BancFirst (BANF) - 2019 Q1 - Quarterly Report

PART I – FINANCIAL INFORMATION Item 1. Financial Statements This section presents the unaudited consolidated financial statements for BancFirst Corporation as of March 31, 2019, and for the three months then ended, including detailed notes on accounting policies and financial items Consolidated Balance Sheets As of March 31, 2019, total assets increased to $7.71 billion from $7.57 billion at year-end 2018, primarily driven by loan growth, with total liabilities and stockholders' equity also rising Consolidated Balance Sheet Highlights (in thousands) | Metric | March 31, 2019 (unaudited) | December 31, 2018 | | :--- | :--- | :--- | | Total Assets | $7,709,000 | $7,574,258 | | Loans, net | $4,989,587 | $4,924,587 | | Total Deposits | $6,706,386 | $6,605,495 | | Total Liabilities | $6,781,073 | $6,671,469 | | Total Stockholders' Equity | $927,927 | $902,789 | Consolidated Statements of Comprehensive Income For Q1 2019, net income rose to $31.8 million, or $0.96 per diluted share, from $29.6 million, or $0.89 per diluted share, in Q1 2018, driven by a $3.9 million increase in net interest income Q1 Statement of Comprehensive Income (in thousands, except per share data) | Metric | Three Months Ended March 31, 2019 | Three Months Ended March 31, 2018 | | :--- | :--- | :--- | | Net Interest Income | $66,903 | $63,035 | | Provision for Loan Losses | $1,684 | $314 | | Noninterest Income | $32,001 | $30,110 | | Noninterest Expense | $56,206 | $55,890 | | Net Income | $31,837 | $29,620 | | Diluted EPS | $0.96 | $0.89 | | Comprehensive Income | $34,377 | $28,232 | Consolidated Statements of Stockholders' Equity Total stockholders' equity increased from $838.1 million at Q1 2018 to $927.9 million at Q1 2019, primarily due to retained earnings from net income offsetting dividends Changes in Stockholders' Equity for Q1 2019 (in thousands) | Component | Beginning Balance (Dec 31, 2018) | Net Change | Ending Balance (Mar 31, 2019) | | :--- | :--- | :--- | :--- | | Retained Earnings | $722,615 | $22,098 (Net Income less Dividends) | $744,713 | | Accumulated Other Comprehensive Income (Loss) | $(2,139) | $2,540 | $401 | | Total Stockholders' Equity | $902,789 | $25,138 | $927,927 | - Dividends on common stock increased to $0.30 per share in Q1 2019 from $0.21 per share in Q1 2018[9] Consolidated Statements of Cash Flow For Q1 2019, the company generated $36.7 million in net cash from operating activities, used $78.2 million in investing activities, and provided $94.7 million from financing activities, resulting in a $53.2 million net increase in cash and cash equivalents Q1 Cash Flow Summary (in thousands) | Activity | Three Months Ended March 31, 2019 | Three Months Ended March 31, 2018 | | :--- | :--- | :--- | | Net Cash from Operating Activities | $36,660 | $26,355 | | Net Cash (Used in)/Provided by Investing Activities | $(78,162) | $26,034 | | Net Cash Provided by/(Used in) Financing Activities | $94,652 | $(38,161) | | Net Increase in Cash | $53,150 | $14,228 | Notes to Consolidated Financial Statements This section provides detailed disclosures supporting the consolidated financial statements, covering accounting policies, recent developments, securities, loans, intangible assets, leases, stock-based compensation, stockholders' equity, fair value measurements, segment information, and subsequent events Note 1: Summary of Significant Accounting Policies The company's accounting policies conform to U.S. GAAP, with the adoption of ASU 2016-02 on January 1, 2019, recognizing $4.3 million in right-of-use assets and lease liabilities, and ongoing evaluation of ASU 2016-13 for credit losses - Adopted ASU 2016-02 (Leases) on January 1, 2019, resulting in the recognition of $4.3 million in right-of-use lease assets and related liabilities with no material impact on operations or cash flows[20] - The company is preparing to adopt ASU 2016-13 (Financial Instruments – Credit Losses) on January 1, 2020, which will replace the current 'incurred loss' model with an 'expected loss' model and could result in an increase in the allowance for loan losses[23] Note 2: Recent Developments, Including Mergers and Acquisitions The company has been active in strategic acquisitions and real estate development, including an agreement to acquire Pegasus Bank in April 2019, the purchase of Cotter Ranch Tower for its new corporate headquarters in 2018, and the acquisition of First Wagoner Corp. and First Chandler Corp. in January 2018 - On April 23, 2019, the Company entered into an agreement to acquire Pegasus Bank (See Note 12)[24] - Purchased Cotter Ranch Tower (renamed BancFirst Tower) in August 2018 for $21.0 million to serve as the corporate headquarters, with renovations expected to cost approximately $70 million and be completed by the end of 2020[25] - Acquired First Wagoner Corp. and First Chandler Corp. in January 2018, adding combined assets of approximately $378 million[26][27] Note 3: Securities The company's securities portfolio, primarily U.S. Treasuries classified as available for sale, had a fair value of $723.7 million as of March 31, 2019, down from $770.7 million at year-end 2018, with most securities maturing within one year Securities Available for Sale (in thousands) | Category | Fair Value (Mar 31, 2019) | Fair Value (Dec 31, 2018) | | :--- | :--- | :--- | | U.S. Treasuries | $652,750 | $697,466 | | U.S. Federal Agencies | $27,954 | $29,919 | | Mortgage Backed Securities | $15,712 | $15,908 | | States and Political Subdivisions | $27,239 | $27,411 | | Total | $723,655 | $770,704 | - As of March 31, 2019, securities with a book value of $418.8 million were pledged as collateral for public funds and other purposes[34] Note 4: Loans and Allowance for Loan Losses The loan portfolio grew to $5.04 billion at March 31, 2019, with commercial real estate and one-to-four family residences as the largest categories, while nonperforming and restructured assets remained stable at $44.7 million, and the allowance for loan losses increased to $52.9 million Loan Portfolio Composition (in thousands) | Loan Category | Balance (Mar 31, 2019) | % of Total | | :--- | :--- | :--- | | Commercial Real Estate | $1,514,266 | 30.03% | | Commercial and Industrial | $1,043,848 | 20.70% | | One to Four Family Residences | $982,605 | 19.49% | | Construction | $469,826 | 9.32% | | Total Loans | $5,042,502 | 100.00% | Nonperforming and Restructured Assets (in thousands) | Category | March 31, 2019 | December 31, 2018 | | :--- | :--- | :--- | | Nonaccrual Loans | $21,594 | $22,603 | | Restructured Loans | $14,552 | $13,188 | | Other Real Estate Owned | $6,433 | $6,873 | | Total | $44,749 | $44,580 | Allowance for Loan Losses Activity - Q1 2019 (in thousands) | Metric | Amount | | :--- | :--- | | Beginning Balance (Dec 31, 2018) | $51,389 | | Net Charge-offs | $(158) | | Provision for Loan Losses | $1,684 | | Ending Balance (Mar 31, 2019) | $52,915 | Note 5: Intangible Assets As of March 31, 2019, the company held net intangible assets of $15.7 million, primarily core deposit intangibles, while goodwill remained unchanged at $79.7 million, largely allocated to the Community Banks segment Intangible Assets Summary (in thousands) | Category | Net Carrying Amount (Mar 31, 2019) | Net Carrying Amount (Dec 31, 2018) | | :--- | :--- | :--- | | Core Deposit Intangibles | $14,122 | $14,794 | | Customer Relationship Intangibles | $1,497 | $1,584 | | Total | $15,701 | $16,470 | - Goodwill remained constant at $79.7 million, with $59.9 million attributed to the Community Banks segment[64] Note 6: Leases Following the adoption of the new lease standard, the company recognized a $4.3 million right-of-use lease asset and corresponding liability, with operating leases having a weighted-average remaining term of 4.4 years, and generated $1.5 million in operating lease revenue as a lessor in Q1 2019 - As a lessee, the company has an operating lease liability of $4.3 million with a weighted-average remaining lease term of 4.4 years[66][67] - As a lessor, the company generated $1.5 million in operating lease revenue in Q1 2019 and expects to receive $8.8 million in future minimum lease payments[68][69] Note 7: Stock-Based Compensation The company maintains stock option plans, with 40,000 options granted and 5,500 exercised in Q1 2019, resulting in a stock-based compensation expense of $174,000 for the quarter, and $3.4 million in unearned expense to be amortized Stock Option Activity (Q1 2019) | Activity | Number of Options | | :--- | :--- | | Outstanding at Dec 31, 2018 | 1,216,700 | | Granted | 40,000 | | Exercised | (5,500) | | Canceled/Forfeited | (22,500) | | Outstanding at Mar 31, 2019 | 1,228,700 | - Recorded stock-based compensation expense was $174,000 for Q1 2019, compared to $306,000 for Q1 2018[75] Note 8: Stockholders' Equity The company did not repurchase any shares in Q1 2019 and, as of March 31, 2019, both BancFirst Corporation and its subsidiary bank were categorized as 'well capitalized' under Basel III, exceeding all capital adequacy requirements - No shares were repurchased in Q1 2019, with 148,736 shares remaining authorized for repurchase under the program[81][83] Regulatory Capital Ratios (BancFirst Corporation, as of Mar 31, 2019) | Ratio | Actual | Required for Adequacy | Required to be Well Capitalized (with buffer) | | :--- | :--- | :--- | :--- | | Common Equity Tier 1 Capital | 14.90% | 4.50% | 7.00% | | Tier 1 Capital | 15.37% | 6.00% | 8.50% | | Total Capital | 16.32% | 8.00% | 10.50% | Note 9: Net Income Per Common Share This note details the calculation of basic and diluted earnings per share (EPS), with Q1 2019 basic EPS at $0.98 and diluted EPS at $0.96, based on weighted-average shares of 32.6 million and 33.3 million, respectively EPS Calculation (Q1 2019) | Calculation | Income (Numerator) | Shares (Denominator) | Per Share Amount | | :--- | :--- | :--- | :--- | | Basic EPS | $31,837 | 32,612,399 | $0.98 | | Dilutive effect of stock options | — | 680,453 | - | | Diluted EPS | $31,837 | 33,292,852 | $0.96 | Note 10: Fair Value Measurements The company categorizes assets and liabilities measured at fair value into a three-level hierarchy, with most recurring assets, including $652.8 million in U.S. Treasury securities, valued using Level 1 inputs, while impaired loans and other real estate owned are measured using Level 3 inputs on a nonrecurring basis - Fair value is defined by a three-level hierarchy: Level 1 (quoted prices for identical assets), Level 2 (observable inputs), and Level 3 (unobservable inputs)[90] Assets Measured at Fair Value on a Recurring Basis (Mar 31, 2019, in thousands) | Asset Category | Level 1 | Level 2 | Level 3 | Total | | :--- | :--- | :--- | :--- | :--- | | U.S. Treasury | $652,750 | $— | $— | $652,750 | | Mortgage-backed securities | $— | $2,311 | $13,401 | $15,712 | | Other Securities & Derivatives | $— | $27,954 + $27,239 + $51 | $— | $55,244 | Note 11: Segment Information The company operates through four principal business units, with the Community Banks segment being the largest contributor to profitability in Q1 2019, generating $28.0 million in pre-tax income and holding nearly $5.0 billion in total assets Income Before Taxes by Segment (Q1 2019, in thousands) | Segment | Income Before Taxes | | :--- | :--- | | Metropolitan Banks | $15,369 | | Community Banks | $28,045 | | Other Financial Services | $4,499 | | Executive, Operations & Support | $25,023 | | Eliminations | $(31,922) | | Consolidated Total | $41,014 | Note 12: Subsequent Event On April 23, 2019, BancFirst Corporation agreed to acquire Pegasus Bank, a Texas-chartered bank, for $122.0 million in cash, with the transaction expected to close in Q3 2019, subject to regulatory approval - Announced agreement to acquire Pegasus Bank for $122.0 million in cash[118] - As of December 31, 2018, Pegasus Bank had approximately $639.1 million in total assets, $367.4 million in loans, and $595.3 million in deposits[118] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the company's Q1 2019 financial performance, highlighting a 7.4% increase in net income to $31.8 million, driven by higher net interest income and a stable net interest margin of 3.85%, alongside strategic initiatives Summary Q1 2019 net income was $31.8 million ($0.96 diluted EPS), up from $29.6 million ($0.89 diluted EPS) in Q1 2018, driven by higher net interest income, with total assets growing to $7.7 billion and strong asset quality Q1 2019 vs Q1 2018 Performance | Metric | Q1 2019 | Q1 2018 | | :--- | :--- | :--- | | Net Income | $31.8 million | $29.6 million | | Diluted EPS | $0.96 | $0.89 | | Net Interest Margin | 3.85% | 3.66% | - Asset quality remained strong with nonperforming and restructured assets at 0.58% of total assets[127] Results of Operations Net interest income increased by $3.9 million year-over-year due to a higher net interest margin, while the provision for loan losses rose to $1.7 million due to loan growth and downgrades, and noninterest income and expense remained relatively stable - Net interest income increased by $3.9 million compared to Q1 2018, primarily due to increases in the federal funds rate throughout 2018[134] - The provision for loan losses was $1.7 million, up from $314,000 in Q1 2018, due to loan growth and downgrades of a few commercial loans[135] - The company noted that if it grows to exceed $10 billion in assets, the Durbin Amendment will decrease its income from debit card usage fees by approximately $15 million annually[137] Financial Position As of March 31, 2019, total assets stood at $7.7 billion, with the securities portfolio decreasing by $47.3 million to $724.9 million, while loans grew by $66.1 million to $5.1 billion, and nonperforming and restructured assets remained stable at $44.7 million Key Balance Sheet Metrics (in thousands) | Metric | March 31, 2019 | December 31, 2018 | | :--- | :--- | :--- | | Total Assets | $7,709,000 | $7,574,258 | | Total Loans | $5,050,221 | $4,984,150 | | Debt Securities | $724,872 | $772,132 | | Deposits | $6,706,386 | $6,605,495 | | Stockholders' Equity | $927,927 | $902,789 | - Nonperforming and restructured assets totaled $44.7 million at March 31, 2019, compared to $44.6 million at December 31, 2018[147] Liquidity and Funding The company maintains a strong liquidity position, primarily funded by a stable base of core deposits, which increased by $100.9 million to $6.7 billion during the quarter, with core deposits representing 98.1% and noninterest-bearing deposits 39.7% of the total - Deposits increased by $100.9 million to $6.7 billion in Q1 2019[152] - Core deposits were 98.1% of total deposits, and noninterest-bearing deposits were 39.7% of total deposits, indicating a stable, low-cost funding base[153] Capital Resources Stockholders' equity increased by $25.1 million during the quarter to $927.9 million, driven by net income of $31.8 million, partially offset by $9.7 million in dividends, with the company's capital ratios well in excess of regulatory requirements - Stockholders' equity grew to $927.9 million at March 31, 2019, from $902.8 million at December 31, 2018[157] - The company's leverage ratio and total risk-based capital ratios were well in excess of regulatory requirements[157] Item 3. Quantitative and Qualitative Disclosures About Market Risk The company states that there have been no significant changes in its disclosures regarding market risk since its most recent annual report for the year ended December 31, 2018 - No significant changes in market risk disclosures were reported for the period[164] Item 4. Controls and Procedures Based on an evaluation by the CEO, CFO, and Disclosure Committee, the company concluded that its disclosure controls and procedures were effective as of the end of the reporting period, with no material changes to internal control over financial reporting during the quarter - Management concluded that disclosure controls and procedures are effective[165] - No material changes were made to internal control over financial reporting during the quarter[166] PART II – OTHER INFORMATION Item 1. Legal Proceedings The company is involved in various legal actions arising from its normal business activities but believes that any potential liability from these actions will not have a material adverse effect on its consolidated financial statements - The company is a defendant in various legal actions from normal business, but does not expect any material adverse effect on its financial statements[168] Item 1A. Risk Factors The company highlights a specific risk factor related to the Durbin Amendment, which would apply if its assets exceed $10 billion, potentially reducing noninterest income from debit card usage by approximately $15 million annually - A key risk factor is the Durbin Amendment, which would apply if the company's assets exceed $10 billion, decreasing income from debit card usage fees by an estimated $15 million annually[169] Item 6. Exhibits This section lists all exhibits filed with the Form 10-Q, including the Share Exchange Agreement for the Pegasus Bank acquisition, various corporate governance documents, and certifications from the CEO and CFO - Lists exhibits filed with the report, including the acquisition agreement for Pegasus Bank and CEO/CFO certifications[172][186][187]