried at the lower of the book values of the related loans or fair values based upon appraisals, less estimated costs to sell. Write-downs arising at the time of reclassification of such properties from loans to other real estate owned are charged directly to the allowance for credit losses. Any losses on bank premises designated to be sold are charged to operating expense at the time of transfer from premises to other real estate owned. Decreases in values of properties subsequent to their classification as other real estate owned are charged to operating expense.
Allowance for Credit Losses/Fair Value Adjustments on Acquired Loans
On January 1, 2020, the Company adopted ASC 326, which replaced the incurred loss methodology with an expected loss methodology that is referred to as CECL. As a result, the Company recorded a decrease to the allowance for credit losses of $3.2 million at January 1, 2020. At December 31, 2021, the allowance for credit losses to total loans represented 1.36% of total loans, compared to 1.42% at December 31, 2020. The decrease in the allowance for credit loss during 2021 was primarily driven by a reversal of provision during 2021 based on sustained improvements in the economy, both nationally and in Oklahoma, which reduced the amount of expected credit loss within the loan portfolio. This reduction was partially offset by additional allowance for credit loss required by newly acquired loans purchased with credit deterioration.
The overall credit quality of the Company’s loan portfolio has remained strong. Net charge-offs were $7.0 million and $22.8 million for the years ended 2021 and 2020, respectively. The amount of net loan charge-offs is relatively low, equating to 0.11% and 0.35% of average total loans for the years ended December 31, 2021 and 2020, respectively. If unforeseen adverse changes occur in the national or local economy, or in the credit markets, it would be reasonable to expect that the allowance for credit losses would increase in future periods.
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ANALYSIS OF ALLOWANCE FOR CREDIT LOSSES
The following table is a break-out of the allowance for credit losses:
| Year Ended December 31, | |||||||
|---|---|---|---|---|---|---|---|
| 2021 | 2020 | ||||||
| (Dollars in thousands) | |||||||
| Real estate: | |||||||
| Commercial real estate owner occupied | $ | 6,410 | $ | 6,911 | |||
| Commercial real estate non-owner occupied | 16,987 | 12,318 | |||||
| Construction and development 60 months | 3,490 | 2,723 | |||||
| Construction residential real estate 60 months | 1,092 | 726 | |||||
| Residential real estate first lien | 3,076 | 2,822 | |||||
| Residential real estate all other | 2,104 | 2,236 | |||||
| Farmland | 4,822 | 3,153 | |||||
| Commercial and agricultural non-real estate | 26,073 | 33,020 | |||||
| Consumer non-real estate | 3,734 | 3,542 | |||||
| Oil and gas | 12,978 | 20,733 | |||||
| Other loans | 3,170 | 3,182 | |||||
| Total | $ | 83,936 | $ | 91,366 |
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:
| 2021 | 2020 | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Amount | % of Avg Loans | Amount | % of Avg Loans | |||||||||||||
| (Dollars in thousands) | ||||||||||||||||
| Real estate: | ||||||||||||||||
| Commercial real estate owner occupied | $ | (36 | ) | 0.00 | % | $ | 763 | 0.01 | % | |||||||
| Commercial real estate non-owner occupied | 736 | 0.01 | 3,609 | 0.06 | ||||||||||||
| Construction and development 60 months | (12 | ) | — | (64 | ) | — | ||||||||||
| Construction residential real estate 60 months | — | — | 29 | — | ||||||||||||
| Residential real estate first lien | 32 | — | 421 | 0.01 | ||||||||||||
| Residential real estate all other | 469 | 0.01 | 72 | — | ||||||||||||
| Farmland | 888 | 0.01 | 2,055 | 0.03 | ||||||||||||
| Commercial and agricultural non-real estate | 4,291 | 0.07 | 3,621 | 0.06 | ||||||||||||
| Consumer non-real estate | 538 | 0.01 | 918 | 0.01 | ||||||||||||
| Oil and gas | — | — | 11,245 | 0.17 | ||||||||||||
| Other loans | 133 | — | 158 | — | ||||||||||||
| Total | $ | 7,039 | 0.11 | % | $ | 22,827 | 0.35 | % |
The fair value adjustment on acquired loans consists of a credit component to adjust for estimated credit exposures in the acquired loans. The credit component of the adjustment was a $1.1 million discount at December 31, 2021 and a $3.0 million discount at December 31, 2020. These fair value adjustments will be accreted to income over the remaining life of the loans. The acquired loans outstanding were $312.0 million and $261.7 million, at December 31, 2021 and 2020, respectively.
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Intangible Assets, Goodwill and Other Assets
Identifiable intangible assets and goodwill totaled $167.5 million and $168.9 million at December 31, 2021 and December 31, 2020, respectively.
On May 20, 2021, the Company recorded a core deposit intangible of approximately $1.7 million because of the purchase of assets and assumption of liabilities from The First National Bank and Trust Company of Vinita, Oklahoma. See Note (2) of the Notes to Consolidated Financial Statements for disclosure regarding the Company’s recent developments, including mergers and acquisitions.
Other assets includes the cash surrender value of key-man life insurance policies totaling $81.4 million at December 31, 2021 and $80.7 million at December 31, 2020.
Equity securities are reported in other assets on the balance sheet. The Company invests in equity securities without readily determinable fair values. These equity securities are reported at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. The realized and unrealized gains and losses are reported as securities transactions in the noninterest income section of the consolidated statements of comprehensive income. The balance of equity securities was $10.6 million at December 31, 2021 and $10.1 million at December 31, 2020. The Company reviews its portfolio of equity securities for impairment at least quarterly.
Low Income Housing and New Market Tax Credit Investments
During 2021, there have not been any material changes in the Company’s low income housing tax credit investments and new market tax credit investments, which are included in other assets on the Company’s balance sheet. See Note (6) of the Notes to Consolidated Financial Statements for disclosures regarding these investments.
Liquidity and Funding
The Company’s principal source of liquidity and funding is its broad deposit base generated from customer relationships. The availability of deposits is affected by economic conditions, competition with other financial institutions and alternative investments available to customers. Through interest rates paid, service charge levels and services offered, the Company can affect its level of deposits to a limited extent. The level and maturity of funding necessary to support the Company’s lending and investment functions is determined through the Company’s asset/liability management process. The Company currently does not rely heavily on long-term borrowings and does not utilize brokered CDs. The Company maintains federal funds lines of credit with other banks and could also utilize the sale of loans, securities and liquidation of other assets as sources of liquidity and funding.
Historically, BancFirst has more liquidity than its peers do. This liquidity positions BancFirst to respond to increased loan demand and other requirements for funds, or to decreases in funding sources. The liquidity of BancFirst Corporation, however, is dependent upon dividend payments from BancFirst and its ability to obtain financing. Banking regulations limit bank dividends based upon net earnings retained by BancFirst and minimum capital requirements. Dividends in excess of these limits require regulatory approval. At January 1, 2022, BancFirst had approximately $153.3 million of equity available for dividends to BancFirst Corporation without regulatory approval. During 2021, BancFirst declared four common stock dividends totaling $48.5 million and two preferred stock dividends totaling $1.9 million. While Pegasus Bank had net income of $6.6 million in 2021, the Company intends to provide additional capital to increase Pegasus Bank’s ability to approve larger loans and allow Pegasus Bank to continue to grow their assets.
Deposits
Total deposits increased $27.2 million to $8.1 billion, an increase of 0.3% in 2021. The increase in deposits during 2021 was predominantly related to government stimulus payments. The Company’s core deposits provide it with a stable, low-cost funding source. The Company’s core deposits as a percentage of total deposits were 98.2% at both December 31, 2021 and 2020, respectively. Noninterest-bearing deposits to total deposits were 46.7% at December 31, 2021, compared to 47.0% at December 31, 2020.
In addition, off-balance sheet sweep accounts totaled $5.1 billion at December 31, 2021, which included a temporary sweep amount of approximately $2.3 billion compared to a sweep account total of $2.8 billion at December 31, 2020. Our sweep accounts affect the balances of our year-end assets and deposits.
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ANALYSIS OF AVERAGE DEPOSITS
| Year Ended December 31, | |||||||
|---|---|---|---|---|---|---|---|
| 2021 | 2020 | ||||||
| (Dollars in thousands) | |||||||
| Average Balances | |||||||
| Demand deposits | $ | 4,437,352 | $ | 3,503,187 | |||
| Interest-bearing transaction deposits | 848,535 | 744,632 | |||||
| Savings deposits | 3,736,901 | 3,273,903 | |||||
| Time deposits | 654,801 | 695,637 | |||||
| Total deposits | $ | 9,677,589 | $ | 8,217,359 |
PERCENTAGE OF TOTAL AVERAGE DEPOSITS AND AVERAGE RATES PAID
| 2021 | 2020 | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| % of Total | Rate | % of Total | Rate | |||||||||||||
| Demand deposits | 45.85 | % | 42.63 | % | ||||||||||||
| Interest-bearing transaction deposits | 8.77 | 0.07 | % | 9.06 | 0.13 | % | ||||||||||
| Savings deposits | 38.61 | 0.11 | 39.84 | 0.29 | ||||||||||||
| Time deposits | 6.77 | 0.54 | 8.47 | 1.17 | ||||||||||||
| Total deposits | 100.00 | % | 100.00 | % | ||||||||||||
| Average rate paid on interest-bearing deposits | 0.16 | % | 0.39 | % |
MATURITY OF TIME DEPOSITS
The following table shows the maturity of time deposits that are in excess of the Federal Deposit Insurance Corporation's insurance limit:
| December 31, 2021 | |||
|---|---|---|---|
| (Dollars in thousands) | |||
| Three months or less | $ | 38,574 | |
| Over three months through six months | 29,371 | ||
| Over six months through twelve months | 44,907 | ||
| Over twelve months | 31,041 | ||
| Total | $ | 143,893 |
At December 31, 2021, 78.4% of the Company’s time deposits greater than $250,000 mature in one year or less.
Subordinated Debt
On June 17, 2021, the Company completed a private placement, under Regulation D of the Securities Act of 1933, of $60 million aggregate principal amount of 3.50% Fixed-to-Floating Rate Subordinated Notes due 2036 ("Subordinated Notes") to various institutional accredited investors. See Note (11) of the Notes to Consolidated Financial Statements for a complete discussion of the Company’s subordinated debt.
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Short-Term Borrowings
See Note (9) of the Notes to Consolidated Financial Statements for a discussion of short-term borrowings.
Lines of Credit
See Note (10) of the Notes to Consolidated Financial Statements for a discussion of the Company’s lines of credit.
Capital Resources
Stockholders’ equity totaled $1.2 billion at December 31, 2021, compared to $1.1 billion at December 31, 2020. In addition to net income of $167.6 million, other changes in stockholders’ equity during the year ended December 31, 2021 included $2.3 million related to common stock issuances and $2.1 million related to stock-based compensation, that were partially offset by $45.8 million in dividends, a $5.3 million decrease in other comprehensive income, $5.5 million in net cash settlement of options, and $11.7 million in common stock repurchases. The Company’s average stockholders’ equity to average assets for 2021 was 10.32% compared to 11.17% for 2020. The Company’s leverage ratio and total risk-based capital ratios at December 31, 2021 were well in excess of the regulatory requirements. Banking institutions are generally expected to maintain capital well above the minimum levels. The Company’s trust preferred securities have continued to be included in Tier 1 capital, as the Company’s total assets do not exceed $15 billion. The Company’s Subordinated Notes have been structured to qualify as Tier 2 capital under bank regulatory guidelines.
See Note (15) of the Notes to Consolidated Financial Statements for a discussion of capital ratio requirements.
See Note (11) of the Notes to Consolidated Financial Statements for disclosures regarding the Company’s Subordinated Debt.
On January 20, 2017, the Company filed with the Securities and Exchange Commission (“SEC”) an automatic shelf registration statement on Form S-3, which became effective upon filing with the SEC. Under the shelf registration, the Company may offer and sell, from time to time, an indeterminate amount of its common stock in one or more future offerings.
The Company has had a Stock Repurchase Program (the “SRP”) since November 1999. The SRP may be used as a means to increase earnings per share and return on equity, to purchase treasury stock for the exercise of stock options or for distributions under the Deferred Stock Compensation Plan, to provide liquidity for optionees to dispose of stock from exercises of their stock options and to provide liquidity for stockholders wishing to sell their stock. All shares repurchased under the SRP have been retired and not held as treasury stock. The timing, price and amount of stock repurchases under the SRP may be determined by management and approved by the Company’s Executive Committee. During September 2021, the SRP was amended to permit the repurchase of an additional 650,000 shares. At December 31, 2021, up to 500,486 shares could be repurchased under the SRP. For the year ended December 31, 2021, the Company repurchased 212,296 shares of its common stock for $11.7 million at an average price of $54.94 per share under the SRP. For the year ended December 31, 2020, the Company repurchased 59,284 shares of its common stock for $3.1 million at an average price of $52.26 per share under the SRP. For the year ended December 31, 2019, the Company repurchased 26,670 shares of its common stock for $1.6 million at an average price of $60.04 per share under the SRP.
Future dividend payments will be determined by the Company’s Board of Directors considering the earnings, financial condition and capital needs of the Company, BancFirst, and Pegasus Bank, applicable governmental policies and regulations and such other factors as the Board of Directors deems appropriate. While no assurance can be given as to the Company’s ability to pay dividends, management believes that, based upon the anticipated performance of the Company, regular dividend payments will continue in 2022.
Related Party Transactions
See Note (18) of the Notes to Consolidated Financial Statements for disclosures regarding the Company’s related party transactions.
Liquidity Risk and Off-Balance Sheet Arrangements
Liquidity is the ability to meet financial obligations through the maturity or sale of existing assets or the acquisition of additional funds. Various financial obligations, including contractual obligations and commercial commitments, may require future cash payments by the Company. Certain obligations are recognized on the Consolidated Balance Sheets, while others are off-balance sheet under U.S. generally accepted accounting principles. The Company currently has 7.20% Junior Subordinated Debentures, Subordinated Notes, operating lease payments, time deposit payments and low income housing partnership commitments. The Company’s time deposits
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require the majority of cash obligations in the next twelve months. The Company’s 7.20% Junior Subordinated Debentures mature on March 31, 2034. The Company's Subordinated Notes mature on June 30, 2036. The Company has consistently generated positive net income and the Company currently expects to have positive net income for 2022. Management does not currently know of any trends that would cause the Company to be unable to provide for current obligations in the next twelve months.
Refer to Notes 6, 8, 11, 19 and 20 to the consolidated financial statements for further information regarding these contractual obligations.
The Company is a party to financial instruments with off balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include loan commitments and standby letters of credit, which involve elements of credit and interest-rate risk to varying degrees. The Company’s exposure to credit loss in the event of nonperformance by the other party to the instrument is represented by the instrument’s contractual amount. To control this credit risk, the Company uses the same underwriting standards as it uses for loans recorded on the balance sheet. The Company had $2.1 billion and $1.8 billion in loan commitments at December 31, 2021 and 2020, respectively. The Company had $82.8 million and $96.3 million in stand-by letters of credit at December 31, 2021 and 2020, respectively. Loan commitments are agreements to lend to a customer, as long as there is no violation of any condition established in the contract. Stand-by letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. These instruments generally have fixed expiration dates or other termination clauses. Since many of the instruments are expected to expire without being drawn upon, the total amounts do not necessarily represent commitments that will be funded in the future.