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BANF > SEC Filings for BANF > Form 10-K on 18-Mar-2013All Recent SEC Filings

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Form 10-K for BANCFIRST CORP /OK/


18-Mar-2013

Annual Report


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, 2012. 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. Actual results may differ materially from forward-looking statements.

SUMMARY

BancFirst Corporation's net income for 2012 was $51.9 million, or $3.36 per diluted share, compared to $45.6 million, or $2.93 per diluted share for 2011 and $42.3 million, or $2.70 per diluted share for 2010.

In 2012, net interest income was $164.8 million, compared to $156.9 million in 2011 and $142.8 million in 2010. The Company's net interest margin was 3.13% for 2012, down from 3.20% for 2011 and 3.37% for 2010. The net interest margin has continued to be negatively impacted by the historically low interest rate environment. Provision for loan losses was $3.1 million in 2012 compared to $4.5 million in 2011 and $3.0 million in 2010. Noninterest income was $87.7 million in 2012 compared to $77.0 million in 2011 and $69.9 million in 2010, while noninterest expense was $170.4 million in 2012 compared to $158.6 million in 2011and $144.1 million in 2010.

Total assets at December 31, 2012 were $6.0 billion, up from $5.6 billion at December 31, 2011 and $5.1 billion at December 31, 2010. Total loans at December 31, 2012 were $3.2 billion versus $3.0 billion for 2011 and $2.8 billion for 2010. Total deposits increased to $5.4 billion from $5.0 billion for 2011 and $4.5 billion for 2010. A temporary inflow of deposits at year end 2012 was responsible for much of the increase in total assets and total deposits over year end 2011. The Company's liquidity remained strong as its average loan-to-deposit ratio was 60.3% for 2012, compared to 60.6% for 2011 and 67.6% for 2010. Stockholders' equity was $519.6 million compared to $483.0 million for 2011 and $458.6 million for 2010. Average stockholders' equity to average assets was 8.79% at December 31, 2012, compared to 8.85% at December 31, 2011 and 9.74% at December 31, 2010.

Asset quality remained strong with a ratio of nonperforming and restructured assets to total assets of 0.81% for the year ended December 31, 2012, compared to 0.71% at December 31, 2011 and 1.01% at December 31, 2010. Net charge-offs to average loans for 2012 decreased to 0.07%, compared to 0.09% for 2011 and 0.13% for 2010. The allowance for loan losses as a percentage of total loans was 1.19% for 2012 compared to 1.25% for 2011 and 1.27% for 2010.

On January 19, 2012, Council Oak Investment Corporation, a wholly-owned subsidiary of BancFirst completed the sale of one of its investments that resulted in a pretax gain of approximately $4.5 million. After related expenses and income taxes, the increase in net income approximated $2.6 million.

On July 12, 2011, the Company completed the acquisition of FBC Financial Corporation and its subsidiary bank, 1st Bank Oklahoma with banking locations in Claremore, Verdigris, and Inola, Oklahoma. The Company


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paid a premium of $1.5 million above the equity capital of FBC Financial Corporation. At acquisition, 1st Bank Oklahoma had approximately $217 million in total assets, $116 million in loans, $178 million in deposits and $18 million in equity capital. 1st Bank Oklahoma operated as a subsidiary of BancFirst Corporation until it was merged into BancFirst on February 17, 2012. The acquisition did not have a material effect on the Company's consolidated financial statements.

On December 15, 2010, the Company completed the acquisition of OK Bancorporation, Inc., and its subsidiary bank, The Okemah National Bank. At acquisition, The Okemah National Bank had approximately $73 million in total assets, $32 million in loans, $62 million in deposits, and $9 million in equity capital. The Okemah National Bank operated as a subsidiary of BancFirst Corporation until it was merged into BancFirst on October 21, 2011. The acquisition did not have a material effect on the Company's consolidated financial statements.

On December 10, 2010, the Company completed the acquisition of Exchange Bancshares of Moore, Inc., and its subsidiary bank, Exchange National Bank of Moore. At acquisition, Exchange National Bank of Moore had approximately $147 million in total assets, $47 million in loans, $116 million in deposits, and $10 million in equity capital. Exchange National Bank operated as a subsidiary of BancFirst Corporation until it was merged into BancFirst on June 17, 2011. The acquisition did not have a material effect on the Company's consolidated financial statements.

On October 8, 2010, the Company completed the acquisition of Union National Bancshares, Inc., and its subsidiary bank, Union Bank of Chandler with offices in Chandler and Tulsa, Oklahoma. At acquisition, Union Bank of Chandler had approximately $134 million in total assets, $90 million in loans, $117 million in deposits, and $15 million in equity capital. Union Bank of Chandler operated as a subsidiary of BancFirst Corporation until it was merged into BancFirst on November 12, 2010. The acquisition did not have a material effect on the Company's consolidated financial statements.

The Company recorded a total of $13.3 million of goodwill and core deposit intangibles as a result of the three acquisitions completed in 2010. The combined acquisitions added approximately $371 million in total assets, $169 million in loans and $295 million in deposits. The effects of these acquisitions are included in the consolidated financial statements of the Company from the date of acquisition forward. The Company does not believe these acquisitions, individually or in aggregate are material to the Company's consolidated financial statements.

In November 2010, the Federal Deposit Insurance Corporation ("FDIC") issued a final rule to implement provisions of the Dodd-Frank Act that provide for temporary unlimited coverage for noninterest-bearing transaction accounts. The separate coverage for noninterest-bearing transaction accounts became effective on December 31, 2010 and terminated on December 31, 2012.

On April 1, 2010, the Company's insurance agency BancFirst Insurance Services, Inc., formerly known as Wilcox, Jones & McGrath, Inc., completed its acquisition of RBC Agency, Inc., which had offices in Shawnee and Stillwater. BancFirst Insurance Services, Inc. also has offices in Oklahoma City, Tulsa, Lawton and Muskogee. The acquisition did not have a material effect on the Company's consolidated financial statements.

On March 21, 2010, Congress passed student loan reform legislation centralizing student lending in a governmental agency, which as of June 30, 2010 resulted in an end to the student loan programs provided by the Company. The Company sold all student loans held for sale of $144.5 million in October 2010.

In November 2009, the FDIC issued a rule that required insured depository institutions to prepay their estimated quarterly risk-based assessments for the fourth quarter of 2009 and for all of 2010, 2011 and 2012. Prepaid deposit insurance of approximately $9.7 million and $12.3 million was included in other assets in the accompanying consolidated balance sheets as of December 31, 2012 and 2011, respectively.


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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 loan 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 Loan Losses

The allowance for loan losses is management's estimate of the probable losses incurred in the Company's loan portfolio through the balance sheet date.

The allowance for loan losses is increased by provisions charged to operating expense and is reduced by net loan charge-offs. The amount of the allowance for loan losses is based on past loan loss experience, evaluations of known impaired loans, levels of adversely classified loans, general economic conditions and other environmental factors. A loan is considered impaired when it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. The majority of the Company's impaired loans are collateral dependent. For collateral dependent loans, the amount of impairment is measured based upon the fair value of the underlying collateral and is included in the allowance for loan losses.

The amount of the allowance for loan losses is first estimated by each business unit's management based on their evaluation of their unit's portfolio. This evaluation involves identifying impaired and adversely classified loans. Specific allowances for losses are determined for impaired loans based on either the loans' estimated discounted cash flows or the fair values of the collateral. Allowances for adversely classified loans are estimated using historical loss percentages for each type of loan adjusted for various economic and environmental factors related to the underlying loans. An allowance is also estimated for non-adversely classified loans using a historical loss percentage based on losses arising specifically from non-adversely classified loans, adjusted for various economic and environmental factors 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 adequacy 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. 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 impaired and adversely classified loans, and their adherence to the Company's loan policies and procedures.

The process of evaluating the adequacy of the allowance for loan losses necessarily involves the exercise of judgment and consideration of numerous subjective factors and, accordingly, there can be no assurance that the estimate of incurred losses will not change in light of future developments and economic conditions. Different assumptions and conditions could result in a materially different amount for the allowance for loan losses.

Income Taxes

The Company files a consolidated income tax return. Deferred taxes are recognized under the liability 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


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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 twelve to eighteen years. Mortgage servicing rights are amortized based on current prepayment assumptions. 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, excluding mortgage servicing rights, 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. Mortgage servicing rights are adjusted to fair value quarterly, if impaired.

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 years ended December 31, 2012, 2011 and 2010 resulted in no impairments.

Fair Value of Financial Instruments

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 securities available for sale are reported as a component of stockholders' equity, net of income tax. Securities that are determined to be impaired, and for which such impairment is determined to be other than temporary, are adjusted to fair value and a corresponding loss is recognized in earnings.

The estimates of fair values of 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.


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Segment Information

See Note (22) of the Notes to Consolidated Financial Statements for disclosures regarding the Company's operating business segments.

RESULTS OF OPERATIONS

Net Interest Income

Net interest income, which is the Company's principal source of operating revenue, increased in 2012 by $7.9 million, to a total of $164.8 million, compared to an increase of $14.1 million in 2011 and an increase of $11.4 million in 2010. In 2012, net interest income increased due primarily to higher loan volume. In 2011, $12.0 million of the increase in net interest income was related to the Company's acquisitions made in the latter part of 2010 and during 2011. In 2010, net interest income increased due to the decrease in interest rates along with approximately $1.7 million of the increase relating to the Company's acquisitions made in the latter part of 2010.

The net interest margin is the ratio of taxable-equivalent net interest income to average earning assets for the period. The net interest margin for 2012 was 3.13%, compared to 3.20% for 2011 and 3.37% for 2010. Net interest margin has decreased in recent years due to continued historically low interest rates, the maturity or pay down of higher-yielding earning assets and an increase in earning assets at relatively low rates.

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 2012 and 2011. If interest rates and/or loan volume do not increase, management expects continued compression of its net interest margin in 2013 as higher yielding loans and securities mature and are replaced at current market rates.

VOLUME/RATE ANALYSIS

Taxable Equivalent Basis



                                                Change in 2012                                  Change in 2011
                                                   Due to           Due to                          Due to           Due to
                                   Total          Volume(1)          Rate           Total          Volume(1)          Rate
                                                                    (Dollars in thousands)
INCREASE (DECREASE)
Interest Income:
Loans                             $  5,026       $    12,718       $  (7,692 )     $  9,353       $    12,739       $ (3,386 )
Investments-taxable                 (4,635 )             (11 )        (4,624 )          (57 )           1,675         (1,732 )
Investments-tax exempt                (497 )            (288 )          (209 )          976             1,846           (870 )
Interest-bearing deposits with
banks and Federal funds sold           618               637             (19 )        1,111             1,073             38

Total interest income                  512            13,056         (12,544 )       11,383            17,333         (5,950 )

Interest Expense:
Transaction deposits                  (457 )            (269 )          (188 )           19               109            (90 )
Savings deposits                    (3,410 )          (2,424 )          (986 )       (3,234 )          (2,661 )         (573 )
Time deposits                       (2,754 )           2,780          (5,534 )         (995 )           5,507         (6,502 )
Short-term borrowings                  (30 )              (5 )           (25 )           52                35             17
Long-term borrowings                  (522 )            (519 )            (3 )          821               630            191
Junior subordinated debentures         (50 )             (77 )            27            191               367           (176 )

Total interest expense              (7,223 )            (514 )        (6,709 )       (3,146 )           3,987         (7,133 )

Net interest income               $  7,735       $    13,570       $  (5,835 )     $ 14,529       $    13,346       $  1,183

(1) Changes in the mix of earning assets and interest-bearing liabilities have been combined with the changes due to volume.


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The following interest rate sensitivity analysis measures the sensitivity of the Company's net interest margin to changes in interest rates by analyzing the repricing relationship between its earning assets and interest-bearing liabilities. This analysis is limited by the fact that it presents a static position as of a single day and is not necessarily indicative of the Company's position at any other point in time, and does not take into account the sensitivity of rates of specific assets and liabilities to changes in market rates. The Company's approach to managing the interest sensitivity gap limits risk while taking advantage of the Company's stable core deposit base and the historical existence of a positively sloped yield curve.

The Analysis of Interest Rate Sensitivity presents the Company's earning assets and interest-bearing liabilities based on maturity and repricing frequency at December 31, 2012. The Company's cumulative negative gap position in the one year interval decreased to $65 million at December 31, 2012 from $193 million at December 31, 2011, and decreased as a percentage of total earning assets to 1.2% from 3.7% at December 31, 2012 and 2011, respectively. This negative gap position assumes that the Company's core savings and transaction deposits are immediately rate sensitive. In a falling rate or sustained low rate environment, the benefit of the Company's noninterest-bearing funds is decreased, resulting in a decrease in the Company's net interest margin over time.

ANALYSIS OF INTEREST RATE SENSITIVITY

December 31, 2012



                                    Interest Rate Sensitive              Noninterest Rate Sensitive
                                    0 to 3            4 to 12            1 to 5              Over 5
                                    Months            Months              Years              Years              Total
                                                                 (Dollars in thousands)
EARNING ASSETS
Loans                            $    464,073        $ 587,407        $   1,150,471       $  1,040,476       $ 3,242,427
Securities                            267,073           68,913              168,066             58,490           562,542
Federal funds sold and
interest-bearing deposits           1,732,745               -                    -                  -          1,732,745

Total                            $  2,463,891        $ 656,320        $   1,318,537       $  1,098,966       $ 5,537,714

FUNDING SOURCES
Noninterest-bearing demand
deposits (1)                     $         -         $      -         $          -        $  1,553,596       $ 1,553,596
Savings and transaction
deposits                            2,580,578               -                    -                  -          2,580,578
Time deposits of $100 or more          89,592          178,396              125,484                 -            393,472
Time deposits under $100              107,835          218,654              123,459                 -            449,948
Short-term borrowings                   4,571               -                    -                  -              4,571
Long-term borrowings                    1,000            4,178                4,000                 -              9,178
Junior subordinated
debentures                                 -                                     -              26,804            26,804
Stockholders' equity                       -                -                    -             519,567           519,567

Total                            $  2,783,576        $ 401,228        $     252,943       $  2,099,967       $ 5,537,714

Interest sensitivity gap         $   (319,685 )      $ 255,092        $   1,065,594       $ (1,001,001 )
Cumulative gap                   $   (319,685 )      $ (64,593 )      $   1,001,001       $         -
Cumulative gap as a
percentage of total earning
assets                                   (5.8 )%          (1.2 )%              18.1 %               -  %

(1) Represents the amount of demand deposits required to support earning assets in excess of interest-bearing liabilities and stockholders' equity.


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Provision for Loan Losses

The provision for loan losses was $3.1 million for 2012, compared to $4.5 million for 2011 and $3.0 million for 2010. The decrease in the provision for loan losses during 2012 compared to 2011 reflects a decreasing trend in the level of adversely classified loans. During 2011, $1.7 million of the increase in the provision for loan losses was related to the Company's bank acquisitions made in the latter part of 2010 and 2011. During 2010, credit quality generally stabilized as previously identified problem loans were moved to other real estate owned while potential problem loans decreased. The Company establishes an allowance as an estimate of the probable inherent losses in the loan portfolio at the balance sheet date. Management believes the recorded amount of the allowance for loan losses is appropriate based upon management's best estimate of probable losses that have been incurred within the existing loan portfolio. Should any of the factors considered by management in evaluating the appropriate level of the allowance for loan losses change, the Company's estimate of probable loan losses could also change, which could affect the level of future provisions for loan losses. Net loan charge-offs were $2.0 million for 2012 compared to $2.6 million for 2011 and $3.6 million for 2010. The net charge-offs equated to 0.07%, 0.09% and 0.13% of average loans for 2012, 2011 and 2010, respectively. A more detailed discussion of the allowance for loan losses is provided under "Loans (Including Acquired Loans)."

Noninterest Income

Noninterest income was $87.7 million in 2012 versus $77.0 million in 2011 and $69.9 million in 2010. Total noninterest income increased $10.7 million in 2012, an increase of 14.0%. This compares to an increase of $7.1 million, or 10.0%, in 2011. For 2012, the increases in revenues were primarily from a $4.5 million pretax securities gain from the sale of an investment by the Company's Small Business Investment Corporation, Council Oak Investment Corporation, a wholly-owned subsidiary of BancFirst. In addition, revenues from trust services, deposit revenues and insurance commissions increased in 2012. For 2011, the . . .

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