Item 1. Business.
General
BancFirst Corporation (the “Company”) is an Oklahoma business corporation and a financial holding company under Federal law. It conducts virtually all of its operating activities through its principal wholly-owned subsidiary, BancFirst (the “Bank” or “BancFirst”), a state-chartered bank headquartered in Oklahoma City, Oklahoma. The Company also owns 100% of the common securities of BFC Capital Trust I, a Delaware Business Trust organized in January 1997, 100% of the common securities of BFC Capital Trust II, a Delaware Business Trust organized in January 2004, 75% of Century Life Assurance Company, an Oklahoma chartered insurance company, and 100% of Council Oak Partners LLC, an Oklahoma limited liability company engaging in investing activities.
The Company was incorporated as United Community Corporation in July 1984 for the purpose of becoming a bank holding company. In June 1985, it merged with seven Oklahoma bank holding companies that had operated under common ownership and the Company has conducted business as a bank holding company since that time. Over the next several years the Company acquired additional banks and bank holding companies, and in November 1988 the Company changed its name to BancFirst Corporation. Effective April 1, 1989, the Company consolidated its 12 subsidiary banks and formed BancFirst. The Company has continued to expand through acquisitions and de-novo branches. BancFirst currently has 86 banking locations serving 44 communities throughout Oklahoma.
The Company’s strategy focuses on providing a full range of commercial banking services to retail customers and small to medium-sized businesses both in the non-metropolitan trade centers of Oklahoma and the metropolitan markets of Oklahoma City, Tulsa, Lawton, Muskogee, Norman and Shawnee. The Company operates as a “super community bank”, managing its community banking offices on a decentralized basis, which permits them to be responsive to local customer needs. Underwriting, funding, customer service and pricing decisions are made by Presidents in each market within the Company’s strategic parameters. At the same time, the Company generally has a larger lending capacity, broader product line and greater operational efficiencies than its principal competitors in the non-metropolitan market areas (which typically are independently-owned community banks). In the metropolitan markets served by the Company, the Company’s strategy is to focus on the needs of local businesses that are not served effectively by larger institutions.
The Bank maintains a strong community orientation by, among other things, appointing selected members of the communities in which the Bank’s branches are located to a local consulting board that assists in introducing prospective customers to the Bank and in developing or modifying products and services to meet customer needs. As a result of the development of broad banking relationships with its customers and the convenience and service of the Bank’s multiple offices, the Bank’s lending and investing activities are funded almost entirely by core deposits.
The Bank centralizes virtually all of its back office, support and investment functions in order to achieve consistency and cost efficiencies in the delivery of products and services. The Bank provides centralized services such as data processing, operations support, bookkeeping, accounting, loan review, compliance and internal auditing to the Bank’s community banking offices to enhance their ability to compete effectively. The Bank also provides centrally certain specialized financial services that require unique expertise. The community banking offices assist the Bank in maintaining its competitive position by actively participating in the development of new products and services needed by their customers and in making desirable changes to existing products and services.
The Bank provides a wide range of retail and commercial banking services, including: commercial, real estate, agricultural and consumer lending; depository and funds transfer services; collections; safe deposit boxes; cash management services; retail brokerage services; and other services tailored for both individual and corporate customers. The Bank also offers trust services and acts as executor, administrator, trustee, transfer agent and in various other fiduciary capacities. Through Unitech, its operations division, the Bank provides, item processing, research and other correspondent banking services to financial institutions and governmental units.
The Bank’s primary lending activity is the financing of business and industry in its market areas. Its commercial loan customers are generally small to medium-sized businesses engaged in light manufacturing, local wholesale and retail trade, services, agriculture, and the energy industry. Most forms of commercial lending are offered, including commercial
mortgages, other forms of asset-based financing and working capital lines of credit. In addition, the Bank offers Small Business Administration (“SBA”) guaranteed loans through BancFirst Commercial Capital, a division established in 1991.
Consumer lending activities of the Bank consist of traditional forms of financing for automobiles, both direct and indirect, residential mortgage loans, home equity loans, and other personal loans. In addition, the Bank is one of Oklahoma’s largest providers of guaranteed student loans.
The Bank’s range of deposit services include checking accounts, NOW accounts, savings accounts, money market accounts, sweep accounts, club accounts, individual retirement accounts and certificates of deposit. Overdraft protection and autodraft services are also offered. Deposits of the Bank are insured by the Bank Insurance Fund administered by the Federal Deposit Insurance Corporation (“FDIC”). In addition, certain Bank employees are licensed insurance agents qualified to offer tax deferred annuities.
Trust services offered through the Bank’s trust, investment, and management division (the “Trust Division”) consist primarily of investment management and administration of trusts for individuals, corporations and employee benefit plans. Investment options include collective equity and fixed income funds managed by the Trust Division and advised by nationally recognized investment management firms.
BancFirst has the following principal subsidiaries: Council Oak Investment Corporation, a small business investment corporation; Citibanc Insurance Agency, Inc., a credit life insurance agency, which in turn owns BancFirst Agency, Inc., an insurance agency; Lenders Collection Corporation, which is engaged in collection of troubled loans assigned to it by BancFirst; and Express Financial Corporation (formerly National Express Corporation), a money order company. All of these companies are Oklahoma corporations. In addition, BancFirst owns Mojave Asset Management Company and Desert Asset Management Company, which in turn own Delamar Asset Management Limited Partnership. These three subsidiaries are Nevada companies and are engaged in investing in loan participations. BancFirst also owns 50% of Premier Source LLC, an Oklahoma limited liability company providing employee benefit plan and insurance products and services.
The Company had approximately 1,360 full-time equivalent employees as of December 31, 2003. Its principal executive offices are located at 101 North Broadway, Oklahoma City, Oklahoma 73102, telephone number (405) 270-1086.
Market Areas and Competition
The banking environment in Oklahoma is very competitive. The geographic dispersion of the Company’s banking locations presents several different levels and types of competition. In general, however, each location competes with other banking institutions, savings and loan associations, brokerage firms, personal loan finance companies and credit unions within their respective market areas. The communities in which the Bank maintains offices are generally local trade centers throughout Oklahoma. The major areas of competition include interest rates charged on loans, interest rates paid on deposits, levels of service charges on deposits, completeness of product line and quality of service.
Management believes the Company is in an advantageous competitive position operating as a “super community bank.” Under this strategy, the Company provides a broad line of financial products and services to small to medium-sized businesses and consumers through full service community banking offices with decentralized management, while achieving operating efficiency through product standardization and centralization of processing and other functions. Each full service banking office has senior management with significant lending experience who exercise substantial autonomy over credit and pricing decisions, subject to a tiered approval process for larger credits. This decentralized management approach, coupled with continuity of service by the same staff members, enables the Bank to develop long-term customer relationships, maintain high quality service and respond quickly to customer needs. The majority of its competitors in the non-metropolitan areas are much smaller, and neither offer the range of products and services nor have the lending capacity of BancFirst. In the metropolitan communities, the Company’s strategy is to be more responsive to, and more focused on, the needs of local businesses that are not served effectively by larger institutions.
Marketing to existing and potential customers is performed through a variety of media advertising, direct mail and direct personal contacts. The Company monitors the needs of its customer base through its Product Development Group, which develops and enhances products and services in response to such needs. Sales, customer service and product training are coordinated with incentive programs to motivate employees to cross-sell the Bank’s products and services.
Control of the Company
Affiliates of the Company beneficially own approximately 56% of the shares of the Common Stock outstanding. Under Oklahoma law, holders of a majority of the outstanding shares of Common Stock are able to elect all of the directors and approve significant corporate actions, including business combinations. Accordingly, the affiliates have the ability to control the business and affairs of the Company.
Recent Developments
In February 2004, BancFirst Corporation completed the issuance of $25 million of new 7.20% fixed rate trust preferred securities offered by its wholly-owned subsidiary, BFC Capital Trust II. The trust preferred securities are listed on the Nasdaq National Market under the trading symbol “BANFP.” The proceeds from the sale of the securities will be used for general corporate purposes which may include acquisitions, retirement of indebtedness, repurchase of the company’s common stock and other investments.
Supervision and Regulation
The following discussion sets forth certain of the material elements of the regulatory framework applicable to bank holding companies and financial holding companies and their subsidiaries and provides certain specific information relevant to the Company, which is both a bank holding company and a financial holding company. This regulatory framework is intended primarily for the protection of depositors and not for the protection of the Company’s stockholders. To the extent that the following information describes statutory and regulatory provisions, it is qualified in its entirety by reference to those provisions. A change in the statutes, regulations or regulatory policies applicable to the Company or its subsidiaries may have a material effect on the business of the Company.
General
As a financial holding company and a bank holding company, the Company is regulated under the Bank Holding Company Act of 1956, as amended (the “Bank Holding Company Act”), as well as other federal and state laws governing the banking business. The Board of Governors of the Federal Reserve System (the “Federal Reserve Board”) is the primary regulator of the Company, and supervises its activities on a continual basis. BancFirst, the Company’s banking subsidiary, is also subject to regulation and supervision by various regulatory authorities, including the Oklahoma State Banking Department and the Federal Deposit Insurance Corporation (the “FDIC”). The Company and its subsidiaries and affiliates are also subject to various other laws and regulations and supervision and examination by other regulatory agencies, all of which directly or indirectly affect the operations and management of the Company and its ability to make distributions to stockholders.
Financial Holding Company Regulation
The Company is regulated as a bank holding company and a financial holding company under the Bank Holding Company Act of 1956, as amended by the 1999 financial modernization legislation known as the Gramm-Leach-Bliley Act. As such it is subject to the supervision of the Federal Reserve Board. In general, the BHC Act limits the business of bank holding companies that are financial holding companies to banking, managing or controlling banks, performing certain servicing activities for subsidiaries, and as a result of the Gramm-Leach-Bliley Act amendments to the BHC Act, engaging in any activity, or acquiring and retaining the shares of any company engaged in any activity, that is either (1) financial in nature or incidental to such financial activity (as determined by the Federal Reserve Board in consultation with the Secretary of the Treasury, or (2) complementary to a financial activity and does not pose a substantial risk to the safety and soundness of depository institutions or the financial system generally (as solely determined by the Federal Reserve Board). Activities that are financial in nature include securities underwriting and dealing, insurance underwriting and making merchant banking investments in commercial and financial companies. They also include activities that the Federal Reserve Board had determined, by order or regulation in effect prior to the enactment of the BHC Act, to be so closely related to banking or managing or controlling banks as to be a proper incident thereto.
A financial holding company may conduct any of these activities so long as the financial holding company notifies the Federal Reserve Board within 30 days after the financial holding company commences such activities or acquires a company that engages in such activities. If a financial holding company wishes to engage in activities that are “financial in nature or incidental to a financial activity” but not yet specifically authorized by the Federal Reserve Board, the financial holding company must file an application with the Federal Reserve Board. If both the Federal Reserve
Board and Department of Treasury approve the application, the financial holding company may commence the new activity. The Federal Reserve Board may also approve a new activity that is complementary to a financial activity, but the financial holding company must make an additional showing that the activity does not pose a substantial risk to the safety and soundness of depository institutions or the financial system generally.
In order for a bank holding company to engage in the broader range of activities that are permitted by the BHC Act for bank holding companies that are also financial holding companies, (1) all of its depository institutions must be well-capitalized and well-managed and (2) it must file a declaration with the Federal Reserve Board that it elects to be a “financial holding company”. In addition, to commence any new activity permitted by the BHC Act and to acquire any company engaged in any new activities permitted by the BHC Act, each insured depository institution of the financial holding company must have received at least a “satisfactory” rating in its most recent examination under the Community Reinvestment Act. The Company’s election to become a financial holding company became effective in March 2000.
National banks are also authorized by the Gramm-Leach-Bliley Act to engage, through “financial subsidiaries,” in any activity that is permissible for a financial holding company (as described above) and any activity that the Secretary of the Treasury, in consultation with the Federal Reserve Board, determines is financial in nature or incidental to any such financial activity, except (1) insurance underwriting, (2) real estate development or real estate investment activities (unless otherwise permitted by law), (3) insurance company portfolio investments and (4) merchant banking. The authority of a national bank to invest in a financial subsidiary is subject to a number of conditions, including, among other things, requirements that the bank must be well managed and well capitalized (after deducting from the bank’s capital outstanding investments in financial subsidiaries). The Gramm-Leach-Bliley Act provides that state nonmember banks, such as the Bank, may invest in financial subsidiaries (assuming they have the requisite investment authority under applicable state law) subject to the same conditions that apply to national bank investments in financial subsidiaries.
The Gramm-Leach-Bliley Act also modified laws related to financial privacy and community reinvestment. The new financial privacy provisions generally prohibit financial institutions, including the Company, from disclosing nonpublic personal financial information to third parties unless customers have the opportunity to “opt out” of the disclosure.
A bank holding company that does not elect to become a financial holding company may remain a bank holding company. A bank holding company’s regulatory requirements remain substantially the same with two exceptions. First, a bank holding company and its subsidiaries are subject to the new customer privacy regulations of the Gramm-Leach-Bliley Act. Second, a bank that engages in securities brokerage activities may be required, under certain circumstances, to move its securities brokerage activities to a subsidiary or non-bank affiliate that is a broker-dealer registered with the NASD.
The Gramm-Leach-Bliley Act preserves the role of the Federal Reserve Board as the umbrella supervisor for both financial holding companies and bank holding companies while at the same time incorporating a system of functional regulation designed to take advantage of the strengths of the various federal and state regulators. In particular, the Gramm-Leach-Bliley Act replaces the broad exemption from Securities and Exchange Commission (“SEC”) regulation that banks previously enjoyed with more limited exemptions, and it reaffirms that states are the regulators for the insurance activities of all persons, including federally-chartered banks.
Bank Holding Company Act and other Applicable Laws
Bank Holding Company Regulation
In addition to being a financial holding company, the Company remains a bank holding company and, as such, is regulated under the BHC Act and is subject to the supervision of the Federal Reserve Board. Under the BHC Act, bank holding companies that are not financial holding companies generally may not acquire the ownership or control of more than 5% of the voting shares, or substantially all the assets, of any company, including a bank or another bank holding company, without the Federal Reserve Board’s prior approval. Also, bank holding companies generally may engage only in banking and other activities that are determined by the Federal Reserve Board to be closely related to banking. The Federal Reserve Board has by regulation determined that such activities include operating a mortgage company, finance company, credit card company or factoring company; performing certain data processing operations; servicing loans and other extensions of credit; providing investment and financial advice; acting as an insurance agent for certain types of credit-related insurance; owning and operating savings and loan associations; and leasing personal property on a full pay-out, nonoperating basis. In the event a bank holding company elects to become a financial holding company, it would no longer be subject to the general requirements of the BHC Act that it obtain the Federal Reserve Board’s approval prior to acquiring more than 5% of the voting shares, or substantially all of the assets, of a company that is not a bank or bank holding company. A bank holding company that does not qualify as a financial holding company is generally limited in the types of activities in which it may engage to those that the Federal Reserve Board had recognized as permissible for bank holding companies prior to the date of enactment of the Gramm-Leach-Bliley Act.
Control Acquisitions
Subject to certain exceptions, the Change in Bank Control Act (the “Control Act”) and regulations promulgated thereunder by the Federal Reserve Board require any person acting directly or indirectly, or through or in concert with one or more persons, to give the Federal Reserve 60 days’ written notice before acquiring control of a bank holding company. Transactions which are presumed to constitute the acquisition of control include the acquisition of any voting securities of a bank holding company having securities registered under section 12 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), if, after the transaction, the acquiring person (or persons acting in concert) owns, controls or holds with power to vote 25% or more of any class of voting securities of the institution. The acquisition may not be consummated subsequent to such notice if the Federal Reserve Board issues a notice within 60 days, or within certain extensions of such period, disapproving the same.
Interstate Banking and Branching
Pursuant to the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the “Interstate Banking and Branching Act”), a bank holding company may acquire banks in states other than its home state without regard to the permissibility of such acquisitions under state law, but subject to any state requirement that the bank has been organized and operating for a minimum period of time, not to exceed five years, and the requirement that the bank holding company, prior to or following the proposed acquisition, controls no more than 10 percent of the total amount of deposits of insured depository institutions in the United States and no more than 30 percent of such deposits in that state (or such lesser or greater amount set by state law). Legislation passed by the Oklahoma legislature in 2000 eliminated the previously existing requirement that Oklahoma banks be in existence for a minimum of five years before being acquired by, or merged into, another bank, or acquired by an existing bank holding company, and increased the “deposit cap” from 15% to 20%, with the result that a business combination involving Oklahoma-chartered banks may not result in the control by the combined institution of more than 20% of the total deposits of insured depositary institutions located in Oklahoma.
Subject to certain restrictions, the Interstate Banking and Branching Act also authorizes banks to merge across state lines, thereby creating interstate branches, without regard to whether such transactions are prohibited by the law of any state, unless the home state of one of the banks had “opted out” of interstate branching by enacting specific legislation prior to June 1, 1997, in which case out-of-state banks would generally not be able to branch into that state, and banks headquartered in that state would not be permitted to branch into other states. Oklahoma elected to “opt-in” to interstate branching effective May 1997 and established a 12.25% deposit cap that was subsequently increased to 20%. Furthermore, pursuant to the Interstate Banking and Branching Act, a bank may open new branches in a state in which it does not already have banking operations if such state enacts a law permitting such de novo branching. Oklahoma law permits de novo branching and, accordingly, while Oklahoma state-chartered banks such as BancFirst are able to establish an unlimited number of de novo branches in Oklahoma, out-of-state banks are now able to establish new
branches in Oklahoma to the same extent as formerly favored state-chartered banks.
Support for Bank Subsidiaries
The Federal Reserve Board has issued regulations under the BHC Act that require a bank holding company to serve as a source of financial and managerial strength to its subsidiary banks. Pursuant to such regulations, the Federal Reserve Board may require the Company to stand ready to use its resources to provide adequate capital funds to its banking subsidiaries during periods of financial stress or adversity. Under the Federal Deposit Insurance Company Improvement Act of 1991 (“FDICIA”), a bank holding company is required to guarantee the compliance of any insured depository institution subsidiary that may become “undercapitalized” (as defined in the statute) with the terms of any capital restoration plan filed by such subsidiary with its appropriate federal banking agency, up to specified limits. See “-FDICIA and Related Regulations,” below. Under the BHC Act, the Federal Reserve Board has the authority to require a bank holding company to terminate any activity or relinquish control of a nonbank subsidiary (other than a nonbank subsidiary of a bank) upon the Federal Reserve Board’s determination that such activity or control constitutes a serious risk to the financial soundness and stability of any bank subsidiary of the bank holding company.
Capital Adequacy Guidelines
The Federal Reserve Board, the Comptroller and the FDIC have issued substantially similar risk-based and leverage capital guidelines applicable to United States banking organizations. In addition, these regulatory agencies may from time to time require that a banking organization maintain capital above the minimum levels, whether because of its financial condition or actual or anticipated growth. The risk-based guidelines of the FDIC, the regulatory agency with oversight over state nonmember banks such as the Bank, define a three-tier capital framework. Core, or “Tier 1,” capital, consists of common and qualifying preferred stockholders’ equity, less certain intangibles and other adjustments. Supplementary, or “Tier 2,” capital includes, among other items, certain other debt and equity investments that do not qualify as Tier 1 capital. Market risk, or “Tier 3,” capital, includes qualifying unsecured subordinated debt. The sum of Tier 1 and Tier 2 capital less investments in unconsolidated subsidiaries represents qualifying total capital. Risk-based capital ratios are calculated by dividing Tier 1 and total capital by risk-weighted assets. Assets and off-balance sheet exposures are assigned to one of four categories of risk-weights, based primarily on relative credit risk. The minimum Tier 1 capital ratio is 4% and the minimum total capital ratio is 8%.
Applicable banking regulations also require banking organizations such as the Bank to maintain a minimum “leverage ratio” (Tier 1 capital to adjusted total assets) of 3%. The principal objective of this measure is to place a constraint on the maximum degree to which banks can leverage their equity capital base. These ratio requirements are minimums. Any institution operating at or near those levels would be expected by the regulators to have well-diversified risk, including no undue interest rate risk exposures, excellent asset quality, high liquidity, and good earnings and, in general, would have to be considered a strong banking organization. All other organizations and any institutions experiencing or anticipating significant growth are expected to maintain capital ratios at least one to two percent above the minimum levels, and higher capital ratios can be required if warranted by particular circumstances or risk profile.
The various regulatory agencies have adopted substantially similar regulations that define the five capital categories (well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized) for classifying insured depository institutions, using the total risk-based capital, Tier 1 risk-based capital and leverage capital ratios as the relevant capital measures, and requires the respective federal regulatory agencies to implement systems for “prompt corrective action” for insured depository institutions that do not meet minimum capital requirements within such categories. Such regulations establish various degrees of corrective action to be taken when an institution is considered undercapitalized.
To be “well capitalized” under federal bank regulatory agency definitions, a depository institution must have a Tier 1 ratio of at least 6%, a combined Tier 1 and Tier 2 ratio of at least 10%, and a leverage ratio of at least 5%. As of December 31, 2003, the Bank had a Tier 1 ratio of 10.19%, a combined Tier 1 and Tier 2 ratio of 11.42%, and a leverage ratio of 7.57% and, accordingly, was considered to be “well capitalized” as of such date.
In addition, the Federal Reserve Board has established minimum risk based capital guidelines and leverage ratio guidelines for bank holding companies that are substantially similar to those adopted by bank regulatory agencies with respect to depository institutions. These guidelines provide for a minimum leverage ratio of 3% for bank holding companies that meet certain specified criteria, including those having the highest regulatory rating. All other bank holding companies generally are required to maintain a leverage ratio of at least 4%. As of December 31, 2003, the
Company had a Tier 1 ratio of 11.26%, a combined Tier 1 and Tier 2 ratio of 12.48%, and a leverage ratio of 8.33% and, accordingly, was in compliance with all of the Federal Reserve Board’s capital guidelines.
FDICIA and Related Regulations
FDICIA, among other things, requires the respective Federal regulatory agencies to implement systems for “prompt corrective action” for insured depository institutions that do not meet minimum capital requirements within the five capital categories described above. FDICIA imposes progressively more restrictive constraints on operations, management and capital distributions, depending on the category in which an institution is classified. Failure to meet the capital guidelines could also subject a banking institution to capital-raising requirements. An “undercapitalized” bank must develop a capital restoration plan and its parent holding company must guarantee that bank’s compliance with the plan. The liability of the parent holding company under any such guarantee is limited to the lesser of 5 percent of the bank’s assets at the time it became “undercapitalized” or the amount needed to comply with the plan. Furthermore, in the event of the bankruptcy of the parent holding company, such guarantee would take priority over the parent’s general unsecured creditors. In addition, FDICIA requires the various regulatory agencies to prescribe certain non-capital standards for safety and soundness relating generally to operations and management, asset quality and executive compensation and permits regulatory action against a financial institution that does not meet such standards.
Significantly or critically undercapitalized institutions and undercapitalized institutions that do not submit and comply with capital restoration plans acceptable to the applicable federal banking regulator are subject to one or more of the following sanctions: (i) forced sale of shares to raise capital, or, where grounds exist for the appointment of a receiver or conservator, a forced merger; (ii) restrictions on transactions with affiliates; (iii) limitations on interest rates paid on deposits; (iv) further restrictions on growth or required shrinkage; (v) replacement of directors or senior executive directors; (vi) prohibitions on the receipt of correspondent deposits; (vii) restrictions on capital distributions by the holding companies of such institutions; (viii) required divestiture of subsidiaries by the institution; or (ix) other restrictions, as determined by the regulator. In addition, the compensation of executive officers will be frozen at the level in effect when the institution failed to meet the capital standards and may be increased only with the applicable federal banking regulator’s prior written approval. The applicable federal banking regulator is required to impose a forced sale of shares or merger, restrictions on affiliate transactions and restrictions on rates paid on deposits unless it determines that such actions would not further an institution’s capital improvement. In addition to the foregoing, a critically undercapitalized institution would be prohibited from making any payment of principal or interest on subordinated debt without the concurrence of its regulator and the FDIC, beginning 60 days after the institution becomes critically undercapitalized. A critically undercapitalized institution may not, without FDIC approval: (i) enter into material transactions outside of the ordinary course of business; (ii) extend credit on highly leveraged transactions; (iii) amend its charter or bylaws; (iv) make any material change in its accounting methods; (v) engage in any covered transactions with affiliates; (vi) pay excessive compensation or bonus (as defined); or (vii) pay rates on liabilities significantly in excess of market rates. As of December 31, 2003 and the date of this Report, the Bank is considered “well capitalized.”
Federal banking regulations also provide that if an insured depository institution receives a less than satisfactory examination rating for asset quality, management, earnings, liquidity or interest rate sensitivity, or market risk, the examining agency may deem such financial institution to be engaging in an unsafe or unsound practice. The potential consequences of being found to have engaged in an unsafe or unsound practice are significant because the appropriate federal regulatory agency may:
• if the financial institution is well-capitalized, reclassify the financial institution as adequately capitalized;
• if the financial institution is adequately capitalized, take any of the prompt corrective actions authorized for undercapitalized financial institutions and impose restrictions on capital distributions and management fees;
• if the financial institution is undercapitalized, take any of the prompt corrective actions authorized for significantly undercapitalized financial institutions.
Such evaluation will be made as a part of the institution’s regular safety and soundness examination. These guidelines did not have a material impact on the Company’s or BancFirst’s regulatory capital ratios or their well capitalized status.
Regulatory Restrictions on Dividends
BancFirst, as a nonmember state bank, may not declare a dividend without the approval of the FDIC unless the dividend to be declared by BancFirst does not exceed the total of (i) BancFirst’s net profits (as defined and interpreted by regulation) for the current year to date plus (ii) its retained net profits (as defined and interpreted by regulation) for the preceding two years, less any required transfers to surplus. In addition, BancFirst can only pay dividends to the extent that its retained net profits (including the portion transferred to surplus) exceed its bad debts (as defined by regulation). Under the Federal Deposit Insurance Act, no dividends may be paid by an insured bank if the bank is in arrears in the payment of any insurance assessment due to the FDIC. Additionally, state and federal regulatory authorities have adopted standards for the maintenance of adequate levels of capital by banks. See “-Capital Adequacy Guidelines,” above. Adherence to such standards further limits the ability of banks to pay dividends. The payment of dividends by any subsidiary bank may also be affected by other regulatory requirements and policies, such as the maintenance of adequate capital. If, in the opinion of the applicable regulatory authority, a bank under its jurisdiction is engaged in, or is about to engage in, an unsafe or unsound practice (which, depending on the financial condition of the bank, could include the payment of dividends), such authority may require, after notice and hearing, that such bank cease and desist from such practice. The FDIC has formal and informal policies which provide that insured banks should generally pay dividends only out of current operating earnings.
Deposit Insurance and Assessments
BancFirst is insured by the FDIC and is required to pay certain fees and premiums to the Bank Insurance Fund (“BIF”). These deposit insurance premiums are assessed through a risk-based system under which all insured depository institutions are placed into one of nine categories and assessed insurance premiums on deposits based upon their level of capital and supervisory evaluation, with the well-capitalized banks with the highest supervisory rating paying lower or no premiums and the critically undercapitalized banks paying up to 0.27% of deposits. BancFirst is currently being assessed at the lowest rate of zero percent.
Under the Deposit Insurance Funds Act of 1996 (the “Funds Act”), beginning in 1997 banks insured under the BIF were required to pay a part of the interest on bonds issued by the Financing Corporation (“FICO”) in the late 1980s to recapitalize the defunct Federal Savings and Loan Insurance Corporation. Before the Funds Act, FICO payments were made only by depository institutions that were members of the Savings Association Insurance Fund (the “SAIF”). Under the Funds Act, until January 1, 2000, BIF members were assessed for FICO payments at only one-fifth the rate of assessment on SAIF members. The Funds Act required that, as of January 1, 2000, all BIF- and SAIF- insured institutions pay FICO assessments at the same rate. For the first quarter of 2004, FICO rates have been set at 0.0154% for both BIF and SAIF members. The FICO assessment rates for both BIF and SAIF members for 2003 were:
State Regulation
BancFirst is an Oklahoma-chartered state bank. Accordingly, BancFirst’s operations are subject to various requirements and restrictions of Oklahoma state law relating to loans, lending limits, interest rates payable on deposits, investments, mergers and acquisitions, borrowings, dividends, capital adequacy, and other matters. However, Oklahoma banking law specifically empowers a state-chartered bank such as BancFirst to exercise the same powers as are conferred upon national banks by the laws of the United States and the regulations and policies of the United States Comptroller of the Currency, unless otherwise prohibited or limited by the State Banking Commissioner or the State Banking Board. Accordingly, unless a specific provision of Oklahoma law otherwise provides, a state-chartered bank is empowered to conduct all activities that a national bank may conduct.
Prior to August 2003, BancFirst was a member bank of the Federal Reserve System and subject to dual regulation by the State Banking Board and the Federal Reserve Board. In August 2003, BancFirst elected to no longer be a member bank in the Federal Reserve System and, accordingly, is no longer subject to direct regulation by the Federal Reserve Board. As a state nonmember bank, BancFirst is subject to primary supervision, periodic examination and regulation by the State Banking Board and the FDIC, and Oklahoma law provides that BancFirst must maintain reserves against deposits as required by the Federal Deposit Insurance Act. The Oklahoma State Bank Commissioner is authorized by statute to accept an FDIC examination in lieu of a state examination. In practice, the FDIC and the Oklahoma State Banking Department alternate examinations of BancFirst. If, as a result of an examination of a bank, the Oklahoma Banking Department determines that the financial condition, capital resources, asset quality, earnings prospects, management, liquidity, or other aspects of the bank’s operations are unsatisfactory or that the management of the bank is violating or has violated any law or regulation, various remedies, including the remedy of injunction, are available to the Oklahoma Banking Department. Oklahoma law permits the acquisition of an unlimited number of wholly-owned bank subsidiaries so long as aggregate deposits at the time of acquisition in a multi-bank holding company do not exceed 20% of the total amount of deposits of insured depository institutions located in Oklahoma.
Governmental Monetary and Fiscal Policies
The commercial banking business is affected directly by the monetary policies of the Federal Reserve Board and by the fiscal policies of federal, state and local governments. The Federal Reserve Board, in fulfilling its role of stabilizing the nation’s money supply, utilizes several operating tools, all of which directly impact commercial bank operations. The primary tools used by the Federal Reserve Board are changes in reserve requirements on member bank deposits and other borrowings, open market operations in the U.S. Government securities market, and control over the availability and cost of members’ direct borrowings from the “discount window.” Banks act as financial intermediaries in the debt capital markets and are active participants in these markets daily. As a result, changes in governmental monetary and fiscal policies have a direct impact upon the level of loans and investments, the availability of sources of lendable funds, and the interest rates earned from and paid on these instruments. It is not possible to predict accurately the future course of such government policies and the residual impact upon the operations of the Company.
Other Legislation
USA Patriot Act of 2001
In October 2001, the USA Patriot Act of 2001 (the “Patriot Act”) was enacted in response to the terrorist attacks in New York, Pennsylvania and Washington, D.C., which occurred on September 11, 2001. Intended to strengthen U.S. law enforcement’s and the intelligence communities’ abilities to work cohesively to combat terrorism on a variety of fronts, the Patriot Act substantially broadened the scope of the U.S. anti-money laundering laws and regulations by imposing significant new compliance and due diligence obligations, creating new crimes and penalties and expanding the extra-territorial jurisdiction of the United States. The U.S. Treasury Department has issued a number of implementing regulations which apply various requirements of the Patriot Act to financial institutions such as the Bank. Those regulations impose new obligations on financial institutions to maintain appropriate policies, procedures and controls to detect, prevent and report money laundering and terrorist financing.
Failure of a financial institution to comply with the Patriot Act’s requirements could have serious legal and reputational consequences for the institution. The Company has adopted appropriate policies, procedures and controls to address compliance with the requirements of the Patriot Act under the existing regulations and will continue to revise and update its policies, procedures and controls to reflect changes required by the Act and its implementing regulations.
Sarbanes-Oxley Act of 2002
On July 30, 2002, President Bush signed into law the Sarbanes-Oxley Act of 2002 (the “SOA”). The stated goals of the SOA are to increase corporate responsibility, to provide for enhanced penalties for accounting and auditing improprieties at publicly traded companies and to protect investors by improving the accuracy and reliability of corporate disclosures pursuant to the securities laws.
The most far-reaching U.S. securities legislation enacted in recent history, the SOA generally applies to all companies, both U.S. and non-U.S., that file or are required to file periodic reports with the SEC under the Exchange Act. The SOA includes very specific additional disclosure requirements and new corporate governance rules, requires the SEC and securities exchanges to adopt extensive additional disclosure, corporate governance and other related rules and mandates further studies of certain issues. The SOA represents significant federal involvement in matters traditionally left to state regulatory systems, such as the regulation of the accounting profession, and to state corporate law, such as the relationship between a board of directors and management and between a board of directors and its committees and public company shareholders.
The SOA addresses, among other matters: (i) independent audit committees for reporting companies whose securities are listed on national exchanges or automated quotation systems (the “Exchanges”) and expanded duties and responsibilities for audit committees; (ii) certification of financial statements by the chief executive officer and the chief financial officer; (iii) the forfeiture of bonuses or other incentive-based compensation and profits from the sale of an issuer’s securities by directors and senior officers in the twelve month period following initial publication of any financial statements that later require restatement; (iv) a prohibition on insider trading during pension plan black out periods; (v) disclosure of off-balance sheet transactions; (vi) a prohibition on personal loans to directors and officers under most circumstances; (vii) expedited electronic filing requirements related to trading by insiders in an issuer’s securities on Form 4; (viii) disclosure of a code of ethics and filing a Form 8-K for a change or waiver of such code; (ix) accelerated filing of periodic reports; (x) the formation of the Public Company Accounting Oversight Board (“PCAOB”) to oversee public accounting firms and the audit of public companies that are subject to the securities laws; (xi) auditor independence; (xii) internal control evaluation and reporting; and (xiii) various increased criminal penalties for violations of securities laws.
Given the extensive role of the SEC, the PCAOB and the Exchanges in implementing rules relating to the SOA’s new requirements, the federalization of certain elements traditionally within the sphere of state corporate law, the impact of the SOA on reporting companies will be significant. Many of the new rules promulgated by the SEC, PCAOB and Exchanges became final during 2003 and will be implemented during 2004. As a result, it is impossible to predict with any precision how these new rules, regulations and changes in corporate law and governance will finally impact public companies including the Company.
Sections 23A and 23B of the Federal Reserve Act and Regulation W
Transactions between a bank and its “affiliates” are governed by Sections 23A and 23B of the Federal Reserve Act, which are intended to protect insured depository institutions from suffering losses arising from transactions with affiliates. An affiliate of a bank is any company or entity that controls, is controlled by or is under common control with the bank. A subsidiary of a bank that is not also a depository institution is not treated as an affiliate of a bank for purposes of Sections 23A and 23B unless it engages in activities not permissible for a national bank to engage in directly. Generally, Sections 23A and 23B (i) limit the extent to which a bank or its subsidiaries may engage in “covered transactions” with any one affiliate to an amount equal to 10% of such institution’s capital stock and surplus, and limit such transactions with all affiliates to an amount equal to 20% of such capital stock and surplus, and (ii) require that all such transactions be on terms that are consistent with safe and sound banking practices. The term “covered transaction” includes the making of loans to an affiliate, the purchase of or investment in securities issued by an affiliate, the purchase of assets from an affiliate, the issuance of a guarantee for the benefit of an affiliate, and similar transactions. Most loans by a bank to any of its affiliates must be secured by collateral in amounts ranging from 100% to 130% of the loan amount, depending on the nature of the collateral. In addition, any covered transaction by a bank with an affiliate and any sale of assets or provision of services to an affiliate must be on terms that are substantially the same, or at least as favorable, to the bank as those prevailing at the time for comparable transactions with nonaffiliated companies. The Bank is also restricted in the loans that it may make to its executive officers, and directors, the executive officers and directors of the Company, any owner of 10% or more of its stock or the stock of the Company, and certain entities affiliated with any such person.
On October 31, 2002, the Federal Reserve Board issued a new regulation, Regulation W, that was effective April 1, 2003, which comprehensively implements sections 23A and 23B of the Federal Reserve Act. The regulation unifies and updates staff interpretations issued over the years, incorporates several new interpretative proposals (such as to clarify when transactions with an unrelated third party will be attributed to an affiliate) and addresses new issues arising as a result of the expanded scope of nonbanking activities engaged in by bank and bank holding companies in recent years and authorized for financial holding companies under the Gramm-Leach-Bliley Act.
Pending and Proposed Legislation
There are various pending and proposed bills in Congress that, among other things, could restructure the federal supervision of financial institutions. The Company is unable to predict with any certainty the effect any such legislation would have on the Company, its subsidiaries or their respective activities. Additional legislation, judicial and administrative decisions also may affect the ability of banks to compete with each other as well as with other businesses. These statutes and decisions may tend to make the operations of various financial institutions more similar and increase competition among banks and other financial institutions or limit the ability of banks to compete with other businesses. Management currently cannot predict whether and, if so, when any such changes might occur or the impact any such changes would have upon the income or operations of the Company or its subsidiaries, or upon the Oklahoma regional banking environment.
Item 2.
Item 2. Properties.
The principal offices of the Company are located at 101 North Broadway, Oklahoma City, Oklahoma 73102. The Company owns substantially all of the properties and buildings in which its various offices and facilities are located. These properties include the main bank and 85 branches. BancFirst also owns properties for future expansion. There are no significant encumbrances on any of these properties.
Item 3.
Item 3. Legal Proceedings.
The Company has been named as a defendant in various legal actions arising from the conduct of its normal business activities. Although the amount of any liability that could arise with respect to these actions cannot be accurately predicted, in the opinion of the Company, any such liability will not have a material adverse effect on the consolidated financial position of the Company.
Item 4.
Item 4. Submission of Matters to Vote of Security Holders.
There were no matters submitted to a vote of security holders, through the solicitation of proxies or otherwise, during the fourth quarter of the year ended December 31, 2003.
PART II
Item 5.
Item 5. Market for the Registrant’s Common Equity and Related Stockholder Matters and Issuer Purchases of Equity Securities.
The Company’s Common Stock is listed on the Nasdaq National Market System (“NASDAQ/NMS”) and is traded under the symbol “BANF”. The following table sets forth, for the periods indicated, (i) the high and low sales prices of the Company’s Common Stock as reported in the NASDAQ/NMS consolidated transaction reporting system and (ii) the quarterly dividends declared on the Common Stock.
As of February 29, 2004 there were approximately 400 holders of record of the Common Stock.
Future dividend payments will be determined by the Company’s Board of Directors in light of the earnings and financial condition of the Company and the Bank, their capital needs, applicable governmental policies and regulations and such other factors as the Board of Directors deems appropriate.
BancFirst Corporation is a legal entity separate and distinct from the Bank, and its ability to pay dividends is substantially dependent upon dividend payments received from the Bank. Various laws, regulations and regulatory policies limit the Bank’s ability to pay dividends to BancFirst Corporation, as well as BancFirst Corporation’s ability to pay dividends to its shareholders. See “Liquidity and Funding” and “Capital Resources” under “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Description of Business-Supervision and Regulation” and note 14 of the Notes to Consolidated Financial Statements for further information regarding limitations on the payment of dividends by BancFirst Corporation and the Bank.
Item 6.
Item 6. Selected Financial Data.
Incorporated by reference from “Selected Consolidated Financial Data” contained on page A-3 of the attached Appendix.
Item 7.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Incorporated by reference from “Financial Review” contained on pages A-2 through A-17 of the attached Appendix.
Item 7A.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Incorporated by reference from “Financial Review-Market Risk” contained on page A-15 of the attached Appendix.
Item 8.
Item 8. Financial Statements and Supplementary Data.
The consolidated financial statements of BancFirst Corporation and its subsidiaries, are incorporated by reference from pages A-18 through A-49 of the attached Appendix, and include the following:
a. Reports of Independent Auditors
b. Consolidated Balance Sheet
c. Consolidated Statement of Income
d. Consolidated Statement of Stockholders’ Equity
e. Consolidated Statement of Cash Flows
f. Notes to Consolidated Financial Statements
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
There have been no material disagreements between the Company and its independent accountants on accounting and financial disclosure matters which are required to be reported under this Item for the period for which this report is filed.
Item 9A.
Item 9A. Controls and Procedures.
The Company’s Chief Executive Officer and Chief Financial Officer have evaluated the Company’s disclosure controls and procedures as of a date within 75 days of the filing date of this report. Based on their evaluation they concluded that the disclosure controls and procedures of the Company are adequate to ensure that information required to be disclosed by the Company in the reports filed or submitted by it under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported, within the time periods specified in the applicable rules and forms. There have been no significant changes in the Company’s internal controls or in other factors that could significantly affect disclosure controls subsequent to the date of their evaluation.
In addition and as of the end of the period covered by this report, there have been no changes in internal control over financial reporting during the Company’s fourth fiscal quarter that have materially affected or are reasonably likely to materially affect, the internal control over financial reporting.
PART III
Item 10.
Item 10. Directors and Executive Officers of the Registrant.
The information required by Item 401 of Regulation S-K will be contained in the 2004 Proxy Statement under the caption “Election of Directors” and is hereby incorporated by reference. The information required by Item 405 of Regulation S-K will be contained in the 2004 Proxy Statement under the caption “Compliance with Section 16(a) of the Securities Exchange Act of 1934” and is hereby incorporated by reference. The information required by Item 406 of Regulation S-K will be contained in the 2004 Proxy Statement under the caption “Code of Ethics” and is hereby incorporated by reference.
Item 11.
Item 11. Executive Compensation.
The information required by Item 402 of Regulation S-K will be contained in the 2004 Proxy Statement under the caption “Compensation of Directors and Executive Officers” and is hereby incorporated by reference.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The information required by Item 201(d) of Regulation S-K will be contained in the 2004 Proxy Statement under the caption “Securities Authorized for Issuance under Equity Compensation Plans” and is hereby incorporated by reference. The information required by Item 403 of Regulation S-K will be contained in the 2004 Proxy Statement under the caption “Security Ownership of Certain Beneficial Owners and Management” and is hereby incorporated by reference.
Item 13.
Item 13. Certain Relationships and Related Transactions.
The information required by Item 404 of Regulation S-K will be contained in the 2004 Proxy Statement under the caption “Transactions with Management” and is hereby incorporated by reference.
Item 14.
Item 14. Principal Accountant Fees and Services.
The information required by Item 9(e) of Schedule 14A will be contained in the 2004 Proxy Statement under the caption “Ratification of Selection of Independent Accountants” and is hereby incorporated by reference.
PART IV
Item 15.
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) The following documents are filed as part of this report:
(1) Financial Statements:
Reports of Independent Auditors
Consolidated Balance Sheet at December 31, 2003 and 2002
Consolidated Statement of Income for the three years ended December 31, 2003
Consolidated Statement of Stockholders’ Equity for the three years ended December 31, 2003
Consolidated Statement of Cash Flows for the three years ended December 31, 2003
Notes to Consolidated Financial Statements
The above financial statements are incorporated by reference from pages A-18 through A-49 of the attached Appendix.
(2) All other schedules are omitted because they are not applicable or the required information is shown in the financial statements or notes thereto.
(3) The following Exhibits are filed with this Report or are incorporated by reference as set forth below:
No reports on Form 8-K were filed by the Company during the fourth quarter ended December 31, 2003.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on March 13, 2004.
/s/ H.E. Rainbolt
/s/ David E. Rainbolt
H. E. Rainbolt
David E. Rainbolt
Chairman of the Board
(Principal Executive Officer)
President, Chief Executive
Officer and Director
(Principal Executive Officer)
APPENDIX A
BancFirst Corporation
AND SUPPLEMENTARY DATA
FINANCIAL REVIEW
The following discussion is an analysis of the financial condition and results of operations of the Company for the three years ended December 31, 2003 and should be read in conjunction with the Consolidated Financial Statements and Notes thereto and the Selected Consolidated Financial Data included herein.
SUMMARY
BancFirst Corporation’s net income for 2003 was $31.9 million, or $4.00 per diluted share, compared to $33.6 million, or $4.06 per diluted share for 2002. Net interest income remained relatively constant compared to 2002 at $109 million. Provisions for loan losses in 2003 decreased to $3.72 million from $5.28 million for 2002. Noninterest income increased to $48.8 million from $45.2 million, while noninterest expense increased to $105 million from $98.3 million. The increase in noninterest income was due in part to $3.28 million of securities gains, $2.56 million of which was related to an adjustment of the Company’s interest sensitivity in the second quarter of 2003 when a loss of $2.43 million was also recognized for early extinguishment of certain Federal Home Loan Bank borrowings. Noninterest expense was also increased in 2003 by an operational loss of $1.18 million and provisions totaling $1.97 million for uncollectible receivables carried in cash and due from banks. Excluding these losses, noninterest expense totaled $99.8 million for 2003.
Total assets increased to $2.92 billion from $2.8 billion at the end of 2002. Two acquisitions in the fourth quarter of 2003 added $124 million of assets. Total loans increased to $1.95 billion from $1.81 billion for 2002. Total deposits increased to $2.59 billion from $2.43 billion for 2002. The Company’s average loans to deposits was 73.33% for 2003, compared to 73.89% for 2002. Stockholders’ equity increased to $255 million from $252 million at the end of 2002. Average stockholder’s equity to average assets increased to 8.81% from 8.53% at year-end 2002.
Asset quality remained strong in 2003 with nonperforming and restructured assets to total assets increasing slightly to 0.70% from 0.60% at year-end 2002. The allowance for loan losses to nonperforming and restructured loans was 158.76% at December 31, 2003, compared to 175.16% at the end of 2002. Net charge-offs for 2003 were only 0.18% of average loans, compared to 0.31% of average loans for 2002.
The Company has continued to repurchase shares of its common stock under its ongoing Stock Repurchase Program (the “SRP”). During 2003, 40,075 shares were repurchased, compared to 186,599 shares repurchased in 2002. At December 31, 2003, there were 249,626 shares remaining that could be repurchased under the SRP. Also, in January 2003, the Company repurchased 320,000 shares for $14.4 million, which was not a part of the SRP.
In October 2003, BancFirst Corporation completed the acquisition of Lincoln National Bancorporation (“Lincoln”) of Oklahoma City, Oklahoma for cash of $16.9 million. Lincoln had consolidated total assets of approximately $108 million. As a result of the acquisition, Lincoln was merged into BancFirst Corporation, and Lincoln’s wholly-owned bank subsidiary, Lincoln National Bank, became a subsidiary of BancFirst Corporation. The acquisition was accounted for as a purchase. Accordingly, the effects of the acquisition are included in the Company’ consolidated financial statements from the date of the acquisition forward. The acquisition did not have a material effect on the results of operations of the Company for 2003.
In November 2003, BancFirst completed the acquisition of the Hobart and Lone Wolf, Oklahoma branches of Gold Bank. As a result of the acquisition, BancFirst purchased approximately $16.3 million of loans and other assets, and assumed approximately $40.5 million of deposits, for a premium of approximately $2.73 million. The acquisition was accounted for as a purchase. Accordingly, the effects of the acquisition are included in the Company’s consolidated financial statements from the date of the acquisition forward. The acquisition did not have a material effect on the results of operations of the Company for 2003.
In 2004, continued historically low, or possibly even lower, interest rates could further compress the Company’s net interest margin. Slow economic growth could have an adverse effect on loan growth and asset quality. Additionally, complying with changes in corporate governance, reporting and other regulatory requirements will result in higher costs. The Company will continue to address these challenges over the coming year.
A-2
SELECTED CONSOLIDATED FINANCIAL DATA
(Dollars in thousands, except per share data)
A-3
CONSOLIDATED AVERAGE BALANCE SHEETS AND INTEREST MARGIN ANALYSIS
Taxable Equivalent Basis (Dollars in thousands)
(1) Nonaccrual loans are included in the average loan balances and any interest on such nonaccrual loans is recognized on a cash basis.
A-4
RESULTS OF OPERATIONS
Net Interest Income
Net interest income, which is the Company’s principal source of operating revenue, remained relatively constant compared to 2002 at $109 million. The net interest margin on a taxable equivalent basis for 2003 was 4.27%, compared to 4.45% for 2002 and 4.44% for 2001. On a taxable equivalent basis, net interest income decreased $414,000 in 2003, compared to an increase of $4.2 million in 2002. Changes in the volume of earning assets and interest-bearing liabilities, and changes in interest rates determine the changes in net interest income. The Volume/Rate Analysis summarizes the relative contribution of each of these components to the changes in net interest income in 2003 and 2002. The decrease in 2003 was due to falling interest rates that reduced net interest income $6.31 million, which was partially offset by loan growth that increased interest income by $4.07 million and changes in the mix of deposits that reduced interest expense by $1.62 million. The increase in 2002 was primarily due to loan growth that increased interest income by $4.01 million and changes in the mix of deposits that reduced interest expense by $2.63 million, which were partially offset by falling interest rates that reduced net interest income by $5.13 million. Average loans grew $57.1 million, or 3.23%, in 2003 and $81.3 million, or 4.83% in 2002. Average time deposits decreased $133 million, or 14.73%, in 2003 and $107 million, or 10.59%, in 2002, while average total deposits increased in both years. The total decrease in net interest income from falling interest rates for the past three years has been $20.4 million.
(1) Changes due to changes in the mix of earning assets and interest-bearing liabilities have been combined with the changes due to volume.
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 yields and rates of specific assets and liabilities to changes in market rates. The Company has continued its strategy of creating manageable negative interest sensitivity gaps in the short term. This approach takes advantage of the Company’s stable core deposit base and the relatively short maturity and repricing frequency of its loan portfolio, as well as the historical existence of a positive yield curve, which enhances the net interest margin over the long term. Although interest rate risk is increased on a controlled basis by this position, it is somewhat mitigated by the Company’s high level of liquidity.
A-5
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, 2003. The Company’s cumulative negative gap position in the one year interval increased to $696 million at December 31, 2003 from $689 million at December 31, 2002, but decreased as a percentage of total earning assets to 26.53% from 27.31%. This negative gap position assumes that the Company’s core savings and transaction deposits are immediately rate sensitive and reflects management’s perception that the yield curve will be positively sloped over the long term. During the 12-month period following an interest rate reduction, the Company’s net interest spread may increase as the rates on its interest-bearing liabilities reprice more rapidly than the rates on its earning assets. However, in the current environment of historically low interest rates the Company’s ability to reduce its liability rates may be limited causing additional pressure on the net interest margin. Additionally, in a low rate environment, the benefit of the Company’s noninterest-bearing funds is reduced, resulting in a decrease in the Company’s net interest margin. In light of the above, and assuming no change in the volume or mix of the Company’s loans and deposits, the Company’s net interest income would reasonably be expected to continue declining over the next several quarters.
(1) Represents the amount of demand deposits required to support earning assets in excess of interest-bearing liabilities and stockholders’ equity.
Provision for Loan Losses
The provision for loan losses decreased to $3.72 million for 2003, compared to $5.28 million for 2002 and $1.78 million for 2001. These relatively low levels of provisions reflect the Company’s strong asset quality. The amounts provided for the last three years primarily relate to loan growth and net loan charge-offs. The Company establishes an allowance as an estimate of the inherent losses on non-classified loans, which results in additional provisions due to loan growth. Net loan charge-offs were $3.21 million for 2003, compared to $5.44 million for 2002 and $2.63 million for 2001. These net charge-offs were equivalent to only 0.18%, 0.31% and 0.16% of average loans for 2003, 2002 and 2001, respectively. A more detailed discussion of the allowance for loan losses is provided under “Loans.”
A-6
Noninterest Income
Total noninterest income increased $3.61 million in 2003, or 7.98%, compared to increases of $8.3 million, or 22.50%, in 2002, and $7.01 million, or 23.43%, in 2001. The increase in 2003 included $3.28 million of securities gains. Excluding the securities gains, total noninterest income for 2003 increased $616,000, or 1.37%. Noninterest income has become an increasingly important source of revenue. The Company’s fee income has increased each year since 1987 due to improved pricing strategies, enhanced product lines, acquisitions and internal deposit growth. New products and strategies continue to be implemented which are expected to produce continued growth in noninterest income.
Trust revenues have grown due to continued development of these products and services. Service charges on deposits have increased as a result of strategies implemented to improve the charging and collection of various service charges, and because of growth in deposits. Income from sales of loans increased again in 2003 due to higher mortgage originations. Other noninterest income, which includes safe deposit box rentals, insurance activities, cash management services, and other service fees decreased $1.37 million in 2003, compared to increases of $2.33 million in 2002 and $4.14 million in 2001. The decrease in 2003 was mainly due to a decrease in income from credit life insurance activities.
Net gains on securities transactions were $3.28 million in 2003, $291,000 in 2002 and $221,000 in 2001. The Company’s practice is to hold its securities to maturity and it does not engage in trading activities. The net gains in 2003 included $2.56 million of gains from the sale of securities related to an adjustment of the Company’s interest sensitivity in the second quarter of 2003 when a loss of $2.43 million was also recognized for early extinguishment of certain Federal Home Loan Bank borrowings. The net gains in 2002 were mainly from the redemption, at a premium, of a preferred stock investment owned by the Company’s small business investment subsidiary. The net gains in 2001 were mainly due to calls of debt securities. A more detailed discussion of securities is provided under “Securities.”
Noninterest Expense
Total noninterest expense increased in 2003 by $7.0 million, or 7.12%, compared to increases of $1.76 million, or 1.82%, for 2002, and $8.9 million, or 10.14% for 2001. The increase in 2003 includes a loss on early extinguishment of debt of $2.43 million, an operational loss of $1.18 million, and provisions totaling $1.97 million for uncollectible receivables carried in cash and due from banks. Excluding these losses, total noninterest expense for 2003 increased $1.42 million, or 1.45%. Amortization of goodwill was eliminated in 2002 due to the adoption of Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets”. Excluding goodwill amortization, total noninterest expense increased $4.11 million, or 4.36%, in 2002. Salaries and employee benefits have increased over the years due to higher salary levels and benefits costs, additional staff for new product lines and increased loan demand, and acquisitions. Occupancy and fixed assets expense, and depreciation have increased because of the addition of facilities from acquisitions and new branches opened. The decrease in occupancy expense in 2002 was due to decreases in certain costs, such as utilities, and an increase in income from rental of bank premises. Other noninterest expenses increased $2.4 million in 2003 and $2.7 million in 2002. The increase in 2003 was primarily due to the operational loss and the provisions for uncollectible receivables. The increase in 2002 was primarily due to a $2.23 million increase in commissions and reserve expenses of Century Life’s insurance business.
Income Taxes
Income tax expense decreased to $17.0 million in 2003, compared to $17.3 million for 2002 and $15.5 million for 2001. The effective tax rates for 2003, 2002 and 2001 were 34.71%, 34.04% and 35.63%, respectively. The primary reasons for the difference between the Company’s effective tax rate and the federal statutory rate are tax-exempt income, nondeductible amortization and state tax expense.
Since banks have traditionally carried large amounts of tax-exempt securities and loans, certain financial information is prepared on a taxable equivalent basis to facilitate analysis of yields and changes in components of earnings. Average balance sheets, income statements and other financial statistics on a taxable equivalent basis have been presented for this purpose.
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
A-7
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.
FINANCIAL POSITION
Cash and Federal Funds Sold
Cash consists of cash and cash items on hand, noninterest-bearing deposits and other amounts due from other banks, reserves deposited with the Federal Reserve Bank, and interest-bearing deposits with other banks. Federal funds sold consists of overnight investments of excess funds with other financial institutions. The amount of cash and federal funds sold carried by the Company is a function of the availability of funds presented to other institutions for clearing, 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. Cash and federal funds sold decreased $30.2 million in 2003 and $78.0 million in 2002 as these liquid funds were used for growth in loans and securities.
Securities
Total securities decreased $490,000, or 0.09%, compared to an increase of $20.9 million, or 3.85%, in 2002. The increase in 2002 was due to the investment of funds from various sources into agency securities with maturities of less than five years.
Securities available for sale represented 93.2% of the total securities portfolio at year-end 2003, compared to 90.3% at year-end 2002. These levels reflect the Company’s strategy of maintaining a very liquid portfolio. Securities available for sale had a net unrealized gain of $14.9 million at year-end 2003, compared to a $24.3 million net unrealized gain the preceding year. These gains are included in the Company’s stockholders’ equity as net unrealized gains, net of income tax, in the amounts of $9.84 million and $15.9 million for 2003 and 2002, respectively.
The Maturity Distribution of Securities summarizes the maturity and weighted average taxable equivalent yields of the securities portfolio. The Company manages its securities portfolio for liquidity and as a tool to execute its asset/liability management strategy. Consequently, the average maturity of the portfolio is relatively short. Securities maturing within five years represents 91.23% of the total portfolio.
A-8
Loans
The Company has historically generated significant loan growth from both internal originations and acquisitions. Total loans increased $132 million, or 7.29%, in 2003, and $97.4 million, or 5.67%, in 2002. In 2003, loan growth from the acquisition of Lincoln and the Gold Bank branch acquisitions accounted for $74.9 million of the overall loan growth. In 2002, the loan growth was internal and was concentrated primarily in the various types of real estate loans.
Composition
The Company’s loan portfolio is diversified among various types of commercial and individual borrowers. Commercial loans are comprised principally of loans to companies in light manufacturing, retail and service industries. Construction and development loans totaled $154 million, or 7.90% of total loans at the end of 2003, up from $137 million, or 7.52% of total loans at the end of 2002. Real estate loans are relatively evenly divided between residential mortgages and loans secured by commercial and other types of properties. Real estate mortgage loans represented 50.90% of total loans at December 31, 2003, compared to 49.15% of total loans at December 31, 2002. Installment loans are comprised mostly of loans to individuals for the purchase of vehicles and student loans.
Loans secured by real estate have been a large portion of the Company’s loan portfolio. In 2003, this percentage was 58.80% compared to 56.67% for 2002. The Company is subject to risk of future market fluctuations in property values relating to these loans. The Company attempts to manage this risk through rigorous loan underwriting standards, training of loan officers and close monitoring of the values of individual properties collateralizing the loan.
A-9
The Maturity and Rate Sensitivity of Loans presents maturity and repricing information for commercial, financial and other loans, and real estate loans, excluding one to four family residential loans. Over 38% of the commercial real estate and other commercial loans have maturities of one year or less. However, many of these loans are renewed at existing or similar terms after scheduled principal reductions. Also, over half of the commercial real estate and other commercial loans had adjustable interest rates at year-end 2003. The short maturities and adjustable rates on these loans allow the Company to maintain the majority of its loan portfolio near market interest rates.
The information relating to the maturity and rate sensitivity of loans is based upon original loan terms and is not adjusted for “rollovers.” 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 Loans
Nonperforming and restructured assets increased $3.68 million, or 22.0% in 2003, and $716,000, or 4.47% in 2002. Nonperforming loans have been relatively low in recent years. Nonperforming and restructured loans as a percentage of total loans was 0.85% at year-end 2003, compared to 0.77% at year-end 2002 and 0.78% at year-end 2001.
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 collectibility of interest and/or principal is in serious doubt. Interest income is recognized on certain of these loans on a cash basis if the full collection of the remaining principal balance is reasonably expected. Otherwise, interest income is not recognized until the principal balance is fully collected. Nonaccrual loans increased $2.48 million, or 22.8%, in 2003, compared to an increase of $674,000, or 6.59%, in 2002. Total interest income which was not accrued on nonaccrual loans outstanding at year end was approximately $505,000 in 2003 and $327,000 in 2002. Only a small amount of this interest is ultimately collected.
The classification of a loan as nonperforming does not necessarily indicate that loan principal and interest will ultimately be uncollectible. The Company’s experience is that a significant portion of the principal and some of the interest is eventually recovered. However, the above normal risk associated with nonperforming loans is considered in
A-10
the determination of the allowance for loan losses. At year-end 2003, the allowance for loan losses as a percentage of nonperforming and restructured loans was 158.76%, compared to 175.16% at the end of 2002 and 184.24% at the end of 2001.
Other real estate owned and repossessed assets increased in 2003 to $3.94 million from $2.82 million at year-end 2002. The Company places a substantial amount of emphasis on disposing of these assets. To encourage local management to sell the other real estate as quickly as possible and to ensure that it is carried at a conservative value, the Company’s policy is to write down other real estate annually by the greater of 10% of its remaining carrying value or the difference between its remaining carrying value and its estimated market value.
Potential problem loans are performing loans to borrowers with a weakened financial condition, or which are experiencing unfavorable trends in their financial condition, which causes management to have concerns as to the ability of such borrowers to comply with the existing repayment terms. BancFirst had approximately $33.7 million of these loans, which are not included in nonperforming and restructured assets, at December 31, 2003. In general, these loans are well collateralized and have no identifiable loss potential. Loans which are considered to have identifiable loss potential are placed on nonaccrual status, are allocated a specific allowance for loss or are directly charged-down, and are reported as nonperforming.
Allowance for Loan Losses
The allowance for loan losses reflects management’s assessment of the risk of loss inherent in the Company’s loan portfolio. The allowance and its adequacy is determined through consideration of many factors, including past loan loss experience, evaluations of known impaired loans, levels of adversely classified loans, and general economic conditions. 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 current level of the allowance will prove adequate in light of future developments and economic conditions. As loan quality changes with economic and credit cycles, it would be reasonable to expect the Company’s net charge-offs and loan loss provisions to return to more historically normal levels.
The Company’s net charge-offs continue to remain relatively low. In 2003, the Company recognized $3.21 million of net charge-offs, which was 0.18% of average loans, compared to $5.44 million of net charge-offs, or 0.31% of average loans, for 2002, and $2.63 million, or 0.16% of average loans, for 2001.
A-11
Liquidity and Funding
The Company’s principal source of liquidity and funding is its diverse 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, competitive service charges and other banking services offered, the Company can, to a limited extent, control its level of deposits. The level and maturity of deposits necessary to support the Company’s lending and investment functions is determined through monitoring loan demand and through its asset/liability management process.
Total deposits increased $157 million, or 6.47%, in 2003, and $27.3 million, or 1.14%, in 2002. The increase in 2003 was primarily due to the Gold Bank and Lincoln acquisitions which added $132 million in total deposits. The increase in 2002 was from internal growth. Demand deposits as a percentage of total deposits have been increasing since 1994. The Company’s core deposits provide it with a stable, low-cost funding source. Core deposits were 91.04% of total deposits in 2003, compared to 88.95% in 2002. Time deposits decreased in 2002 due to lower interest rates offered on certificates of deposit.
A-12
The Company has not utilized brokered deposits. At December 31, 2003, 82.5% of its time deposits of $100,000 or more mature in one year or less.
Short-term borrowings, consisting mainly of federal funds purchased and repurchase agreements, are another source of funds for the Company. The level of these borrowings is determined by various factors, including customer demand and the Company’s ability to earn a favorable spread on the funds obtained. Short-term borrowings totaled $16.6 million at December 31, 2003, compared to $24.4 million at December 31, 2002.
In 1995, the Bank became a member of the Federal Home Loan Bank of Topeka, Kansas (the “FHLB”) and began borrowing from the FHLB at favorable interest rates. These borrowings are principally used to match-fund longer-term, fixed-rate loans, and are collateralized by a pledge of residential first mortgages and certain securities. Long-term borrowings decreased to $11.1 million in 2003 from $34.1 million in 2002, primarily from the early payment of $25.1 million in FHLB borrowings as part of an adjustment in the Company’s interest sensitivity. A loss of $2.43 million was recognized on this early extinguishment of debt.
The Bank is highly liquid. This liquidity positions the Bank to respond to increased loan demand and other requirements for funds, or to decreases in funding sources. Cash flows from operations, investing activities and other funding sources have provided the funds for the increased loan activity.
The liquidity of BancFirst Corporation is dependent upon dividend payments from the Bank and its ability to obtain financing. Banking regulations limit bank dividends based upon net earnings retained by the bank and minimum
A-13
capital requirements. Dividends in excess of these limits require regulatory approval. During 2003, the Bank declared four common stock dividends totaling $19.1 million and two preferred stock dividends totaling $1.93 million.
The Company has various contractual obligations that require future cash payments. The following table presents certain known payments for contractual obligations by payment due period as of December 31, 2003.
(1) Includes principal and interest.
Capital Resources
Stockholders’ equity totaled $255 million at year-end 2003, compared to $252 million at year-end 2002 and $223 million at year-end 2001. Stockholders’ equity has continued to increase due to net earnings retained, stock option exercises, and unrealized gains on securities. The Company’s average equity capital ratio for 2003 was 8.81%, compared to 8.53% for 2002 and 7.86% for 2001. At December 31, 2003, the Company’s leverage ratio was 8.33%, its Tier 1 capital ratio was 11.26%, and its total risk-based capital ratio was 12.48%, compared to minimum requirements of 3%, 4% and 8%, respectively. Banking institutions are generally expected to maintain capital well above the minimum levels.
In January 2003, BancFirst Corporation repurchased 320,000 shares of its common stock for $14.4 million. The shares were repurchased through a market-maker in the Company’s stock and was not a part of the Company’s ongoing Stock Repurchase Program.
In November 1999, the Company adopted a Stock Repurchase Program (the “SRP”) authorizing management to repurchase up to 300,000 shares of the Company’s common stock. The SRP was amended in May 2001 to increase the shares authorized to be purchased by 277,916 shares and was amended again in August 2002 to increase the shares authorized to be purchased by 182,265 shares. 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 shareholders wishing to sell their stock. The timing, price and amount of stock repurchases under the SRP may be determined by management and must be approved by the Company’s Executive Committee. During 2003, the Company purchased and canceled 40,075 shares at an average price of $45.80. In 2002, the Company purchased and canceled 186,599 shares at an average price of $39.19 per share. At December 31, 2003, there were 249,626 shares remaining that could be repurchased under the SRP.
In January 1997, BancFirst Corporation established BFC Capital Trust I (the “Trust”), a trust formed under the Delaware Business Trust Act. BancFirst Corporation owns all of the common securities of the Trust. In February 1997, the Trust issued $25 million of aggregate liquidation amount of 9.65% Capital Securities, Series A (the “Capital Securities”) to other investors. The proceeds from the sale of the Capital Securities and the common securities of the Trust were invested in $25 million of 9.65% Junior Subordinated Deferrable Interest Debentures, Series A (the “9.65% Junior Subordinated Debentures”) of BancFirst Corporation. The Series A Capital Securities and 9.65% Junior Subordinated Debentures were subsequently exchanged for Series B Capital Securities and Junior Subordinated Debentures, pursuant to a Registration Rights Agreement. The terms of the Series A and Series B securities are identical in all material respects. Interest payments on the 9.65% Junior Subordinated Debentures are payable January 15 and July 15 of each year. Such interest payments may be deferred for up to ten consecutive semi-annual periods. The stated maturity date of the 9.65% Junior Subordinated Debentures is January 15, 2027, but they are subject to mandatory redemption pursuant to optional prepayment terms. The Capital Securities represent an undivided interest in the 9.65% Junior Subordinated Debentures, are guaranteed by BancFirst Corporation, and qualify as Tier 1 regulatory capital. During any deferral period or during any event of default, BancFirst Corporation may not declare or pay any dividends on any of its capital stock.
A-14
Future dividend payments will be determined by the Company’s Board of Directors in light of the earnings and financial condition of the Company and the Bank, their capital needs, 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 2004.
Market Risk
Market risk is defined as the risk of loss related to financial instruments from changes in interest rates, foreign currency exchange rates and commodity prices. The Company’s market risk arises principally from its lending, investing, deposit and borrowing activities. The Company is not exposed to market risk from foreign exchange rates and commodity prices. Management monitors and controls interest rate risk through sensitivity analysis and its strategy of creating manageable negative interest sensitivity gaps, as described under “Net Interest Income” above. The Company does not use derivative financial instruments to manage its interest rate risk exposure.
The table below presents the Company’s financial instruments that are sensitive to changes in interest rates, their expected maturities and their estimated fair values at December 31, 2003.
The expected maturities and principal repayments are based upon the contractual terms of the instruments. Prepayments have been estimated for certain instruments with predictable prepayment rates. Savings and transaction deposits are assumed to mature all in the first year as they are not subject to withdrawal restrictions and any assumptions regarding decay rates would be very subjective. The actual maturities and principal repayments for the financial instruments could vary substantially from the contractual terms and assumptions used in the analysis.
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 in the Company’s loan portfolio and its unfunded lending commitments.
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, and general economic conditions. A loan is considered impaired
A-15
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 determined 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 value of the collateral. Allowances for adversely classified loans are estimated using historical loss percentages for each type of loan. 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. Each month the Company’s Senior Loan Committee reviews the adequacy of each business unit’s allowance, and the aggregate allowance for the Company. The Senior Loan Committee also periodically 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 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 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 current level of the allowance will prove adequate 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 asset and liability approach based upon the future tax consequences of temporary differences between the carrying amounts and tax bases 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. Changes in the various factors considered in our estimates could produce material changes in the accruals for income taxes.
Intangible Assets
Core deposit intangibles are amortized on a straight-line basis over the estimated useful lives of the core deposits. Prior to 2002, the excess of cost over the fair value of assets acquired (goodwill) was amortized on a straight-line basis over fifteen to forty years, depending upon when the goodwill originated. Beginning with 2002, goodwill is no longer amortized. Trademarks are amortized on a straight-line basis over fifteen years. Intangible assets are reviewed annually 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 income statement.
The evaluation of 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 the 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.
A-16
The evaluation of intangible assets for the year ended December 31, 2003 did not indicate that any of the intangible assets were impaired.
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 market 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.
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.
Segment Information
See note (20) of the Notes to Consolidated Financial Statements for disclosures regarding the Company’s operating business segments.
Forward-Looking Statements
The Company may make forward-looking statements (within the meaning of the Private Securities Litigation Reform Act of 1995) with respect to earnings, credit quality, corporate objectives, interest rates and other financial and business matters. 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.
A-17
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
BancFirst Corporation
We have audited the accompanying consolidated balance sheets of BancFirst Corporation as of December 31, 2003 and 2002, and the related consolidated statements of income, stockholders’ equity, and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. The financial statements of BancFirst Corporation for the year ended December 31, 2001, were audited by other auditors who have ceased operations and whose report dated March 25, 2002, expressed an unqualified opinion on those financial statements.
We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the 2003 and 2002 financial statements referred to above present fairly, in all material respects, the consolidated financial position of BancFirst Corporation at December 31, 2003 and 2002, and the consolidated results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States.
As discussed above, the financial statements of BancFirst Corporation for the year ended December 31, 2001, were audited by other auditors who have ceased operations. As described in Note 7, these financial statements have been revised to include the transitional disclosures required by Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets, which was adopted by the Company as of January 1, 2002. Our audit procedures with respect to these disclosures in Note 7 relating to 2001 included (a) agreeing the previously reported net income to the previously issued financial statements and the adjustments to reported net income representing amortization expense including the related tax effects recognized in those periods related to goodwill to the Company’s underlying records obtained from management, and (b) testing the mathematical accuracy of the reconciliation of adjusted net income to reported net income, and the related basic and diluted income per share amounts. Additionally, as described in Note 1 under the heading Stock Based Compensation, the Company accounts for fixed price stock options in accordance with Accounting Principles Bulletin Opinion No. 25. The 2001 financial statements have been revised to include the additional disclosures required by Statement of Financial Accounting Standards No. 148, Accounting for Stock-Based Compensation - Transition and Disclosure, which was adopted by the Company as of December 31, 2002. Our audit procedures with respect to these disclosures in Note 1 relating to 2001 included (a) agreeing the previously reported net income to the previously issued financial statements and the adjustments to reported net income representing compensation expense including the related tax effects that would have been recognized in those periods related to the cost recognition provisions of Statement of Financial Accounting Standards No. 148 to underlying records obtained from management, and (b) testing the mathematical accuracy of the reconciliation of pro forma net income to reported net income, and the related basic and diluted income per share amounts. In our opinion, the disclosures for 2001 in Note 7 and Note 1 are appropriate. However, we were not engaged to audit, review, or apply any procedures to the 2001 financial statements of the Company other than with respect to such disclosures and, accordingly, we do not express an opinion or any other form of assurance on the 2001 financial statements taken as a whole.
/s/ Ernst & Young LLP
Oklahoma City, Oklahoma
March 13, 2004
A-18
REPORT OF PREDECESSOR INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of BancFirst Corporation:
We have audited the accompanying consolidated balance sheets of BancFirst Corporation and its subsidiaries as of December 31, 2001 and 2000, and the related consolidated statements of income, stockholders’ equity and cash flows for the three years ended December 31, 2001. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of BancFirst Corporation and subsidiaries as of December 31, 2001 and 2000, and the results of their operations and their cash flows for the three years ended December 31, 2001, in conformity with accounting principles generally accepted in the United States.
ARTHUR ANDERSEN LLP
Oklahoma City, Oklahoma
March 25, 2002
The above report is a copy of the previously issued report and the predecessor auditor has not reissued the report.
A-19
BANCFIRST CORPORATION
CONSOLIDATED BALANCE SHEET
(Dollars in thousands, except per share data)
The accompanying notes are an integral part of these consolidated financial statements.
A-20
BANCFIRST CORPORATION
CONSOLIDATED STATEMENT OF INCOME
(Dollars in thousands, except per share data)
The accompanying notes are an integral part of these consolidated financial statements.
A-21
BANCFIRST CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
(Dollars in thousands, except per share data)
The accompanying notes are an integral part of these consolidated financial statements.
A-22
BANCFIRST CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(Dollars in thousands)
The accompanying notes are an integral part of these consolidated financial statements.
A-23
BANCFIRST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of BancFirst Corporation and its subsidiaries (the “Company”) conform to generally accepted accounting principles and general practice within the banking industry. A summary of the significant accounting policies follows.
Basis of Presentation
The accompanying consolidated financial statements include the accounts of BancFirst Corporation, Century Life Assurance Company, Council Oak Capital, Inc., Council Oak Partners, LLC, Lincoln National Bank, and BancFirst and its subsidiaries. The operating subsidiaries of BancFirst are Council Oak Investment Corporation, Citibanc Insurance Agency, Inc., BancFirst Agency, Inc., Lenders Collection Corporation, Express Financial Corporation, Mojave Asset Management Company, Desert Asset Management Company, Delamar Asset Management Limited Partnership and PremierSource LLC. All significant intercompany accounts and transactions have been eliminated. Assets held in a fiduciary or agency capacity are not assets of the Company and, accordingly, are not included in the consolidated financial statements. Certain amounts for 2002 and 2001 have been reclassified to conform to the 2003 presentation.
Use of Estimates
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.
Securities
The Company does not engage in securities trading activities. Any sales of 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. 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 market value. Unrealized gains or losses on securities available for sale are reported as a component of stockholders’ equity, net of income tax. 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. 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. Gains or losses from sales of securities are based upon the book values of the specific securities sold.
Loans
Loans are stated at the principal amount outstanding. Interest income on certain installment loans is recorded by use of a method that produces a reasonable approximation of a constant yield on the outstanding principal. Interest on all other performing loans is recognized based upon the principal amount outstanding. A loan is placed on nonaccrual status when, in the opinion of management, the future collectibility of interest and/or principal is in serious doubt. Interest income is recognized on certain of these loans on a cash basis if the full collection of the remaining principal balance is reasonably expected. Otherwise, interest income is not recognized until the principal balance is fully collected.
A-24
BANCFIRST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Cont.)
Allowance for Loan Losses
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, and general economic conditions. 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.
Premises and Equipment
Premises and equipment are stated at cost, less accumulated depreciation. Depreciation is charged to operating expense and is computed using the straight-line method over the estimated useful lives of the assets. Maintenance and repairs are charged to expense as incurred while improvements are capitalized. Premises and equipment is tested for impairment if events or changes in circumstances occur that indicate that the carrying amount of any premises and equipment may not be recoverable. Impairment losses are measured by comparing the fair values of the premises and equipment with their recorded amounts. Premises that are identified to be sold are transferred to other real estate owned at the lower of their carrying amounts or their fair values less estimated costs to sell. Any losses on premises identified to be sold are charged to operating expense. When premises and equipment are transferred to other real estate owned, sold, or otherwise retired, the cost and applicable accumulated depreciation are removed from the respective accounts and any resulting gains or losses are reported in the income statement.
Other Real Estate Owned
Other real estate owned consists of properties acquired through foreclosure proceedings or acceptance of a deed in lieu of foreclosure, and premises held for sale. These properties are carried at the lower of the book values of the related loans or fair market values based upon appraisals, less estimated costs to sell. Losses arising at the time of reclassification of such properties from loans to other real estate owned are charged directly to the allowance for loan losses. Any losses on premises identified to be sold are charged to operating expense at the time of transfer from premises to other real estate owned. Losses from declines in value of the properties subsequent to classification as other real estate owned are charged to operating expense.
Intangible Assets
Core deposit intangibles are amortized on a straight-line basis over the estimated useful lives of the core deposits. Prior to 2002, the excess of cost over the fair value of assets acquired (goodwill) was amortized on a straight-line basis over fifteen to forty years, depending upon when the goodwill originated. Beginning with 2002, goodwill is no longer amortized. Trademarks are amortized on a straight-line basis over fifteen years. Intangible assets are reviewed annually 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 income statement.
Stock - Based Compensation
The Company uses the intrinsic value method, as described in Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”) and related interpretations, for accounting for its stock-based compensation. Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation” (“FAS 123”), as amended by Statement of Financial Accounting Standards No. 148, “Accounting for Stock-Based Compensation-Transition and Disclosure-an amendment of FASB Statement No. 123,” which, if fully adopted by the Company, would change the method the Company applies in recognizing the cost of these plans to the fair value method. Adoption of the cost recognition provisions of FAS 123 is optional and the Company has not adopted such provisions. However, pro forma disclosures as if the Company adopted the cost recognition provisions of FAS 123 in 1995 are required and are presented below.
A-25
BANCFIRST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Cont.)
The effects of applying FAS 123 to the pro forma disclosure are not indicative of future results. FAS 123 does not apply to grants of options prior to 1995 and the Company anticipates making additional grants in the future.
Income Taxes
The Company files a consolidated income tax return. Deferred taxes are recognized under the asset and liability approach based upon the future tax consequences of temporary differences between the carrying amounts and tax bases 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.
Earnings Per Common Share
Basic earnings per common share is computed by dividing net income, less any preferred dividends requirement, by the weighted average of common shares outstanding. Diluted earnings per common share reflects the potential dilution that could occur if options, convertible securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the Company.
Statement of Cash Flows
For purposes of the statement of cash flows, the Company considers cash and due from banks, and interest-bearing deposits with banks as cash equivalents. Acquisitions accounted for as purchases or as book value purchases are presented net of any stock issued, assets acquired and liabilities assumed.
Recent Accounting Pronouncements
The Financial Accounting Standards Board (the “FASB”) Statement of Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities”, as amended by Statements 137 and 138, was adopted by the Company on January 1, 2001. It was further amended by Statement 149 in 2003. This Statement established accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those financial instruments at fair value. The accounting for changes in the fair value of a derivative instrument depends on the intended use of the derivative and its resulting designation. The adoption of this standard did not have a material effect on the Company’s consolidated financial statements.
In September 2000, the FASB issued Statement of Financial Accounting Standards No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities -A Replacement of FASB Statement No. 125”. This Statement is effective for transfers occurring after March 31, 2001 and for disclosures relating to securitization transactions and collateral for fiscal years ending after December 15, 2000. The adoption of this standard did not have a material effect on the Company’s consolidated financial statements.
A-26
BANCFIRST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Cont.)
In June 2001, the FASB issued Statement of Financial Accounting Standards No. 141, “Business Combinations”. This Statement is effective for all business combinations initiated after June 30, 2001, and requires that all business combinations be accounted for using the purchase method. Also in June 2001, the FASB issued Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets”. Statement 142 requires that, for fiscal years beginning after December 15, 2001, goodwill and other indefinite-lived intangible assets already recognized in an entity’s financial statements no longer be amortized, and that goodwill and other indefinite-lived intangible assets acquired after June 30, 2001 not be amortized. Instead, goodwill and other indefinite-lived intangible assets will be tested at least annually for impairment by comparing the fair value of those assets with their recorded amounts. Any impairment losses will be reported in the entity’s income statement. The adoption of Statement 142 will have a material effect on the consolidated financial statements of the Company by eliminating goodwill amortization from its income statement and from the calculations of net income per share. Excluding the effects of goodwill amortization, the Company’s net income for the year ended December 31, 2001 would have been $30,042. Net income per diluted share for the year would have been $3.59. The Company did not recognize any impairment charges from the adoption of Statement 142.
In June 2001, the FASB issued Statement of Financial Accounting Standards No. 143, “Accounting for Asset Retirement Obligations”. This Statement is effective for financial statements issued for fiscal years beginning after June 15, 2002. Statement 143 requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset. The adoption of this standard did not have a material effect on the Company’s consolidated financial statements.
In August 2001, the FASB issued Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”. This Statement is effective for fiscal years beginning after December 15, 2001, and replaces Statement of Financial Accounting Standards No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of” and also replaces the provisions of Accounting Principles Board Opinion No. 30, “Reporting Results of Operations-Reporting the Effects of Disposal of a Segment of a Business”, for disposals of segments of a business. Statement 144 requires that long-lived assets to be disposed of by sale be measured at the lower of carrying amount or fair value less cost to sell, whether reported in continuing operations or in discontinued operations. Statement 144 also broadens the reporting of discontinued operations to include all components of an entity with operations that can be distinguished from the rest of the ongoing operations of the entity. Since the provisions of this Statement are to be applied prospectively, the adoption of this new standard did not have a material effect on the Company’s consolidated financial statements.
In October 2002, the FASB issued FAS No. 147, “Acquisitions of Certain Financial Institutions - an amendment of FASB Statements No. 72 and 144 and FASB Interpretation No. 9. “ This Statement is effective October 1, 2002. FAS No. 72, “Accounting for Certain Acquisitions of Banking or Thrift Institutions “, and FASB Interpretation No. 9, “Applying APB Opinions No. 16 and 17 When a Savings and Loan Association or a Similar Institution is Acquired in a Business Combination Accounted for by the Purchase Method “, provide interpretive guidance on the application of the purchase method to acquisitions of financial institutions. This Statement removes acquisitions of financial institutions from the scope of both FAS No. 72 and Interpretation 9 and requires that those transactions be accounted for in accordance with FAS No. 141 and FAS No. 142. In addition, this Statement amends FAS 144 to include in its scope long-term customer relationship intangible assets of financial institutions such as depositor and borrower relationship intangible assets and credit cardholder intangible assets. The adoption of this new standard did not have a material effect on the Company’s consolidated financial statements.
A-27
BANCFIRST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Cont.)
In December 2002, the FASB issued FAS No. 148, “Accounting for Stock-Based Compensation - Transition and Disclosure - an amendment of FASB Statement No. 123. “ This Statement amends FAS No. 123, “Accounting for Stock-Based Compensation “ to provide two additional transition methods for entities that adopt the fair value method of accounting for stock-based compensation. This Statement also prohibits the use of the prospective method of transition for changes to the fair value method made in fiscal years beginning after December 15, 2003. In addition, this Statement requires new disclosures about the effect of stock-based compensation on reported results and requires more prominent disclosures about stock-based compensation by prescribing specific tabular format and by requiring disclosure in the “Summary of Significant Accounting Policies. “ The adoption of this new standard did not have a material effect on the Company’s consolidated financial statements, as the Company uses the intrinsic value method of accounting for stock-based compensation.
In January 2003, the FASB issued Interpretation No. 46, “Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51” (“FIN 46”) which provides guidance for determining when an entity should consolidate another entity that meets the definition of a variable interest entity. Special purpose entities and other types of entities are assessed for consolidation under this new guidance. FIN 46 requires a variable interest entity to be consolidated if the company will absorb a majority of the expected losses, will receive a majority of the expected residual returns, or both. FIN 46 is effective immediately for interests in variable interest entities acquired after January 31, 2003. It applies in the first interim period after June 15, 2003 to interests in variable interest entities acquired before February 1, 2003. As of October 9, 2003, the FASB deferred compliance with FIN 46 from July 1, 2003 to the first period ending after December 15, 2003 for variable interest entities created prior to February 1, 2003. However, the Company adopted FIN 46 on July 1, 2003, as originally issued, and de-consolidated BFC Capital Trust I. In December 2003, the FASB issued a revision of FIN 46 (“Revised FIN 46”) that codified the proposed modifications and other decisions previously issued through certain FASB Staff Positions, made other revisions, and superceded the original FIN 46. FIN 46 and the Revised FIN 46 require the de-consolidation of BFC Capital Trust I. The effect of this de-consolidation was to remove the $25,000 of 9.65% Capital Securities and the related interest expense from the Company’s Consolidated financial statements, and instead report the $25,000 of Junior Subordinated Debentures issued by BancFirst Corporation to the Trust, and the related interest expense thereon. A potential result of the de-consolidation of the Trust could be that the 9.65% Capital Securities would no longer be included in the Company’s Tier 1 capital. The Federal Reserve Board has issued interim guidance that allows such securities to continue to qualify as Tier 1 capital while the issue of de-consolidation continues under review.
In May 2003, the FASB issued FAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.” This statement is effective for all new and modified financial instruments beginning with the first interim period beginning after June 15, 2003. FAS No. 150 changes the accounting for certain financial instruments that, under previous guidance, could be accounted for as equity and requires that those instruments be classified as liabilities, or assets in certain circumstances. The adoption of this new standard did not have a material effect on the Company’s consolidated financial statements.
(2) FORMATION OF BANCFIRST CORPORATION; MERGERS AND ACQUISITIONS; RECENT TRANSACTIONS
BancFirst Corporation was incorporated in Oklahoma in July 1984. In June 1985, it merged with seven Oklahoma bank holding companies and has conducted business as a bank holding company since that time. Additional mergers and acquisitions have been completed and, as a result, BancFirst Corporation is the surviving corporation along with the aforementioned subsidiaries, while the holding companies, banks and other companies that were merged or acquired ceased to exist as separate companies.
In March 2000, BancFirst Corporation became a financial holding company under the Gramm-Leach-Bliley financial services modernization law. This allows the Company to expand into new financial activities such as insurance sales and underwriting, securities underwriting and dealing, and merchant banking.
A-28
BANCFIRST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Cont.)
In January 2001, BancFirst Corporation completed the acquisition of 75% of the outstanding common stock of Century Life Assurance Company (“Century Life”) from Pickard Limited Partnership, a Rainbolt family partnership. Century Life underwrites credit life insurance, credit accident and health insurance, and ordinary life insurance. The Rainbolt family is the largest shareholder of BancFirst Corporation and two members of the family are the Chairman and the CEO of BancFirst Corporation. The purchase price was $5,429. At December 31, 2000, Century Life had total assets of $22,964 and total stockholders’ equity of $6,956. The acquisition was accounted for as a book value purchase. Accordingly, the acquisition was recorded based on the book value of Century Life and the effects of the acquisition are included in the Company’s consolidated financial statements from the date of the acquisition forward. The acquisition did not have a material effect on the results of operations of the Company for 2001.
In January 2003, BancFirst Corporation repurchased 320,000 shares of its common stock for $14,400. The shares were repurchased through a market - maker in the Company’s stock and was not a part of the Company’s ongoing Stock Repurchase Program.
In October 2003, BancFirst Corporation completed the acquisition of Lincoln National Bancorporation (“Lincoln”) of Oklahoma City, Oklahoma for cash of $16,949. Lincoln had consolidated total assets of approximately $107,673. As a result of the acquisition, Lincoln was merged into BancFirst Corporation, and Lincoln’s wholly-owned bank subsidiary, Lincoln National Bank, became a subsidiary of BancFirst Corporation. The acquisition was accounted for as a purchase. Accordingly, the effects of the acquisition are included in the Company’ consolidated financial statements from the date of the acquisition forward. The acquisition did not have a material effect on the results of operations of the Company for 2003.
In November 2003, BancFirst completed the acquisition of the Hobart and Lone Wolf, Oklahoma branches of Gold Bank. As a result of the acquisition, BancFirst purchased approximately $16,256 of loans and other assets, and assumed approximately $40,465 of deposits, for a premium of approximately $2,731. The acquisition was accounted for as a purchase. Accordingly, the effects of the acquisition are included in the Company’s consolidated financial statements from the date of the acquisition forward. The acquisition did not have a material effect on the results of operations of the Company for 2003.
In January 2004, BancFirst Corporation established BFC Capital Trust II (“BFC II”), a trust formed under the Delaware Business Trust Act. BancFirst Corporation owns all of the common securities of BFC II. In February 2004, BFC II issued $25,000 of aggregate liquidation amount of 7.20% Cumulative Trust Preferred Securities (the “Trust Preferred Securities”) to other investors. The proceeds from the sale of the Trust Preferred Securities and the common securities of BFC II were invested in $25,773 of 7.20% Junior Subordinated Debentures of BancFirst Corporation. Interest payments on the 7.20% Junior Subordinated Debentures are payable January 15, April 15, July 15 and October 15 of each year. Such interest payments may be deferred for up to twenty consecutive quarters. The stated maturity date of the 7.20% Junior Subordinated Debentures is March 31, 2034, but they are subject to mandatory redemption pursuant to optional prepayment terms. The Trust Preferred Securities represent an undivided interest in the 7.20% Junior Subordinated Debentures, are guaranteed by BancFirst Corporation, and qualify as Tier 1 regulatory capital. During any deferral period or during any event of default, BancFirst Corporation may not declare or pay any dividends on any of its capital stock.
A-29
BANCFIRST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Cont.)
(3) DUE FROM BANKS AND FEDERAL FUNDS SOLD
The Company maintains accounts with various other financial institutions and the Federal Reserve Bank, primarily for the purpose of clearing cash items. It also sells federal funds to certain of these institutions on an overnight basis. As a result, the Company had concentrations of credit risk in one institution totaling $28,239 at December 31, 2003 and in five institutions totaling $134,050 at December 31, 2002. These institutions are selected based on the strength of their financial condition and their creditworthiness. No collateral is required on such balances.
The Company is required, as a matter of law, to maintain a reserve balance in the form of vault cash or on deposit with the Federal Reserve Bank. The average amount of reserves maintained for each of the years ended December 31, 2003 and 2002 was approximately $20,000 and $14,000, respectively.
(4) SECURITIES
The table below summarizes securities held for investment and securities available for sale:
The table below summarizes the amortized cost and estimated market values of securities held for investment:
A-30
BANCFIRST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Cont.)
The table below summarizes the amortized cost and estimated market values of securities available for sale:
None of the gross unrealized losses at December 31, 2003 and 2002 were considered to be other than temporary.
The maturities of securities held for investment and available for sale are summarized below. Actual maturities may differ from contractual maturities due to obligations that are called or prepaid. For purposes of the maturity table, mortgage-backed securities, which are not due at a single maturity date, have been allocated over maturity groupings based on the weighted-average contractual maturities of underlying collateral.
A-31
BANCFIRST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Cont.)
Sales of securities are summarized below:
Securities having book values of $439,105, $432,578 and $383,266 at December 31, 2003, 2002 and 2001, respectively, were pledged as collateral for public funds on deposit, repurchase agreements and for other purposes as required or permitted by law.
(5) LOANS AND ALLOWANCE FOR LOAN LOSSES
The following is a schedule of loans outstanding by category:
The Company’s loans are mostly to customers within Oklahoma and over half of the loans are secured by real estate. Credit risk on loans is managed through limits on amounts loaned to individual borrowers, underwriting standards and loan monitoring procedures. The amounts and types of collateral obtained to secure loans are based upon the Company’s underwriting standards and management’s credit evaluation. Collateral varies, but may include real estate, equipment, accounts receivable, inventory, livestock and securities. The Company’s interest in collateral is secured through filing mortgages and liens, and in some cases, by possession of the collateral. The amount of estimated loss due to credit risk in the Company’s loan portfolio is provided for in the allowance for loan losses. The amount of the allowance required to provide for all existing losses in the loan portfolio is an estimate based upon evaluations of loans, appraisals of collateral and other estimates which are subject to rapid change due to changing economic conditions and the economic prospects of borrowers. It is reasonably possible that a material change could occur in the estimated allowance for loan losses in the near term.
A-32
BANCFIRST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Cont.)
Changes in the allowance for loan losses are summarized as follows:
Below is a summary of impaired loans and the amounts included in the allowance for loan losses for impaired loans. No material amounts of interest income were collected on impaired loans for 2003 or 2002.
BancFirst has made loans in the ordinary course of business to the executive officers and directors of the Company and to certain affiliates of these executive officers and directors. Management believes that all such loans were made on substantially the same terms as those prevailing at the time for comparable transactions with other persons and do not represent more than a normal risk of collectibility or present other unfavorable features. A summary of these loans is as follows:
Transfers from loans to other real estate owned and repossessed assets are non-cash transactions, and are not included in the statement of cash flows. Such transfers totaled $5,443 and $5,833 for the years ended December 31, 2003 and 2002, respectively.
(6) PREMISES AND EQUIPMENT
The following is a summary of premises and equipment by classification:
A-33
BANCFIRST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Cont.)
(7) INTANGIBLE ASSETS AND GOODWILL
The Company adopted Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets” effective January 1, 2002. All intangible assets and goodwill were reassessed and reviewed for impairment as of that date. No changes were made to the estimated useful lives of intangible assets and no impairment charges were recognized from the adoption of this statement.
The following is a summary of intangible assets:
Amortization of intangible assets and estimated amortization of intangible assets are as follows:
The following is a summary of goodwill by business segment:
A-34
BANCFIRST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Cont.)
A reconciliation of reported net income to adjusted net income, and the related per share amounts, is as follows:
(8) TIME DEPOSITS
Certificates of deposit in denominations of $100 or more totaled $250,891 and $252,305 at December 31, 2003 and 2002, respectively. At December 31, 2003, the scheduled maturities of all certificates of deposit are as follows:
(9) SHORT-TERM BORROWINGS
The following is a summary of short-term borrowings:
Federal funds purchased represents borrowings of overnight funds from other financial institutions.
The Company enters into sales of securities to certain of its customers with simultaneous agreements to repurchase. These agreements represent an overnight borrowing of funds.
A-35
BANCFIRST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Cont.)
The notes payable represent short-term advances on a $12,000 revolving line of credit with another bank. Advances under the line of credit bear interest at one of three specified rates, at the option of the Company. Interest is due quarterly and at maturity, or at the end of various interest periods which may be selected by the Company. Any outstanding principal is due at the maturity of the note in April 2004. The note may be renewed annually.
(10) LONG-TERM BORROWINGS
The Company borrows under a line of credit from the Federal Home Loan Bank of Topeka, Kansas in order to match-fund certain long-term fixed rate loans. Such advances are at rates of from 5.09% to 7.86% and mature from 2004 through 2008. Interest payments on the advances are due monthly. Principal payments on the advances total $3,687 per year. Residential first mortgages and certain securities are pledged as collateral for the borrowings under the line of credit.
In June 2003, the Company paid off, in advance, $25,100 of Federal Home Loan Bank borrowings and recognized a $2,429 loss on the early extinguishment of this debt.
(11) JUNIOR SUBORDINATED DEBENTURES
In January 1997, BancFirst Corporation established BFC Capital Trust I (the “Trust”), a trust formed under the Delaware Business Trust Act. BancFirst Corporation owns all of the common securities of the Trust. In February 1997, the Trust issued $25,000 of aggregate liquidation amount of 9.65% Capital Securities, Series A (the “Capital Securities”) to other investors. The proceeds from the sale of the Capital Securities and the common securities of the Trust were invested in $25,000 of 9.65% Junior Subordinated Deferrable Interest Debentures, Series A (the “9.65% Junior Subordinated Debentures”) of BancFirst Corporation. The Series A Capital Securities and 9.65% Junior Subordinated Debentures were subsequently exchanged for Series B Capital Securities and Junior Subordinated Debentures, pursuant to a Registration Rights Agreement. The terms of the Series A and Series B securities are identical in all material respects. Interest payments on the 9.65% Junior Subordinated Debentures are payable January 15 and July 15 of each year. Such interest payments may be deferred for up to ten consecutive semi-annual periods. The stated maturity date of the 9.65% Junior Subordinated Debentures is January 15, 2027, but they are subject to mandatory redemption pursuant to optional prepayment terms. The Capital Securities represent an undivided interest in the 9.65% Junior Subordinated Debentures, are guaranteed by BancFirst Corporation, and qualify as Tier 1 regulatory capital. During any deferral period or during any event of default, BancFirst Corporation may not declare or pay any dividends on any of its capital stock.
(12) INCOME TAXES
The components of the Company’s income tax expense are as follows:
Income tax expense applicable to securities transactions approximated $1,149 and $102 for the years ended December 31, 2003 and 2002, respectively.
A-36
BANCFIRST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Cont.)
A reconciliation of tax expense at the federal statutory tax rate applied to income before taxes follows:
The net deferred tax liability consisted of the following:
(13) EMPLOYEE BENEFITS
In May 1986, the Company adopted the BancFirst Corporation Employee Stock Ownership and Thrift Plan (the “ESOP”) effective January 1, 1985. The ESOP covers all eligible employees, as defined in the ESOP, of the Company and its subsidiaries. The ESOP allows employees to defer up to 15% of their base salary, of which the Company may match 50%, but not to exceed 3% of their base salary. In addition, the Company may make discretionary contributions to the ESOP, as determined by the Company’s Board of Directors. The aggregate amounts of contributions by the Company to the ESOP for the years ended December 31, 2003, 2002 and 2001, were approximately $2,170, $2,266 and $2,076, respectively.
BancFirst Corporation also adopted a nonqualified incentive stock option plan (the “BancFirst ISOP”) in May 1986. In 2001, the Company amended the BancFirst ISOP to increase the number of shares to be issued under the plan to 1,100,000 and extend the term of the plan to December 31, 2011. The options are exercisable beginning four years from the date of grant at the rate of 25% per year for four years. Options granted prior to 1996 expire at the end of eleven years from the date of grant. Options granted after January 1, 1996 expire at the end of fifteen years from the date of grant. Options outstanding as of December 31, 2003 will become exercisable through the year 2010. The option price must be no less than 100% of the fair market value of the stock relating to such option at the date of grant.
A-37
BANCFIRST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Cont.)
In June 1999, the Company adopted the BancFirst Corporation Non-Employee Directors’ Stock Option Plan (the “BancFirst Directors’ Stock Option Plan”). A total of 75,000 shares may be issued under the plan. Each non-employee director is granted an option for 5,000 shares. The options are exercisable beginning one year from the date of grant at the rate of 25% per year for four years, and expire at the end of fifteen years from the date of grant. Options outstanding as of December 31, 2003 will become exercisable through the year 2006. The option price must be no less than 100% of the fair value of the stock relating to such option at the date of grant.
A summary of the options granted under both the BancFirst ISOP and the BancFirst Directors’ Stock Option Plan is as follows:
The fair value of each option granted is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions: a dividend yield of from 1.5% to 2.0%; risk-free interest rates are different for each grant and range from 3.74% to 7.74%; the expected lives of the options are from five to ten years; and volatility of the Company’s stock price is from 17.77% to 90.52% for all grants.
A summary of options outstanding under the BancFirst ISOP and the BancFirst Directors’ Stock Option Plan as of December 31, 2003 is as follows:
A-38
BANCFIRST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Cont.)
AmQuest Financial Corp. (“AmQuest”), which merged with the Company in 1998, had four stock option plans. These plans were assumed by the Company, but no new options will be issued under the plans. Pro forma disclosures, as if the cost recognition provision of FAS 123 had been applied, have not been presented for these plans since such disclosures would not result in material differences from the intrinsic value method. Three of the plans are qualified incentive stock option plans for employees (the “AmQuest Employees Stock Option Plans”). A total of 178,135 shares were authorized to be issued under the plans. These options became fully vested at the time of the merger and will expire at various dates through November 2006. A summary of the options granted under the AmQuest Employees Stock Option Plans is as follows:
A summary of options outstanding under the AmQuest Employees Stock Option Plans as of December 31, 2003 is as follows:
AmQuest’s other stock option plan was for non-employee directors (the “AmQuest Directors’ Stock Option Plan”). The AmQuest Directors Stock Option Plan was authorized to issue up to 118,755 shares and the options were fully exercisable when granted. A summary of the options granted under the AmQuest Directors Stock Option Plan is as follows:
A summary of options outstanding under the AmQuest Directors Stock Option Plan as of December 31, 2003 is as follows:
A-39
BANCFIRST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Cont.)
In May 1999, the Company adopted the BancFirst Corporation Directors’ Deferred Stock Compensation Plan (the “Deferred Stock Compensation Plan”). Under the plan, directors and members of the community advisory boards of the Company and its subsidiaries may defer up to 100% of their board fees. They are credited for each deferral with a number of stock units based on the current market price of the Company’s stock, which accumulate in an account until such time as the director or community board member terminates serving as a board member. Shares of common stock of the Company are then distributed to the terminating director or community board member based upon the number of stock units accumulated in his or her account. A total of 20,000 shares are authorized to be issued under the plan. A summary of the accumulated stock units is as follows:
(14) STOCKHOLDERS’ EQUITY
The following is a description of the capital stock of the Company:
(a) Senior Preferred Stock: $1.00 par value; 10,000,000 shares authorized; no shares issued or outstanding. Shares may be issued with such voting, dividend, redemption, sinking fund, conversion, exchange, liquidation and other rights as shall be determined by the Company’s Board of Directors, without approval of the stockholders. The Senior Preferred Stock would have a preference over common stock as to payment of dividends, as to the right to distribution of assets upon redemption of such shares or upon liquidation of the Company.
(b) 10% Cumulative Preferred Stock: $5.00 par value, redeemable at the Company’s option at $5.00 per share plus accumulated dividends; non-voting; cumulative dividends at the rate of 10% payable semi-annually on January 15 and July 15; 900,000 shares authorized; no shares issued or outstanding.
(c) Common stock: $1.00 par value; 15,000,000 shares authorized. At December 31, 2003 and 2002, there were 7,822,637 shares and 8,136,852 shares issued and outstanding, respectively.
In January 2003, BancFirst Corporation repurchased 320,000 shares of its common stock for $14,400. The shares were repurchased through a market-maker in the Company’s stock and the repurchase was not a part of the Company’s ongoing Stock Repurchase Program.
In November 1999, the Company adopted a Stock Repurchase Program (the “SRP”) authorizing management to repurchase up to 300,000 shares of the Company’s common stock. The SRP was amended in May 2001 to increase the shares authorized to be purchased by 277,916 shares and was amended again in August 2002 to increase the shares authorized to be purchased by 182,265 shares. 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 shareholders wishing to sell their stock. The timing, price and amount of stock repurchases under the SRP may be determined by management and must be approved by the Company’s Executive Committee. At December 31, 2003 there were 249,626 shares remaining that could be repurchased under the SRP. Below is a summary of the shares repurchased under the program.
A-40
BANCFIRST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Cont.)
BancFirst Corporation’s ability to pay dividends is dependent upon dividend payments received from BancFirst. Banking regulations limit bank dividends based upon net earnings retained and minimum capital requirements. Dividends in excess of these requirements require regulatory approval. At December 31, 2003, approximately $44,340 of the equity of BancFirst was available for dividend payments to BancFirst Corporation.
During any deferral period or any event of default on the Junior Subordinated Debentures, BancFirst Corporation may not declare or pay any dividends on any of its capital stock.
The Company is subject to risk-based capital guidelines issued by the Board of Governors of the Federal Reserve System. These guidelines are used to evaluate capital adequacy and involve both quantitative and qualitative evaluations of the Company’s assets, liabilities, and certain off-balance-sheet items calculated under regulatory practices. Failure to meet the minimum capital requirements can initiate certain mandatory or discretionary actions by the regulatory agencies that could have a direct material effect on the Company’s financial statements. The required minimums and the Company’s respective ratios are shown below.
To be “well capitalized” under federal bank regulatory agency definitions, a depository institution must have a Tier 1 ratio of at least 6%, a combined Tier 1 and Tier 2 ratio of at least 10%, and a leverage ratio of at least 5%. As of December 31, 2003 and 2002, BancFirst was considered to be “well capitalized”. There are no conditions or events since the most recent notification of BancFirst’s capital category that management believes would change its category.
A-41
BANCFIRST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Cont.)
(15) NET INCOME PER COMMON SHARE
Basic and diluted net income per common share are calculated as follows:
Below is the number and average exercise price of options that were excluded from the computation of diluted net income per common share for each year because the options’ exercise prices were greater than the average market price of the common shares.
A-42
BANCFIRST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Cont.)
(16) CONDENSED PARENT COMPANY FINANCIAL STATEMENTS
BALANCE SHEET
STATEMENT OF INCOME
A-43
BANCFIRST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Cont.)
STATEMENT OF CASH FLOWS
(17) RELATED PARTY TRANSACTIONS
In January 2004, the Company purchased land for one its branches from a director of the Company for $540, pursuant to a purchase option in the lease agreement for the property.
In past years, the Company purchased supplies, furniture and equipment from an affiliated company. This company was sold to a non-affiliated company in 2001. During the year ended December 31, 2001 such purchases totaled $148.
BancFirst sells credit life, credit accident and health, and ordinary life insurance policies for Century Life, which BancFirst Corporation acquired 75% of in 2001, and which is included in the Company’s consolidated financial statements beginning in 2001. BancFirst retains 40% of the commissions for such sales, which is the maximum amount permitted by law. The net income of Century Life for the years ended December 31, 2003, 2002, and 2001 was $455, $400, and $953, respectively.
Refer to note (5) for information regarding loan transactions with related parties.
A-44
BANCFIRST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Cont.)
(18) COMMITMENTS AND CONTINGENT LIABILITIES
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 amounts of financial instruments with off-balance-sheet risk are as follows:
Loan commitments are agreements to lend to a customer, as long as there is no violation of any condition established in the contract. 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 and may require payment of a fee. 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.
The Company leases office space in thirteen buildings, three parcels of land on which it owns buildings, and ten ATM locations. These leases expire at various dates through 2064.
The future minimum rental payments under these leases are as follows:
Rental expense on all property and equipment rented, including those rented on a monthly or temporary basis, totaled $929, $993 and $818 during 2003, 2002 and 2001, respectively.
The Company is a defendant in legal actions arising from normal business activities. Management believes that all legal actions against the Company are without merit or that the ultimate liability, if any, resulting from them will not materially affect the Company’s financial position, results of operations or cash flows.
A-45
BANCFIRST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Cont.)
(19) FAIR VALUES OF FINANCIAL INSTRUMENTS
The fair values reported below for 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.
The following methods and assumptions were used to estimate the fair value of each class of financial instruments:
Cash and Due From Banks; Federal Funds Sold and Interest-Bearing Deposits
The carrying amount of these short-term instruments is a reasonable estimate of fair value.
Securities
For securities, fair values are based on quoted market prices or dealer quotes, if available. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities.
Loans
For certain homogeneous categories of loans, such as some residential mortgages, fair value is estimated using the quoted market prices for securities backed by similar loans, adjusted for differences in loan characteristics. For residential mortgage loans held for sale, guaranteed student loans and participation in pools of credit card receivables, the carrying amount is a reasonable estimate of fair value. The fair value of other types of loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities.
Deposits
The fair value of transaction and savings accounts is the amount payable on demand at the reporting date. The fair value of fixed-maturity certificates of deposit is estimated using the rates currently offered for deposits of similar remaining maturities.
Short-term Borrowings
The amount payable on these short-term instruments is a reasonable estimate of fair value.
Long-term Borrowings
The fair value of fixed-rate long-term borrowings is estimated using the rates that would be charged for borrowings of similar remaining maturities.
Junior Subordinated Debentures
The fair value of fixed-rate junior subordinated debentures is estimated using the rates that would be charged for junior subordinated debentures of similar remaining maturities.
Loan Commitments and Letters of Credit
The fair value of commitments is estimated using the fees currently charged to enter into similar agreements, taking into account the terms of the agreements. The fair value of letters of credit is based on fees currently charged for similar agreements.
A-46
BANCFIRST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Cont.)
The estimated fair values of the Company’s financial instruments are as follows:
A-47
BANCFIRST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Cont.)
(20) SEGMENT INFORMATION
The Company evaluates its performance with an internal profitability measurement system that measures the profitability of its business units on a pre-tax basis. The four principal business units were metropolitan banks, community banks, other financial services, and executive, operations and support. Metropolitan and community banks offer traditional banking products such as commercial and retail lending, and a full line of deposit accounts. Metropolitan banks consist of banking locations in the metropolitan Oklahoma City and Tulsa areas. Community banks consist of banking locations in communities throughout Oklahoma. Other financial services are specialty product business units including guaranteed small business lending, guaranteed student lending, residential mortgage lending, trust services, securities brokerage, electronic banking and insurance. The executive, operations and support groups represent executive management, operational support and corporate functions that are not allocated to the other business units. The results of operations and selected financial information for the four business units are as follows:
A-48
BANCFIRST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Cont.)
The financial information for each business unit is presented on the basis used internally by management to evaluate performance and allocate resources. The Company utilizes a transfer pricing system to allocate the benefit or cost of funds provided or used by the various business units. Certain services provided by the support group to other business units, such as item processing, are allocated rates approximating the cost of providing the services. Eliminations are adjustments to consolidate the business units and companies. Capital expenditures are generally charged to the business unit using the asset.
(21) SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
A summary of the unaudited quarterly results of operations for the years ended December 31, 2003 and 2002 is as follows:
A-49
INDEX TO EXHIBITS
* Filed herewith.