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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2015

Commission file number 0-7674

 

 

FIRST FINANCIAL BANKSHARES, INC.

(Exact name of registrant as specified in its charter)

 

 

 

Texas   75-0944023

(State or other jurisdiction of incorporation

or organization)

 

(I.R.S. Employer

Identification No.)

400 Pine Street, Abilene, Texas   79601
(Address of principal executive offices)   (Zip Code)

(325) 627-7155

(Registrant’s telephone number, including area code)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulations S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer   x    Accelerated filer   ¨
Non-accelerated filer   ¨  (Do not check if a smaller reporting company)    Smaller reporting company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes  ¨    No  x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:

 

Class

  

Outstanding at October 28, 2015

Common Stock, $0.01 par value per share

   65,974,908

 

 

 


Table of Contents

TABLE OF CONTENTS

 

PART I   
FINANCIAL INFORMATION   

Item

      

Page

 
1.  

Financial Statements

     3   
 

Consolidated Balance Sheets – Unaudited

     4   
 

Consolidated Statements of Earnings – Unaudited

     5   
 

Consolidated Statements of Comprehensive Earnings – Unaudited

     6   
 

Consolidated Statements of Shareholders’ Equity – Unaudited

     7   
 

Consolidated Statements of Cash Flows – Unaudited

     8   
 

Notes to Consolidated Financial Statements – Unaudited

     9   
2.  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     33   
3.  

Quantitative and Qualitative Disclosures About Market Risk

     51   
4.  

Controls and Procedures

     52   
PART II   
OTHER INFORMATION   
1.  

Legal Proceedings

     53   
1A.  

Risk Factors

     53   
2.  

Unregistered Sales of Equity Securities and Use of Proceeds

     53   
3.  

Defaults Upon Senior Securities

     53   
4.  

Mine Safety Disclosures

     53   
5.  

Other Information

     53   
6.  

Exhibits

     54   
 

Signatures

     55   

 

2


Table of Contents

PART I

FINANCIAL INFORMATION

Item 1. Financial Statements.

The consolidated balance sheets of First Financial Bankshares, Inc. (the “Company”) at September 30, 2015 and 2014 and December 31, 2014, the consolidated statements of earnings and comprehensive earnings for the three and nine months ended September 30, 2015 and 2014, and the consolidated statements of shareholders’ equity and cash flows for the nine months ended September 30, 2015 and 2014, follow on pages 4 through 8.

 

3


Table of Contents

FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except per share amounts)

 

     September 30,     December 31,  
     2015     2014     2014  
     (Unaudited)        
ASSETS     

CASH AND DUE FROM BANKS

   $ 133,340      $ 149,957      $ 190,387   

FEDERAL FUNDS SOLD

     2,790        4,785        8,760   

INTEREST-BEARING DEPOSITS IN BANKS

     4,268        83,994        54,324   
  

 

 

   

 

 

   

 

 

 

Total cash and cash equivalents

     140,398        238,736        253,471   

INTEREST-BEARING TIME DEPOSITS IN BANKS

     4,491        19,234        17,002   

SECURITIES AVAILABLE-FOR-SALE, at fair value

     2,737,353        2,253,762        2,415,856   

SECURITIES HELD-TO-MATURITY (fair value of $291, $560 and $447 at September 30, 2015 and 2014, and December 31, 2014, respectively)

     286        554        441   

LOANS:

      

Held for investment

     3,266,817        2,828,430        2,929,188   

Less - allowance for loan losses

     (40,420     (36,388     (36,824
  

 

 

   

 

 

   

 

 

 

Net loans held for investment

     3,226,397        2,792,042        2,892,364   

Held for sale

     21,605        11,266        8,803   
  

 

 

   

 

 

   

 

 

 

Net loans

     3,248,002        2,803,308        2,901,167   

BANK PREMISES AND EQUIPMENT, net

     116,803        101,437        103,000   

INTANGIBLE ASSETS

     144,296        97,429        97,359   

OTHER ASSETS

     76,016        61,351        59,906   
  

 

 

   

 

 

   

 

 

 

Total assets

   $ 6,467,645      $ 5,575,811      $ 5,848,202   
  

 

 

   

 

 

   

 

 

 
LIABILITIES AND SHAREHOLDERS’ EQUITY       

NONINTEREST-BEARING DEPOSITS

   $ 1,720,383      $ 1,505,847      $ 1,570,330   

INTEREST-BEARING DEPOSITS

     3,376,900        2,958,517        3,179,925   
  

 

 

   

 

 

   

 

 

 

Total deposits

     5,097,283        4,464,364        4,750,255   

DIVIDENDS PAYABLE

     10,551        8,969        8,972   

SHORT-TERM BORROWINGS

     500,903        341,909        367,110   

OTHER LIABILITIES

     66,874        101,804        40,328   
  

 

 

   

 

 

   

 

 

 

Total liabilities

     5,675,611        4,917,046        5,166,665   
  

 

 

   

 

 

   

 

 

 

COMMITMENTS AND CONTINGENCIES

      

SHAREHOLDERS’ EQUITY:

      

Common stock - ($0.01 par value, authorized 120,000,000 shares; 65,942,155, 64,065,828 and 64,089,921 shares issued at September 30, 2015 and 2014, and December 31, 2014, respectively)

     659        641        641   

Capital surplus

     367,444        304,866        305,429   

Retained earnings

     373,372        314,363        327,978   

Treasury stock (shares at cost: 524,163, 532,256 and 529,563 at September 30, 2015 and 2014, and December 31, 2014, respectively)

     (6,207     (5,797     (5,878

Deferred compensation

     6,207        5,797        5,878   

Accumulated other comprehensive earnings

     50,559        38,895        47,489   
  

 

 

   

 

 

   

 

 

 

Total shareholders’ equity

     792,034        658,765        681,537   
  

 

 

   

 

 

   

 

 

 

Total liabilities and shareholders’ equity

   $ 6,467,645      $ 5,575,811      $ 5,848,202   
  

 

 

   

 

 

   

 

 

 

See notes to consolidated financial statements.

 

4


Table of Contents

FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF EARNINGS - (UNAUDITED)

(Dollars in thousands, except for share amounts)

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
     2015      2014      2015      2014  

INTEREST INCOME:

     

Interest and fees on loans

   $ 39,368       $ 34,682       $ 110,464       $ 101,586   

Interest on investment securities:

     

Taxable

     7,298         6,858         22,502         21,032   

Exempt from federal income tax

     10,457         8,335         29,439         24,543   

Interest on federal funds sold and interest-bearing deposits in banks

     40         80         171         257   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total interest income

     57,163         49,955         162,576         147,418   

INTEREST EXPENSE:

     

Interest on deposits

     932         999         2,761         2,894   

Other

     133         70         281         249   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total interest expense

     1,065         1,069         3,042         3,143   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net interest income

     56,098         48,886         159,534         144,275   

PROVISION FOR LOAN LOSSES

     2,664         896         5,508         3,710   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net interest income after provision for loan losses

     53,434         47,990         154,026         140,565   
  

 

 

    

 

 

    

 

 

    

 

 

 

NONINTEREST INCOME:

     

Trust fees

     4,818         4,772         14,289         13,897   

Service charges on deposit accounts

     4,653         4,402         12,442         12,623   

ATM, interchange and credit card fees

     5,794         5,093         16,209         14,291   

Real estate mortgage operations

     3,742         2,079         7,321         4,835   

Net gain (loss) on sale of available-for-sale securities (includes $136 and $1 for the three months ended September 30, 2015 and 2014, respectively, and $380 and ($4) for the nine months ended September 30, 2015 and 2014, respectively, related to accumulated other comprehensive earnings reclassification)

     136         1         380         (4

Net gain (loss) on sale of foreclosed assets

     28         305         10         804   

Other

     1,275         672         3,501         3,155   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total noninterest income

     20,446         17,324         54,152         49,601   

NONINTEREST EXPENSE:

     

Salaries and employee benefits

     21,648         17,950         59,086         52,638   

Net occupancy expense

     3,050         2,297         7,640         6,804   

Equipment expense

     3,114         2,758         9,005         8,045   

FDIC insurance premiums

     819         693         2,316         2,035   

ATM, interchange and credit card expenses

     1,509         1,819         4,844         4,995   

Professional and service fees

     1,148         1,205         3,370         3,249   

Printing, stationery and supplies

     594         632         1,662         1,960   

Amortization of intangible assets

     200         62         362         210   

Other

     7,891         6,624         20,837         21,553   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total noninterest expense

     39,973         34,040         109,122         101,489   
  

 

 

    

 

 

    

 

 

    

 

 

 

EARNINGS BEFORE INCOME TAXES

     33,907         31,274         99,056         88,677   

INCOME TAX EXPENSE (includes $48 and $0 for the three months ended September 30, 2015 and 2014, respectively, and $133 and ($1) for the nine months ended September 30, 2015 and 2014, respectively, related to income tax expense from reclassification items)

     8,021         7,843         23,867         21,705   
  

 

 

    

 

 

    

 

 

    

 

 

 

NET EARNINGS

   $ 25,886       $ 23,431       $ 75,189       $ 66,972   
  

 

 

    

 

 

    

 

 

    

 

 

 

EARNINGS PER SHARE, BASIC

   $ 0.40       $ 0.37       $ 1.16       $ 1.05   
  

 

 

    

 

 

    

 

 

    

 

 

 

EARNINGS PER SHARE, ASSUMING DILUTION

   $ 0.40       $ 0.36       $ 1.16       $ 1.04   
  

 

 

    

 

 

    

 

 

    

 

 

 

DIVIDENDS PER SHARE

   $ 0.16       $ 0.14       $ 0.46       $ 0.41   
  

 

 

    

 

 

    

 

 

    

 

 

 

See notes to consolidated financial statements.

 

5


Table of Contents

FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS - (UNAUDITED)

(Dollars in thousands)

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2015     2014     2015     2014  

NET EARNINGS

   $ 25,886      $ 23,431      $ 75,189      $ 66,972   

OTHER ITEMS OF COMPREHENSIVE EARNINGS (LOSS):

        

Change in unrealized gain on investment securities available-for-sale, before income taxes

     23,025        5,707        5,318        43,889   

Reclassification adjustment for realized losses (gains) on investment securities included in net earnings, before income tax

     (136     (1     (380     4   

Minimum liability pension adjustment, before income taxes

     (108     —          (216     —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other items of comprehensive earnings (losses)

     22,781        5,706        4,722        43,893   

Income tax benefit (expense) related to:

        

Investment securities

     (8,011     (1,997     (1,728     (15,362

Minimum liability pension adjustment

     38        —          76        —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Total income tax benefit (expense)

     (7,973     (1,997     (1,652     (15,362
  

 

 

   

 

 

   

 

 

   

 

 

 

COMPREHENSIVE EARNINGS

   $ 40,694      $ 27,140      $ 78,259      $ 95,503   
  

 

 

   

 

 

   

 

 

   

 

 

 

See notes to consolidated financial statements.

 

6


Table of Contents

FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(Dollars in thousands, except per share amounts)

 

                Capital
Surplus
    Retained
Earnings
          Accumulated
Other
Comprehensive
Earnings
    Total
Shareholders’
Equity
 
    Common Stock         Treasury Stock     Deferred
Compensation
     
    Shares     Amount         Shares     Amounts        

Balances at December 31, 2013

    31,992,497      $ 320      $ 302,991      $ 273,972        (269,467   $ (5,490   $ 5,490      $ 10,364      $ 587,647   

Net earnings (unaudited)

    —          —          —          66,972        —          —          —          —          66,972   

Stock option exercises (unaudited)

    50,571        1        1,076        —          —          —          —          —          1,077   

Cash dividends declared, $0.41 per share (unaudited)

    —          —          —          (26,261     —          —          —          —          (26,261

Change in unrealized gain in investment securities available-for-sale, net of related income taxes (unaudited)

    —          —          —          —          —          —          —          28,531        28,531   

Additional tax benefit related to directors’ deferred compensation plan (unaudited)

    —          —          267        —          —          —          —          —          267   

Shares redeemed in connection with directors’ deferred compensation plan, net (unaudited)

    —          —          —          —          5,345        (307     307        —          —     

Stock option expense (unaudited)

    —          —          532        —          —          —          —          —          532   

Two-for-one stock split in the form of a 100% stock dividend (unaudited)

    32,022,760        320        —          (320     (268,134     —          —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balances at September 30, 2014 (unaudited)

    64,065,828      $ 641      $ 304,866      $ 314,363        (532,256   $ (5,797   $ 5,797      $ 38,895      $ 658,765   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balances at December 31, 2014

    64,089,921      $ 641      $ 305,429      $ 327,978        (529,563   $ (5,878   $ 5,878      $ 47,489      $ 681,537   

Net earnings (unaudited)

    —          —          —          75,189        —          —          —          —          75,189   

Stock option exercises (unaudited)

    89,790        —          1,290        —          —          —          —          —          1,290   

Restricted stock grant (unaudited)

    7,070        —          250        —          —          —          —          —          250   

Stock issued in acquisition of FBC Bancshares, Inc. (unaudited)

    1,755,374        18        59,630        —          —          —          —          —          59,648   

Cash dividends declared, $0.46 per share (unaudited)

    —          —          —          (29,795     —          —          —          —          (29,795

Minimum liability pension adjustment, net of related income taxes (unaudited)

    —          —          —          —          —          —          —          (140     (140

Change in unrealized gain in investment securities available-for-sale, net of related income taxes (unaudited)

    —          —          —          —          —          —          —          3,210        3,210   

Additional tax benefit related to directors’ deferred compensation plan (unaudited)

    —          —          303        —          —          —          —          —          303   

Shares redeemed in connection with directors’ deferred compensation plan, net (unaudited)

    —          —          —          —          5,400        (329     329        —          —     

Stock option expense (unaudited)

    —          —          542        —          —          —          —          —          542   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balances at September 30, 2015 (unaudited)

    65,942,155      $ 659      $ 367,444      $ 373,372        (524,163   $ (6,207   $ 6,207      $ 50,559      $ 792,034   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See notes to consolidated financial statements.

 

7


Table of Contents

FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS - (UNAUDITED)

(Dollars in thousands)

 

     Nine Months Ended
September 30,
 
     2015     2014  

CASH FLOWS FROM OPERATING ACTIVITIES:

    

Net earnings

   $ 75,189      $ 66,972   

Adjustments to reconcile net earnings to net cash provided by operating activities:

    

Depreciation and amortization

     8,069        6,244   

Provision for loan losses

     5,508        3,710   

Securities premium amortization (discount accretion), net

     20,493        14,739   

Gain on sale of assets, net

     (379     (815

Deferred federal income tax benefit

     (1,487     (844

Change in loans held for sale, net

     (12,801     (6,103

Change in other assets

     (9,655     8,936   

Change in other liabilities

     8,982        6,721   
  

 

 

   

 

 

 

Total adjustments

     18,730        32,588   
  

 

 

   

 

 

 

Net cash provided by operating activities

     93,919        99,560   
  

 

 

   

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

    

Cash paid for asset acquisition of 4Trust Mortgage, Inc.

     (1,931     —     

Cash received in acquisition of FBC Bancshares, Inc.

     65,197        —     

Net decrease in interest-bearing time deposits in banks

     12,511        12,683   

Activity in available-for-sale securities:

    

Sales

     34,541        3,590   

Maturities

     2,189,905        1,677,839   

Purchases

     (2,501,587     (1,794,233

Activity in held-to-maturity securities - maturities

     155        130   

Net increase in loans

     (91,259     (146,452

Purchases of bank premises and equipment and other assets

     (12,437     (12,993

Proceeds from sale of other assets

     727        3,823   
  

 

 

   

 

 

 

Net cash used in investing activities

     (304,178     (255,613
  

 

 

   

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

    

Net increase (decrease) in noninterest-bearing deposits

     (2,096     143,663   

Net increase in interest-bearing deposits

     5,540        185,626   

Net increase (decrease) in short-term borrowings

     120,668        (121,979

Common stock transactions:

    

Proceeds from stock issuances

     1,291        1,076   

Dividends paid

     (28,217     (25,609
  

 

 

   

 

 

 

Net cash provided by financing activities

     97,186        182,777   
  

 

 

   

 

 

 

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

     (113,073     26,724   

CASH AND CASH EQUIVALENTS, beginning of period

     253,471        212,012   
  

 

 

   

 

 

 

CASH AND CASH EQUIVALENTS, end of period

   $ 140,398      $ 238,736   
  

 

 

   

 

 

 

SUPPLEMENTAL INFORMATION AND NONCASH TRANSACTIONS:

    

Interest paid

   $ 3,066      $ 3,155   

Federal income tax paid

     22,179        21,281   

Transfer of loans to foreclosed assets

     97        1,085   

Investment securities purchased but not settled

     17,869        61,332   

See notes to consolidated financial statements.

 

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Table of Contents

FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Note 1 - Basis of Presentation

The unaudited interim consolidated financial statements include the accounts of the Company, a Texas corporation and a financial holding company registered under the Bank Holding Company Act of 1956, as amended, or BHCA, and its wholly-owned subsidiaries: First Financial Bank, National Association, Abilene, Texas; First Technology Services, Inc.; First Financial Trust & Asset Management Company, National Association; First Financial Investments, Inc.; and First Financial Insurance Agency, Inc.

Through our subsidiary bank, we conduct a full-service commercial banking business. Our banking centers are located primarily in Central, North Central, Southeast and West Texas. As of September 30, 2015, we had 70 financial centers across Texas, with eleven locations in Abilene, three locations in San Angelo and Weatherford, two locations in Cleburne, Conroe, Huntsville, Stephenville and Granbury, and one location each in Acton, Albany, Aledo, Alvarado, Beaumont, Boyd, Bridgeport, Brock, Burleson, Cut and Shoot, Cisco, Clyde, Decatur, Eastland, Fort Worth, Glen Rose, Grapevine, Hereford, Keller, Magnolia, Mauriceville, Merkel, Midlothian, Mineral Wells, Montgomery, Moran, New Waverly, Newton, Odessa, Orange, Port Arthur, Ranger, Rising Star, Roby, Southlake, Sweetwater Tomball, Trent, Trophy Club, Vidor, Waxahachie, Willis and Willow Park and three mortgage origination offices in Dallas, Ft. Worth and Southlake, Texas. Our trust subsidiary has nine locations which are located in Abilene, Fort Worth, Lubbock, Odessa, Beaumont, Hereford, San Angelo, Stephenville and Sweetwater, all in Texas.

In the opinion of management, the unaudited interim consolidated financial statements reflect all adjustments necessary for a fair presentation of the Company’s financial position and unaudited results of operations and should be read in conjunction with the Company’s audited consolidated financial statements, and notes thereto in the Company’s Annual Report on Form 10-K, for the year ended December 31, 2014. All adjustments were of a normal recurring nature. However, the results of operations for the three months and nine months ended September 30, 2015, are not necessarily indicative of the results to be expected for the year ending December 31, 2015, due to seasonality, changes in economic conditions and loan credit quality, interest rate fluctuations, regulatory and legislative changes and other factors. The preparation of financial statements in conformity with United States generally accepted accounting principles (“GAAP”) require management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the financial statement date. Actual results could vary. Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted under U. S. Securities and Exchange Commission (“SEC”) rules and regulations. The Company evaluated subsequent events for potential recognition and/or disclosure through the date the consolidated financial statements were issued.

On April 28, 2015, the Company’s shareholders approved an amendment to the Company’s Amended and Restated Certificate of Formation to increase the number of authorized common shares to 120,000,000.

On October 28, 2014, the Company’s Board of Directors authorized the repurchase of up to 1,500,000 common shares through September 30, 2017. The stock buyback plan authorizes management to repurchase the stock at such time as repurchases are considered beneficial to shareholders. Any repurchase of stock will be made through the open market, block trades or in privately negotiated transactions in accordance with applicable laws and regulations. Under the repurchase plan, there is no minimum number of shares that the Company is required to repurchase. Through September 30, 2015, no shares were repurchased under this authorization.

Goodwill and other intangible assets are evaluated annually for impairment as of the end of the second quarter. No such impairment has been noted in connection with the current or any prior evaluations.

 

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Note 2 - Stock Split

On April 22, 2014, the Company’s Board of Directors declared a two-for-one stock split in the form of a 100% stock dividend effective for shareholders of record on May 15, 2014 that was distributed on June 2, 2014. All per share amounts in this report have been restated to reflect this stock split. An amount equal to the par value of the additional common shares issued pursuant to the stock split was reflected as a transfer from retained earnings to common stock on the consolidated financial statements as of and for the nine months ended September 30, 2014.

Note 3 - Earnings Per Share

Basic earnings per common share is computed by dividing net income available to common shareholders by the weighted average number of shares outstanding during the periods presented. In computing diluted earnings per common share for the three and nine months ended September 30, 2015 and 2014, the Company assumes that all dilutive outstanding options to purchase common stock have been exercised at the beginning of the period (or the time of issuance, if later). The dilutive effect of the restricted stock and the outstanding options is reflected by application of the treasury stock method, whereby the proceeds from the restricted stock and the exercised options are assumed to be used to purchase common stock at the average market price during the respective periods. The weighted average common shares outstanding used in computing basic earnings per common share for the three months ended September 30, 2015 and 2014 were 65,335,457 and 64,059,675 shares, respectively. The weighted average common shares outstanding used in computing basic earnings per common share for the nine months ended September 30, 2015 and 2014 were 64,540,034 and 64,038,526 shares, respectively. The weighted average common shares outstanding used in computing fully diluted earnings per common share for the three months ended September 30, 2015 and 2014 were 65,501,697 and 64,304,985 shares, respectively. The weighted average common shares outstanding used in computing fully diluted earnings per common share for the nine months ended September 30, 2015 and 2014 were 64,736,155 and 64,302,615 shares, respectively.

Note 4 - Interest-bearing Time Deposits in Banks and Securities

Interest-bearing time deposits in banks totaled $4,491,000, $19,234,000 and $17,002,000 at September 30, 2015 and 2014 and December 31, 2014, respectively, and have original maturities generally ranging from one to four years. Of these amounts, $489,000, $3,693,000 and $3,195,000 are time deposits with balances greater than $250,000, the FDIC insured limit, at September 30, 2015 and 2014 and December 31, 2014, respectively.

Management classifies debt and equity securities as held-to-maturity, available-for-sale, or trading based on its intent. Debt securities that management has the positive intent and ability to hold to maturity are classified as held-to-maturity and recorded at cost, adjusted for amortization of premiums and accretion of discounts, which are recognized as adjustments to interest income using the interest method. Securities not classified as held-to-maturity or trading are classified as available-for-sale and recorded at fair value, with all unrealized gains and unrealized losses judged to be temporary, net of deferred income taxes, excluded from earnings and reported in the consolidated statements of comprehensive earnings. Available-for-sale securities that have unrealized losses that are judged other-than-temporary are included in gain (loss) on sale of securities and a new cost basis is established. Securities classified as trading are recorded at fair value with unrealized gains and losses included in earnings.

The Company records its available-for-sale and trading securities portfolio at fair value. Fair values of these securities are determined based on methodologies in accordance with current authoritative accounting guidance. Fair values are volatile and may be influenced by a number of factors, including market interest rates, prepayment speeds, discount rates, credit ratings and yield curves. Fair values for investment securities are based on quoted market prices, where available. If quoted market prices are not available, fair values are based on the quoted prices of similar instruments or an estimate of fair value by using a range of fair value estimates in the market place as a result of the illiquid market specific to the type of security.

 

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When the fair value of a security is below its amortized cost, and depending on the length of time the condition exists and the extent the fair value is below amortized cost, additional analysis is performed to determine whether an other-than-temporary impairment condition exists. Available-for-sale and held-to-maturity securities are analyzed quarterly for possible other-than-temporary impairment. The analysis considers (i) whether we have the intent to sell our securities prior to recovery and/or maturity, (ii) whether it is more likely than not that we will have to sell our securities prior to recovery and/or maturity, (iii) the length of time and extent to which the fair value has been less than amortized cost, and (iv) the financial condition of the issuer. Often, the information available to conduct these assessments is limited and rapidly changing, making estimates of fair value subject to judgment. If actual information or conditions are different than estimated, the extent of the impairment of the security may be different than previously estimated, which could have a material effect on the Company’s results of operations and financial condition.

The Company’s investment portfolio consists of U.S. Treasury securities, obligations of U. S. government sponsored enterprises and agencies, obligations of state and political subdivisions, mortgage pass-through securities, corporate bonds and general obligation or revenue based municipal bonds. Pricing for such securities is generally readily available and transparent in the market. The Company utilizes independent third party pricing services to value its investment securities, which the Company reviews as well as the underlying pricing methodologies for reasonableness and to ensure such prices are aligned with pricing matrices. The Company validates quarterly, on a sample basis, prices supplied by the independent pricing services by comparison to prices obtained from other third party sources.

A summary of the Company’s available-for-sale securities follows (in thousands):

 

     September 30, 2015  
     Amortized
Cost Basis
     Gross
Unrealized
Holding Gains
     Gross
Unrealized
Holding Losses
    Estimated
Fair Value
 

U.S. Treasury securities

   $ 10,828       $ 89       $ —        $ 10,917   

Obligations of U.S. government sponsored enterprises and agencies

     153,960         1,237         —          155,197   

Obligations of states and political subdivisions

     1,375,958         62,005         (812     1,437,151   

Corporate bonds and other

     88,927         2,382         —          91,309   

Residential mortgage-backed securities

     817,791         16,566         (1,498     832,859   

Commercial mortgage-backed securities

     207,778         2,175         (33     209,920   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total securities available-for-sale

   $ 2,655,242       $ 84,454       $ (2,343   $ 2,737,353   
  

 

 

    

 

 

    

 

 

   

 

 

 

 

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     September 30, 2014  
     Amortized
Cost Basis
     Gross
Unrealized
Holding Gains
     Gross
Unrealized
Holding Losses
    Estimated
Fair Value
 

U.S. Treasury securities

   $ 520       $ —         $ —        $ 520   

Obligations of U.S. government sponsored enterprises and agencies

     106,339         964         (2     107,301   

Obligations of states and political subdivisions

     1,046,148         56,398         (577     1,101,969   

Corporate bonds and other

     96,424         3,269         —          99,693   

Residential mortgage-backed securities

     803,072         14,395         (5,600     811,867   

Commercial mortgage-backed securities

     134,769         31         (2,388     132,412   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total securities available-for-sale

   $ 2,187,272       $ 75,057       $ (8,567   $ 2,253,762   
  

 

 

    

 

 

    

 

 

   

 

 

 

 

     December 31, 2014  
     Amortized
Cost Basis
     Gross
Unrealized
Holding Gains
     Gross
Unrealized
Holding Losses
    Estimated
Fair Value
 

U.S. Treasury securities

   $ 518       $ 2       $ —        $ 520   

Obligations of U.S. government sponsored enterprises and agencies

     128,919         864         (28     129,755   

Obligations of states and political subdivisions

     1,107,795         60,083         (250     1,167,628   

Corporate bonds and other

     95,864         2,894         —          98,758   

Residential mortgage-backed securities

     871,265         16,804         (2,858     885,211   

Commercial mortgage-backed securities

     134,322         555         (893     133,984   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total securities available-for-sale

   $ 2,338,683       $ 81,202       $ (4,029   $ 2,415,856   
  

 

 

    

 

 

    

 

 

   

 

 

 

Disclosures related to the Company’s held-to-maturity securities, which totaled $286,000, $554,000 and $441,000 at September 30, 2015 and 2014, and December 31, 2014, respectively, have not been presented due to insignificance.

The Company invests in mortgage-backed securities that have expected maturities that differ from their contractual maturities. These differences arise because borrowers may have the right to call or prepay obligations with or without a prepayment penalty. These securities include collateralized mortgage obligations (CMOs) and other asset backed securities. The expected maturities of these securities at September 30, 2015 were computed by using scheduled amortization of balances and historical prepayment rates. At September 30, 2015 and 2014 and December 31, 2014, the Company did not hold CMOs that entail higher risks than standard mortgage-backed securities.

 

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The amortized cost and estimated fair value of available-for-sale securities at September 30, 2015, by contractual and expected maturity, are shown below (in thousands):

 

     Amortized
Cost Basis
     Estimated
Fair Value
 

Due within one year

   $ 134,596       $ 135,906   

Due after one year through five years

     751,592         786,916   

Due after five years through ten years

     739,704         767,254   

Due after ten years

     3,781         4,498   

Mortgage-backed securities

     1,025,569         1,042,779   
  

 

 

    

 

 

 

Total

   $ 2,655,242       $ 2,737,353   
  

 

 

    

 

 

 

The following tables disclose, as of September 30, 2015 and 2014, and December 31, 2014, the Company’s investment securities that have been in a continuous unrealized-loss position for less than 12 months and for 12 or more months (in thousands):

 

     Less than 12 Months      12 Months or Longer      Total  

September 30, 2015

   Fair Value      Unrealized
Loss
     Fair Value      Unrealized
Loss
     Fair Value      Unrealized
Loss
 

Obligations of states and political subdivisions

   $ 97,670       $ 792       $ 2,233       $ 20       $ 99,903       $ 812   

Residential mortgage-backed securities

     62,765         396         65,614         1,102         128,379         1,498   

Commercial mortgage-backed securities

     5,878         9         9,466         24         15,344         33   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 166,313       $ 1,197       $   77,313       $ 1,146       $ 243,626       $ 2,343   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     Less than 12 Months      12 Months or Longer      Total  

September 30, 2014

   Fair Value      Unrealized
Loss
     Fair Value      Unrealized
Loss
     Fair Value      Unrealized
Loss
 

Obligations of U.S. Government sponsored enterprises and agencies

   $ 876       $ 2       $ —         $ —         $ 876       $ 2   

Obligations of states and political subdivisions

     17,871         38         50,158         539         68,029         577   

Residential mortgage-backed securities

     82,382         450         134,271         5,150         216,653         5,600   

Commercial mortgage-backed securities

     6,435         15         102,353         2,373         108,788         2,388   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 107,564       $ 505       $ 286,782       $ 8,062       $ 394,346       $ 8,567   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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     Less than 12 Months      12 Months or Longer      Total  

December 31, 2014

   Fair Value      Unrealized
Loss
     Fair Value      Unrealized
Loss
     Fair Value      Unrealized
Loss
 

Obligations of U.S. government sponsored enterprises and agencies

   $ 25,480       $ 28       $ —         $ —         $ 25,480       $ 28   

Obligations of states and political subdivisions

     15,128        60        21,249        190         36,377         250   

Residential mortgage-backed securities

     76,350         148         128,368         2,710         204,718         2,858   

Commercial mortgage-backed securities

     48,399         273         55,065         620         103,464         893   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 165,357       $ 509       $ 204,682       $ 3,520       $ 370,039       $ 4,029   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The number of investments in an unrealized loss position totaled 80 at September 30, 2015. We do not believe these unrealized losses are “other-than-temporary” as (i) we do not have the intent to sell our securities prior to recovery and/or maturity and (ii) it is more likely than not that we will not have to sell our securities prior to recovery and/or maturity. In making this determination, we also consider the length of time and extent to which fair value has been less than cost and the financial condition of the issuer. The unrealized losses noted are interest rate related due to the level of interest rates at September 30, 2015 compared to the time of purchase. We have reviewed the ratings of the issuers and have not identified any issues related to the ultimate repayment of principal as a result of credit concerns on these securities. Our mortgage related securities are backed by GNMA, FNMA and FHLMC or are collateralized by securities backed by these agencies.

At September 30, 2015, $1,667,548,000 of the Company’s securities were pledged as collateral for public or trust fund deposits, repurchase agreements and for other purposes required or permitted by law.

During the quarters ended September 30, 2015 and 2014, sales of investment securities that were classified as available-for-sale totaled $27,910,000 and $1,839,000, respectively. Gross realized gains from security sales in the third quarter of 2015 and 2014 totaled $142,000 and $1,000, respectively. Gross realized losses from security sales during the third quarter of 2015 totaled $6,000. There were no gross realized losses from security sales or calls in the third quarter of 2014. During the nine months ended September 30, 2015 and 2014, sales of investment securities that were classified as available-for-sale totaled $34,541,000 and $3,590,000, respectively. Gross realized gains from security sales during the nine-month periods ended September 30, 2015 and 2014 totaled $390,000 and $1,000, respectively. Gross realized losses from security sales during the nine-month periods ended September 30, 2015 and 2014 totaled $10,000 and $5,000, respectively. The specific identification method was used to determine cost in order to compute the realized gains and losses.

Note 5 - Loans and Allowance for Loan Losses

Loans held for investment are stated at the amount of unpaid principal, reduced by unearned income and an allowance for loan losses. Interest on loans is calculated by using the simple interest method on daily balances of the principal amounts outstanding. The Company defers and amortizes net loan origination fees and costs as an adjustment to yield. The allowance for loan losses is established through a provision for loan losses charged to expense. Loans are charged against the allowance for loan losses when management believes the collectability of the principal is unlikely.

The Company has certain lending policies and procedures in place that are designed to maximize loan income with an acceptable level of risk. Management reviews and approves these policies and procedures on an annual basis and makes changes as appropriate. Management receives and reviews monthly reports related to loan originations, quality, concentrations, delinquencies, nonperforming and potential problem loans. Diversification in the loan portfolio is a means of managing risk associated with fluctuations in economic conditions, both by type of loan and geographic location.

 

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Commercial loans are underwritten after evaluating and understanding the borrower’s ability to operate profitably and effectively. Underwriting standards are designed to determine whether the borrower possesses sound business ethics and practices and to evaluate current and projected cash flows to determine the ability of the borrower to repay their obligations as agreed. Commercial loans are primarily made based on the identified cash flows of the borrower and, secondarily, on the underlying collateral provided by the borrower. Most commercial loans are secured by the assets being financed or other business assets, such as accounts receivable or inventory, and include personal guarantees.

Agricultural loans are subject to underwriting standards and processes similar to commercial loans. These agricultural loans are based primarily on the identified cash flows of the borrower and secondarily on the underlying collateral provided by the borrower. Most agricultural loans are secured by the agriculture related assets being financed, such as farm land, cattle or equipment, and include personal guarantees.

Real estate loans are also subject to underwriting standards and processes similar to commercial and agricultural loans. These loans are underwritten primarily based on projected cash flows and, secondarily, as loans secured by real estate. The repayment of real estate loans is generally largely dependent on the successful operation of the property securing the loans or the business conducted on the property securing the loan. Real estate loans may be more adversely affected by conditions in the real estate markets or in the general economy. The properties securing the Company’s real estate portfolio are generally diverse in terms of type and geographic location within Texas. This diversity helps reduce the exposure to adverse economic events that affect any single market or industry. Generally, real estate loans are owner occupied which further reduces the Company’s risk.

Consumer loan underwriting utilizes methodical credit standards and analysis to supplement the Company’s underwriting policies and procedures. The Company’s loan policy addresses types of consumer loans that may be originated and the collateral, if secured, which must be perfected. The relatively smaller individual dollar amounts of consumer loans that are spread over numerous individual borrowers also minimize the Company’s risk.

The allowance for loan losses is an amount which represents management’s best estimate of probable losses that are inherent in the Company’s loan portfolio as of the balance sheet date. The allowance for loan losses is comprised of three elements: (i) specific reserves determined based on probable losses on specific classified loans; (ii) a historical valuation reserve component that considers historical loss rates; and (iii) qualitative reserves based upon general economic conditions and other qualitative risk factors both internal and external to the Company. The allowance for loan losses is increased by charges to income and decreased by charge-offs (net of recoveries). Management’s periodic evaluation of the appropriateness of the allowance is based on general economic conditions, the financial condition of borrowers, the value and liquidity of collateral, delinquency, prior loan loss experience, and the results of periodic reviews of the portfolio. For purposes of determining our historical valuation reserve, the loan portfolio, less cash secured loans, government guaranteed loans and classified loans, is multiplied by the Company’s historical loss rate. Specific allocations are increased or decreased in accordance with deterioration or improvement in credit quality and a corresponding increase or decrease in risk of loss on a particular loan. In addition, we adjust our allowance for qualitative factors such as current local economic conditions and trends, including, without limitations, unemployment, oil and gas prices, drought conditions, changes in lending staff, policies and procedures, changes in credit concentrations, changes in the trends and severity of problem loans and changes in trends in volume and terms of loans. This qualitative reserve serves to estimate for additional areas of losses inherent in our portfolio that are not reflected in our historic loss factors.

 

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Although we believe we use the best information available to make loan loss allowance determinations, future adjustments could be necessary if circumstances or economic conditions differ substantially from the assumptions used in making our initial determinations. A downturn in the economy and employment could result in increased levels of non-performing assets and charge-offs, increased loan provisions and reductions in income. Additionally, bank regulatory agencies periodically review our allowance for loan losses and methodology and could require, in accordance with generally accepted accounting principles, additional provisions to the allowance for loan losses based on their judgment of information available to them at the time of their examination as well as changes to our methodology.

Accrual of interest is discontinued on a loan and payments are applied to principal when management believes, after considering economic and business conditions and collection efforts, the borrower’s financial condition is such that collection of interest is doubtful. Except consumer loans, generally all loans past due greater than 90 days, based on contractual terms, are placed on non-accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured. Consumer loans are generally charged-off when a loan becomes past due 90 days. For other loans in the portfolio, facts and circumstances are evaluated in making charge-off decisions.

Loans are considered impaired when, based on current information and events, management determines that it is probable we will be unable to collect all amounts due in accordance with the loan agreement, including scheduled principal and interest payments. If a loan is impaired, a specific valuation allowance is allocated, if necessary. Interest payments on impaired loans are typically applied to principal unless collectability of the principal amount is reasonably assured, in which case interest is recognized on a cash basis. Impaired loans, or portions thereof, are charged off when deemed uncollectable.

The Company’s policy requires measurement of the allowance for an impaired, collateral dependent loan based on the fair value of the collateral. Other loan impairments for non-collateral dependent loans are measured based on the present value of expected future cash flows or the loan’s observable market price. At September 30, 2015 and 2014, and December 31, 2014, all significant impaired loans have been determined to be collateral dependent and the allowance for loss has been measured utilizing the estimated fair value of the collateral.

From time to time, the Company modifies its loan agreement with a borrower. A modified loan is considered a troubled debt restructuring when two conditions are met: (i) the borrower is experiencing financial difficulty and (ii) concessions are made by the Company that would not otherwise be considered for a borrower with similar credit risk characteristics. Modifications to loan terms may include a lower interest rate, a reduction of principal, or a longer term to maturity. For all impaired loans, including the Company’s troubled debt restructurings, the Company performs a periodic, well-documented credit evaluation of the borrower’s financial condition and prospects for repayment to assess the likelihood that all principal and interest payments required under the terms of the agreement will be collected in full. When doubt exists about the ultimate collectability of principal and interest, the troubled debt restructuring remains on non-accrual status and payments received are applied to reduce principal to the extent necessary to eliminate such doubt. This determination of accrual status is judgmental and is based on facts and circumstances related to each troubled debt restructuring. Each of these loans is individually evaluated for impairment and a specific reserve is recorded based on probable losses, taking into consideration the related collateral, modified loan terms and cash flow. As of September 30, 2015 and 2014, and December 31, 2014, substantially all of the Company’s troubled debt restructured loans are included in the non-accrual totals.

The Company originates certain mortgage loans for sale in the secondary market. Accordingly, these loans are classified as held-for-sale and are carried at the lower of cost or fair value on an aggregate basis. The mortgage loan sales contracts contain indemnification clauses should the loans default, generally in the first three to six months, or if documentation is determined not to be in compliance with regulations. The Company’s historic losses as a result of these indemnities have been insignificant.

 

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Loans acquired, including loans acquired in a business combination, are initially recorded at fair value with no valuation allowance. Acquired loans are segregated between those considered to be credit impaired and those deemed performing. To make this determination, management considers such factors as past due status, non-accrual status and credit risk ratings. The fair value of acquired performing loans is determined by discounting expected cash flows, both principal and interest, at prevailing market interest rates. The difference between the fair value and principal balances at acquisition date, the fair value discount, is accreted into interest income over the estimated life of each loan.

Purchased credit impaired loans are those loans that showed evidence of deterioration of credit quality since origination and for which it is probable, at acquisition, that the Company will be unable to collect all amounts contractually owed. Their acquisition fair value, which includes a credit component at the acquisition date, was based on the estimate of cash flows, both principal and interest, expected to be collected or estimated collateral values if cash flows are not estimable, discounted at prevailing market rates of interest. The difference between the discounted cash flows expected at acquisition and the investment in the loan is recognized as interest income on a level-yield method over the life of the loan, unless management was unable to reasonably forecast cash flows in which case the loans were placed on nonaccrual. Contractually required payments for interest and principal that exceed the cash flows expected at acquisition are not recognized as a yield adjustment. Increases in expected cash flows subsequent to the initial investment are recognized prospectively through adjustment of the yield on the loan over its remaining life. Decreases in expected cash flows subsequent to acquisition are recognized as impairment. Valuation allowances on these impaired loans reflect only losses incurred after the acquisition. The carrying amount of purchased credit impaired loans at September 30, 2015 and 2014, and December 31, 2014 was $2,422,000, $2,383,000 and $2,151,000, respectively, compared to a contractual balance of $3,213,000, $3,525,000, and $3,275,000, respectively. Other purchased credit impaired loan disclosures were omitted due to immateriality.

Loans held-for-investment by class of financing receivables are as follows (in thousands):

 

     September 30,      December 31,  
     2015      2014      2014  

Commercial

   $ 698,406       $ 612,092       $ 639,954   

Agricultural

     99,232         86,718         105,694   

Real estate

     2,088,002         1,774,639         1,822,854   

Consumer

     381,177         354,981         360,686   
  

 

 

    

 

 

    

 

 

 

Total loans held-for-investment

   $ 3,266,817       $ 2,828,430       $ 2,929,188   
  

 

 

    

 

 

    

 

 

 

Loans held for sale totaled $21,605,000, $11,266,000 and $8,803,000 at September 30, 2015 and 2014, and December 31, 2014, respectively, which were recorded at cost as fair value approximated cost.

The Company’s non-accrual loans, loans still accruing and past due 90 days or more and restructured loans are as follows (in thousands):

 

     September 30,      December 31,  
     2015      2014      2014  

Non-accrual loans*

   $ 21,788       $ 22,093       $ 20,194   

Loans still accruing and past due 90 days or more

     49         263         261   

Troubled debt restructured loans**

     204         —           226   
  

 

 

    

 

 

    

 

 

 

Total

   $ 22,041       $ 22,356       $ 20,681   
  

 

 

    

 

 

    

 

 

 

 

* Includes $2,422,000, $2,383,000 and $2,151,000 of purchased credit impaired loans as of September 30, 2015 and 2014, and December 31, 2014, respectively.

 

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Table of Contents
** Troubled debt restructured loans of $6,462,000, $10,114,000 and $9,073,000, whose interest collection, after considering economic and business conditions and collection efforts, is doubtful are included in non-accrual loans at September 30, 2015 and 2014, and December 31, 2014, respectively.

The Company’s recorded investment in impaired loans and the related valuation allowance are as follows (in thousands):

 

September 30, 2015    September 30, 2014    December 31, 2014

Recorded
Investment

   Valuation
Allowance
   Recorded
Investment
   Valuation
Allowance
   Recorded
Investment
   Valuation
Allowance
$ 21,788    $4,645    $22,093    $4,634    $20,194    $4,213

 

  

 

  

 

  

 

  

 

  

 

The average recorded investment in impaired loans for the three and nine months ended September 30, 2015 and the year ended December 31, 2014 was approximately $20,026,000, $19,755,000 and $24,497,000, respectively. The Company had $22,742,000, $23,629,000 and $21,716,000 in non-accrual, past due 90 days or more and still accruing and restructured loans and foreclosed assets at September 30, 2015 and 2014, and December 31, 2014, respectively. Non-accrual loans at September 30, 2015 and 2014, and December 31, 2014, consisted of the following by class of financing receivables (in thousands):

 

     September 30,      December 31,  
     2015      2014      2014  

Commercial

   $ 5,077       $ 3,481       $ 3,193   

Agricultural

     75         102         165   

Real estate

     16,124         17,712         16,218   

Consumer

     512         798         618   
  

 

 

    

 

 

    

 

 

 

Total

   $ 21,788       $ 22,093       $ 20,194   
  

 

 

    

 

 

    

 

 

 

No significant additional funds are committed to be advanced in connection with impaired loans as of September 30, 2015.

The Company’s impaired loans and related allowance as of September 30, 2015 and 2014, and December 31, 2014, are summarized in the following tables by class of financing receivables (in thousands). No interest income was recognized on impaired loans subsequent to their classification as impaired.

 

September 30, 2015

   Unpaid
Contractual
Principal
Balance
     Recorded
Investment
With No
Allowance*
     Recorded
Investment
With
Allowance
     Total
Recorded
Investment
     Related
Allowance
     Year-to-Date
Average
Recorded
Investment
     Three-month
Average
Recorded
Investment
 

Commercial

   $ 6,351       $ 413       $ 4,664       $ 5,077       $ 1,666       $ 4,037       $ 4,316   

Agricultural

     121         —           75         75         47         55         85   

Real Estate

     22,796         4,341         11,783         16,124         2,844         15,222         15,114   

Consumer

     698         343         169         512         88         441         511   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 29,966       $ 5,097       $ 16,691       $ 21,788       $ 4,645       $ 19,755       $ 20,026   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

* Includes $2,422,000 of purchased credit impaired loans.

 

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Table of Contents

September 30, 2014

   Unpaid
Contractual
Principal
Balance
     Recorded
Investment
With No
Allowance*
     Recorded
Investment
With
Allowance
     Total
Recorded
Investment
     Related
Allowance
     Year-to-Date
Average
Recorded
Investment
     Three-month
Average
Recorded
Investment
 

Commercial

   $ 3,928       $ 278       $ 3,203       $ 3,481       $ 1,160       $ 3,990       $ 3,713   

Agricultural

     113         —           102         102         37         113         104   

Real Estate

     23,559         5,546         12,166         17,712         3,256         21,510         20,212   

Consumer

     977         467         331         798         181         911         864   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 28,577       $ 6,291       $ 15,802       $ 22,093       $ 4,634       $ 26,524       $ 24,893   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

* Includes $2,383,000 of purchased credit impaired loans.

 

December 31, 2014

   Unpaid
Contractual
Principal
Balance
     Recorded
Investment
With No
Allowance*
     Recorded
Investment
With
Allowance
     Total
Recorded
Investment
     Related
Allowance
     Average
Recorded
Investment
 

Commercial

   $ 3,749       $ 287       $ 2,906       $ 3,193       $ 1,171       $ 3,698   

Agricultural

     177         —           165         165         57         179   

Real Estate

     22,177         4,859         11,359         16,218         2,867         19,837   

Consumer

     838         420         198         618         118         783   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 26,941       $ 5,566       $ 14,628       $ 20,194       $ 4,213       $ 24,497   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

* Includes $2,151,000 of purchased credit impaired loans.

The Company recognized interest income on impaired loans prior to being classified as impaired of approximately $162,000 during the year ended December 31, 2014. Such amounts for the three-month and nine-month periods ended September 30, 2015 and 2014 were not significant.

From a credit risk standpoint, the Company rates its loans in one of four categories: (i) pass, (ii) special mention, (iii) substandard or (iv) doubtful. Loans rated as loss are charged-off.

The ratings of loans reflect a judgment about the risks of default and loss associated with the loan. The Company reviews the ratings on our credits as part of our on-going monitoring of the credit quality of our loan portfolio. Ratings are adjusted to reflect the degree of risk and loss that are felt to be inherent in each credit as of each reporting period. Our methodology is structured so that specific allocations are increased in accordance with deterioration in credit quality (and a corresponding increase in risk and loss) or decreased in accordance with improvement in credit quality (and a corresponding decrease in risk and loss).

Credits rated special mention show clear signs of financial weakness or deterioration in credit worthiness, however, such concerns are not so pronounced that the Company generally expects to experience significant loss within the short-term. Such credits typically maintain the ability to perform within standard credit terms and credit exposure is not as prominent as credits rated more harshly.

Credits rated substandard are those in which the normal repayment of principal and interest may be, or has been, jeopardized by reason of adverse trends or developments of a financial, managerial, economic or political nature, or important weaknesses exist in collateral. A protracted workout on these credits is a distinct possibility. Prompt corrective action is therefore required to strengthen the Company’s position, and/or to reduce exposure and to assure that adequate remedial measures are taken by the borrower. Credit exposure becomes more likely in such credits and a serious evaluation of the secondary support to the credit is performed.

Credits rated doubtful are those in which full collection of principal appears highly questionable, and which some degree of loss is anticipated, even though the ultimate amount of loss may not yet be certain and/or other factors exist which could affect collection of debt. Based upon available information, positive action by the Company is required to avert or minimize loss. Credits rated doubtful are generally also placed on non-accrual.

 

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Table of Contents

The following summarizes the Company’s internal ratings of its loans held-for-investment by class of financing receivables and portfolio segments, which are the same, at September 30, 2015 and 2014, and December 31, 2014 (in thousands):

 

September 30, 2015

   Pass      Special
Mention
     Substandard      Doubtful      Total  

Commercial

   $ 656,566       $ 19,242       $ 22,598       $ —         $ 698,406   

Agricultural

     98,180         148         904         —           99,232   

Real Estate

     2,020,556         23,542         43,846         58         2,088,002   

Consumer

     379,397         352         1,424         4         381,177   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 3,154,699       $ 43,284       $ 68,772       $ 62       $ 3,266,817   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

September 30, 2014

   Pass      Special
Mention
     Substandard      Doubtful      Total  

Commercial

   $ 597,717       $ 3,649       $ 10,726       $ —         $ 612,092   

Agricultural

     86,272         93         353         —           86,718   

Real Estate

     1,710,201         18,741         45,613         84         1,774,639   

Consumer

     352,850         601         1,527         3         354,981   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 2,747,040       $ 23,084       $ 58,219       $ 87       $ 2,828,430   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2014

   Pass      Special
Mention
     Substandard      Doubtful      Total  

Commercial

   $ 626,266       $ 3,853       $ 9,835       $ —         $ 639,954   

Agricultural

     105,101         91         502         —           105,694   

Real Estate

     1,765,886         15,106         41,722         140         1,822,854   

Consumer

     358,953         403         1,329         1         360,686   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 2,856,206       $ 19,453       $ 53,388       $ 141       $ 2,929,188   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

At September 30, 2015 and 2014, and December 31, 2014, the Company’s past due loans are as follows (in thousands):

 

September 30, 2015

   15-59
Days Past
Due*
     60-89
Days Past
Due
     Greater
Than 90
Days
     Total Past
Due
     Current      Total Loans      90 Days
Past Due
Still
Accruing
 

Commercial

   $ 11,554       $ 1,043       $ 202       $ 12,799       $ 685,607       $ 698,406       $ —     

Agricultural

     169         28         33         230         99,002         99,232         —     

Real Estate

     19,392         1,267         2,328         22,987         2,065,015         2,088,002         21   

Consumer

     1,657         467         53         2,177         379,000         381,177         28   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 32,772       $ 2,805       $ 2,616       $ 38,193       $ 3,228,624       $ 3,266,817       $ 49   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

September 30, 2014

   15-59
Days Past
Due*
     60-89
Days Past
Due
     Greater
Than 90
Days
     Total Past
Due
     Current      Total Loans      90 Days
Past Due
Still
Accruing
 

Commercial

   $ 2,726       $ 110       $ 316       $ 3,152       $ 608,940       $ 612,092       $ 111   

Agricultural

     294         59         —           353         86,365         86,718         —     

Real Estate

     15,404         930         2,216         18,550         1,756,089         1,774,639         102   

Consumer

     1,742         292         297         2,331         352,650         354,981         50   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 20,166       $ 1,391       $ 2,829       $ 24,386       $ 2,804,044       $ 2,828,430       $ 263   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

December 31, 2014

   15-59
Days Past
Due*
     60-89
Days Past
Due
     Greater
Than 90
Days
     Total Past
Due
     Current      Total Loans      90 Days
Past Due
Still
Accruing
 

Commercial

   $ 4,611       $ 94       $ 175       $ 4,880       $ 635,074       $ 639,954       $ 24   

Agricultural

     437         42         —           479         105,215         105,694         —     

Real Estate

     12,002         707         1,868         14,577         1,808,277         1,822,854         207   

Consumer

     2,322         496         134         2,952         357,734         360,686         30   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 19,372       $ 1,339       $ 2,177       $ 22,888       $ 2,906,300       $ 2,929,188       $ 261   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

* The Company monitors commercial, agricultural and real estate loans after such loans are 15 days past due. Consumer loans are monitored after such loans are 30 days past due.

The following table details the allowance for loan losses at September 30, 2015 and 2014, and December 31, 2014 by portfolio segment (in thousands). There were no allowances for purchased credit impaired loans at September 30, 2015 and 2014, or December 31, 2014. Allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other categories.

 

September 30, 2015

   Commercial      Agricultural      Real Estate      Consumer      Total  

Loans individually evaluated for impairment

   $ 1,666       $ 47       $ 2,844       $ 88       $ 4,645   

Loans collectively evaluated for impairment

     10,195         867         20,954         3,759         35,775   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 11,861       $ 914       $ 23,798       $ 3,847       $ 40,420   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

September 30, 2014

   Commercial      Agricultural      Real Estate      Consumer      Total  

Loans individually evaluated for impairment

   $ 1,160       $ 37       $ 3,256       $ 181       $ 4,634   

Loans collectively evaluated for impairment

     6,326         348         23,043         2,037         31,754   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 7,486       $ 385       $ 26,299       $ 2,218       $ 36,388   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2014

   Commercial      Agricultural      Real Estate      Consumer      Total  

Loans individually evaluated for impairment

   $ 1,171       $ 57       $ 2,867       $ 118       $ 4,213   

Loans collectively evaluated for impairment

     6,819         470         23,790         1,532         32,611   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 7,990       $ 527       $ 26,657       $ 1,650       $ 36,824   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The tables above for 2014 have been changed to conform to the 2015 presentation.

Changes in the allowance for loan losses for the three and nine months ended September 30, 2015 and 2014 are summarized as follows by portfolio segment (in thousands):

 

Three months ended September 30, 2015

   Commercial     Agricultural     Real Estate     Consumer     Total  

Beginning balance

   $ 11,456      $ 392      $ 24,342      $ 2,809      $ 38,999   

Provision for loan losses

     1,283        544        (369     1,206        2,664   

Recoveries

     52        —          65        117        234   

Charge-offs

     (930     (22     (240     (285     (1,477
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 11,861      $ 914      $ 23,798      $ 3,847      $ 40,420   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

Three months ended September 30, 2014

   Commercial     Agricultural     Real Estate     Consumer     Total  

Beginning balance

   $ 6,861      $ 364      $ 26,561      $ 2,106      $ 35,892   

Provision for loan losses

     635        7        (80     334        896   

Recoveries

     72        14        42        86        214   

Charge-offs

     (82     —          (224     (308     (614
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $   7,486      $ 385      $ 26,299      $ 2,218      $ 36,388   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

Nine months ended September 30, 2015

   Commercial     Agricultural     Real Estate     Consumer     Total  

Beginning balance

   $ 7,990      $ 527      $ 26,657      $ 1,650      $ 36,824   

Provision for loan losses

     5,072        486        (2,884     2,834        5,508   

Recoveries

     249        2        438        329        1,018   

Charge-offs

     (1,450     (101     (413     (966     (2,930
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 11,861      $ 914      $ 23,798      $ 3,847      $ 40,420   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

Nine months ended September 30, 2014

   Commercial     Agricultural     Real Estate     Consumer     Total  

Beginning balance

   $ 6,440      $ 383      $ 24,940      $ 2,137      $ 33,900   

Provision for loan losses

     1,189        (14     1,988        547        3,710   

Recoveries

     225        17        361        386        989   

Charge-offs

     (368     (1     (990     (852     (2,211
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $   7,486      $ 385      $ 26,299      $ 2,218      $ 36,388   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The Company’s recorded investment in loans as of September 30, 2015 and 2014, and December 31, 2014 related to the balance in the allowance for loan losses on the basis of the Company’s impairment methodology was as follows (in thousands). Purchased credit impaired loans of $2,422,000, $2,383,000 and $2,151,000 at September 30, 2015 and 2014, and December 31, 2014, respectively, are included in loans individually evaluated for impairment.

 

September 30, 2015

   Commercial      Agricultural      Real Estate      Consumer      Total  

Loans individually evaluated for impairment

   $ 5,077       $ 75       $ 16,124       $ 512       $ 21,788   

Loans collectively evaluated for impairment

     693,329         99,157         2,071,878         380,665         3,245,029   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 698,406       $   99,232       $ 2,088,002       $ 381,177       $ 3,266,817   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

September 30, 2014

   Commercial      Agricultural      Real Estate      Consumer      Total  

Loans individually evaluated for impairment

   $ 3,481       $ 102       $ 17,712       $ 798       $ 22,093   

Loans collectively evaluated for impairment

     608,611         86,616         1,756,927         354,183         2,806,337   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 612,092       $   86,718       $ 1,774,639       $ 354,981       $ 2,828,430   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

December 31, 2014

   Commercial      Agricultural      Real Estate      Consumer      Total  

Loans individually evaluated for impairment

   $ 3,193       $ 165       $ 16,218       $ 618       $ 20,194   

Loans collectively evaluated for impairment

     636,761         105,529         1,806,636         360,068         2,908,994   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 639,954       $ 105,694       $ 1,822,854       $ 360,686       $ 2,929,188   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

22


Table of Contents

The tables above for 2014 have been changed to conform to the 2015 presentation.

The Company’s loans that were modified in the three and nine months ended September 30, 2015 and 2014 and considered troubled debt restructurings are as follows (in thousands):

 

     Three Months Ended September 30, 2015      Nine Months Ended September 30, 2015  
     Number      Pre-
Modification
Recorded
Investment
     Post-
Modification
Recorded
Investment
     Number      Pre-
Modification
Recorded
Investment
     Post-
Modification
Recorded
Investment
 

Commercial

     1       $ 66       $ 66         3       $ 139       $ 139   

Agricultural

     —           —           —           3         129         129   

Real Estate

     1         149         149         2         228         228   

Consumer

     2         32         32         5         60         60   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     4       $ 247       $ 247         13       $    556       $    556   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     Three Months Ended September 30, 2014      Nine Months Ended September 30, 2014  
     Number      Pre-
Modification
Recorded
Investment
     Combined
Rate and
Maturity
     Number      Pre-
Modification
Recorded
Investment
     Combined
Rate and
Maturity
 

Commercial

     1       $ 158       $ 158         6       $ 557       $ 557   

Agricultural

     —           —           —           1         39         39   

Real Estate

     1         40         40         5         630         630   

Consumer

     —           —           —           3         11         11   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     2       $ 198       $ 198         15       $ 1,237       $ 1,237   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The balances below provide information as to how the loans were modified as troubled debt restructured loans during the three and nine months ended September 30, 2015 and 2014 (in thousands):

 

     Three Months Ended September 30, 2015      Nine Months Ended September 30, 2015  
     Adjusted
Interest
Rate
     Extended
Maturity
     Combined
Rate and
Maturity
     Adjusted
Interest
Rate
     Extended
Maturity
     Combined
Rate and
Maturity
 

Commercial

   $ —         $ 66       $ —         $ —         $ 139       $ —     

Agricultural

     —           —           —           —           129         —     

Real Estate

     —           149         —           —           149         79   

Consumer

     —           32         —           —           36         24   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ —         $ 247       $ —         $ —         $ 453       $ 103   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     Three Months Ended September 30, 2014      Nine Months Ended September 30, 2014  
     Adjusted
Interest
Rate
     Extended
Maturity
     Combined
Rate and
Maturity
     Adjusted
Interest
Rate
     Extended
Maturity
     Combined
Rate and
Maturity
 

Commercial

   $ —         $ 158       $ —         $ —         $ 255       $ 302   

Agricultural

     —           —           —           —           —           39   

Real Estate

     —           —           40         —           118         512   

Consumer

     —           —           —           —           8         3   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ —         $ 158       $ 40       $ —         $ 381       $ 856   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

During the three months ended September 30, 2015 and 2014, no loans were modified as troubled debt restructured loans within the previous 12 months and for which there was a payment default. During the

 

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nine months ended September 30, 2015 and 2014, one loan was modified in each nine-month period as a troubled debt restructured loan within the previous 12 months and for which there was a payment default. A default for purposes of this disclosure is a troubled debt restructured loan in which the borrower is 90 days past due or more or results in the foreclosure and repossession of the applicable collateral. The loans with payment default are as follows (dollars in thousands):

 

     Nine Months Ended September 30, 2015  
     Number      Balance  

Commercial

     1       $ 111   

Agriculture

     —           —     

Real Estate

     —           —     

Consumer

     —           —     
  

 

 

    

 

 

 

Total

     1       $ 111   
  

 

 

    

 

 

 

 

     Nine Months Ended September 30, 2014  
     Number      Balance  

Commercial

     —         $ —     

Agriculture

     —           —     

Real Estate

     —           —     

Consumer

     1         32   
  

 

 

    

 

 

 

Total

     1       $ 32   
  

 

 

    

 

 

 

As of September 30, 2015, the Company has no commitments to lend additional funds to loan customers whose terms have been modified in troubled debt restructurings.

Our subsidiary bank has established a line of credit with the Federal Home Loan Bank of Dallas (FHLB) to provide liquidity and meet pledging requirements for those customers eligible to have securities pledged to secure certain uninsured deposits. At September 30, 2015, $1,752,727,000 in loans held by our bank subsidiary were subject to blanket liens as security for this line of credit. At September 30, 2015, $170,028,000 in advances and $5,000,000 in letters of credit were outstanding under this line of credit. The letters of credit were pledged as collateral for public funds held by our bank subsidiary.

Note 6 – Short-Term Borrowings

Short-term borrowings at September 30, 2015 and 2014, and December 31, 2014 consisted of the following (dollars in thousands):

 

     September 30,      December 31,  
     2015      2014      2014  

Securities sold under agreements with customers to repurchase

   $ 324,150       $ 330,846       $ 357,400   

Federal funds purchased

     6,725         10,025         8,700   

Advances from Federal Home Loan Bank of Dallas

     170,028         1,038         1,010   
  

 

 

    

 

 

    

 

 

 

Total

   $ 500,903       $ 341,909       $ 367,110   
  

 

 

    

 

 

    

 

 

 

 

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Securities sold under repurchase agreements are generally with significant customers of the Company that require short-term liquidity for their funds for which the Company pledges certain securities that have a fair value equal to at least the amount of the short-term borrowings. The agreements mature daily and therefore the risk arising from a decline in the fair value of the collateral pledged is minimal. The securities pledged are mortgage-backed securities. These agreements do not include “right of set-off” provisions and therefore the Company does not offset such agreements for financial reporting purposes.

Note 7 - Income Taxes

Income tax expense was $8,021,000 for the third quarter of 2015 as compared to $7,843,000 for the same period in 2014. The Company’s effective tax rates on pretax income were 23.66% and 25.08% for the third quarters of 2015 and 2014, respectively. Income tax expense was $23,867,000 for the nine months ended September 30, 2015 as compared to $21,705,000 for the same period in 2014. The Company’s effective tax rates on pretax income were 24.09% and 24.48% for the nine months ended September 30, 2015 and 2014, respectively. The effective tax rates differ from the statutory federal tax rate of 35% primarily due to tax exempt interest income earned on certain investment securities and loans and the deductibility of dividends paid to our employee stock ownership plan.

Note 8 - Stock Based Compensation

The Company grants incentive stock options for a fixed number of shares with an exercise price equal to the fair value of the shares at the date of grant to employees. Through September 30, 2015, no options have been granted in 2015 and no options were granted in 2014. The Company recorded stock option expense totaling $182,000 and $174,000 for the three months ended September 30, 2015 and 2014, respectively. The Company recorded stock option expense totaling $543,000 and $532,000 for the nine months ended September 30, 2015 and 2014, respectively. Subsequent to third quarter end, on October 27, 2015, the Company granted 458,000 shares in incentive stock options to certain officers. The additional disclosure requirements under authoritative accounting guidance have been omitted due to immateriality.

On April 28, 2015, shareholders of the Company approved a restricted stock plan for selected employees, officers, non-employee directors and consultants. On July 21, 2015, 7,070 shares were granted to the ten non-employee directors. Total value of these shares totaled $250,000 and will be expensed over the period from grant date to April 26, 2016, the next scheduled annual shareholders’ meeting at which the directors current term will expire. Subsequent to third quarter end, on October 27, 2015, the Company granted 33,000 shares with a total value of $1,110,000 to certain officers that will vest over three years.

Note 9 - Pension Plan

The Company’s defined benefit pension plan was frozen effective January 1, 2004, whereby no new participants will be added to the plan and no additional years of service will accrue to participants, unless the pension plan is reinstated at a future date. The pension plan covered substantially all of the Company’s employees at the time. The benefits for each employee were based on years of service and a percentage of the employee’s qualifying compensation during the final years of employment. The Company’s funding policy was and is to contribute annually the amount necessary to satisfy the Internal Revenue Service’s funding standards. Contributions to the pension plan, prior to freezing the plan, were intended to provide not only for benefits attributed to service to date but also for those expected to be earned in the future. As a result of the Pension Protection Act of 2006 (the “Protection Act”), the Company will be required to contribute amounts in future years to fund any shortfalls. The Company has evaluated the provisions of the Protection Act as well as the Internal Revenue Service’s funding standards to develop a plan for funding in future years. The Company made contributions to the plan totaling $500,000 in 2015 and $250,000 in 2014.

During the fourth quarter of 2014, as permitted by the Internal Revenue Service, the Company offered settlement of a portion of its pension obligations to those plan participants who no longer were employed

 

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Table of Contents

by the Company. As a result of the partial settlement of the plan, the Company recognized in the fourth quarter of 2014 $2,909,000 in pension expense, before income tax. The effect of this transaction was relatively neutral to shareholders’ equity since the recorded pension obligation associated with the plan participants who accepted the settlement closely approximated the amount offered to such plan participants and the amount recognized in pension expense had been previously recognized as unrealized losses in other comprehensive earnings. As a result, the Company paid $10,626,000 out of pension plan assets, or approximately 43% of the total outstanding obligation balance, to plan participants and the number of participants was reduced by 335, or 44%. The Company’s investment risk and administrative expense associated with the Company’s pension plan should be significantly reduced going forward.

Net periodic benefit costs totaling $83,000 and $107,000 were recorded for the three months ended September 30, 2015 and 2014, respectively. Net periodic benefit costs totaling $232,000 and $321,000 were recorded for the nine months ended September 30, 2015 and 2014, respectively.

Note 10 - Fair Value Disclosures

The authoritative accounting guidance for fair value measurements defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. A fair value measurement assumes that the transaction to sell the asset or transfer the liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability. The price in the principal (or most advantageous) market used to measure the fair value of the asset or liability shall not be adjusted for transaction costs. An orderly transaction is a transaction that assumes exposure to the market for a period prior to the measurement date to allow for marketing activities that are usual and customary for transactions involving such assets and liabilities; it is not a forced transaction. Market participants are buyers and sellers in the principal market that are (i) independent, (ii) knowledgeable, (iii) able to transact, and (iv) willing to transact.

The authoritative accounting guidance requires the use of valuation techniques that are consistent with the market approach, the income approach and/or the cost approach. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets and liabilities. The income approach uses valuation techniques to convert future amounts, such as cash flows or earnings, to a single present amount on a discounted basis. The cost approach is based on the amount that currently would be required to replace the service capacity of an asset (replacement costs). Valuation techniques should be consistently applied. Inputs to valuation techniques refer to the assumptions that market participants would use in pricing the asset or liability. Inputs may be observable, meaning those that reflect the assumptions market participants would use in pricing the asset or liability developed based on market data obtained from independent sources, or unobservable, meaning those that reflect the reporting entity’s own assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. In that regard, the authoritative guidance establishes a fair value hierarchy for valuation inputs that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The fair value hierarchy is as follows:

 

    Level 1 Inputs – Unadjusted quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date.

 

    Level 2 Inputs – Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (for example, interest rates, volatilities, prepayment speeds, loss severities, credit risks and default rates) or inputs that are derived principally from or corroborated by observable market data by correlation or other means.

 

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Table of Contents
    Level 3 Inputs – Significant unobservable inputs that reflect an entity’s own assumptions that market participants would use in pricing the assets or liabilities.

A description of the valuation methodologies used for assets and liabilities measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth below.

In general, fair value is based upon quoted market prices, where available. If such quoted market prices are not available, fair value is based upon internally developed models that primarily use, as inputs, observable market-based parameters. Valuation adjustments may be made to ensure that financial instruments are recorded at fair value. While management believes the Company’s valuation methodologies are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date.

Securities classified as available-for-sale and trading are reported at fair value utilizing Level 1 and Level 2 inputs. For these securities, the Company obtains fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include market spreads, cash flows, the United States Treasury yield curve, live trading levels, trade execution data, dealer quotes, market consensus prepayments speeds, credit information and the security’s terms and conditions, among other items.

There were no transfers between Level 2 and Level 3 during the three and nine months ended September 30, 2015 or 2014.

The following table summarizes financial assets and financial liabilities measured at fair value on a recurring basis as of September 30, 2015 and 2014, and December 31, 2014, respectively, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value (dollars in thousands):

 

September 30, 2015

   Level 1
Inputs
     Level 2
Inputs
     Level 3
Inputs
     Total Fair
Value
 

Available-for-sale investment securities:

           

U.S. Treasury securities

   $ 10,917       $ —         $ —         $ 10,917   

Obligations of U. S. government sponsored enterprises and agencies

     —           155,197         —           155,197   

Obligations of states and political subdivisions

     —           1,437,151         —           1,437,151   

Corporate bonds

     —           86,342         —           86,342   

Residential mortgage-backed securities

     —           832,859         —           832,859   

Commercial mortgage-backed securities

     —           209,920         —           209,920   

Other securities

     4,967         —           —           4,967   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 15,884       $ 2,721,469       $ —         $ 2,737,353   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

September 30, 2014

   Level 1
Inputs
     Level 2
Inputs
     Level 3
Inputs
     Total Fair
Value
 

Available-for-sale investment securities:

           

U.S. Treasury securities

   $ 520       $ —         $ —         $ 520   

Obligations of U. S. government sponsored enterprises and agencies

     —           107,301         —           107,301   

Obligations of states and political subdivisions

     —           1,101,969         —           1,101,969   

Corporate bonds

     —           95,038         —           95,038   

Residential mortgage-backed securities

     —           811,867         —           811,867   

Commercial mortgage-backed securities

     —           132,412         —           132,412   

Other securities

     4,655         —           —           4,655   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $   5,175       $ 2,248,587       $ —         $ 2,253,762   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

December 31, 2014

   Level 1
Inputs
     Level 2
Inputs
     Level 3
Inputs
     Total Fair
Value
 

Available-for-sale investment securities:

           

U.S. Treasury securities

   $ 520       $ —         $ —         $ 520   

Obligations of U. S. government sponsored enterprises and agencies

     —           129,755         —           129,755   

Obligations of states and political subdivisions

     —           1,167,628         —           1,167,628   

Corporate bonds

     —           94,065         —           94,065   

Residential mortgage-backed securities

     —           885,211         —           885,211   

Commercial mortgage-backed securities

     —           133,984         —           133,984   

Other securities

     4,693         —           —           4,693   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $   5,213       $ 2,410,643       $ —         $ 2,415,856   
  

 

 

    

 

 

    

 

 

    

 

 

 

The tables above for 2014 have been changed to conform to the 2015 presentation.

Certain financial assets and financial liabilities are measured at fair value on a nonrecurring basis, that is, the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment). Financial assets and financial liabilities measured at fair value on a non-recurring basis include the following at September 30, 2015:

Impaired Loans – Impaired loans are reported at the fair value of the underlying collateral if repayment is expected solely from the collateral. Collateral values are estimated using Level 2 inputs based on observable market data. At September 30, 2015, impaired loans with a carrying value of $21,788,000 were reduced by specific valuation reserves totaling $4,645,000 resulting in a net fair value of $17,143,000.

Loans Held-for-Sale – Loans held-for-sale are reported at the lower of cost or fair value. In determining whether the fair value of loans held-for-sale is less than cost when quoted market prices are not available, the Company considers investor commitments/contracts. These loans are considered Level 2 of the fair value hierarchy. At September 30, 2015, the Company’s mortgage loans held-for-sale were recorded at cost as fair value exceeded cost.

 

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Certain non-financial assets and non-financial liabilities measured at fair value on a non-recurring basis include other real estate owned, goodwill and other intangible assets and other non-financial long-lived assets. Non-financial assets measured at fair value on a non-recurring basis during the three and nine months ended September 30, 2015 and 2014 include other real estate owned which, subsequent to their initial transfer to other real estate owned from loans, were re-measured at fair value through a write-down included in gain (loss) on sale of foreclosed assets. During the reported periods, all fair value measurements for foreclosed assets utilized Level 2 inputs based on observable market data, generally third-party appraisals, or Level 3 inputs based on customized discounting criteria. These appraisals are evaluated individually and discounted as necessary due to the age of the appraisal, lack of comparable sales, expected holding periods of property or special use type of the property. Such discounts vary by appraisal based on the above factors but generally range from 5% to 25% of the appraised value. Reevaluation of other real estate owned is performed at least annually as required by regulatory guidelines or more often if particular circumstances arise. The following table presents other real estate owned that were re-measured subsequent to their initial transfer to other real estate owned (dollars in thousands):

 

     Three Months Ended
September 30,
 
     2015      2014  

Carrying value of other real estate owned prior to re-measurement

   $ —         $ 173   

Write-downs included in gain (loss) on sale of other real estate owned

     —           (46
  

 

 

    

 

 

 

Fair value

   $ —         $ 127   
  

 

 

    

 

 

 

 

     Nine Months Ended
September 30,
 
     2015      2014  

Carrying value of other real estate owned prior to re-measurement

   $ 351       $ 881   

Write-downs included in gain (loss) on sale of other real estate owned

     (95      (135
  

 

 

    

 

 

 

Fair value

   $ 256       $ 746   
  

 

 

    

 

 

 

At September 30, 2015 and 2014, and December 31, 2014, other real estate owned totaled $360,000, $1,185,000 and $943,000, respectively.

The Company is required under current authoritative accounting guidance to disclose the estimated fair value of their financial instrument assets and liabilities including those subject to the requirements discussed above. For the Company, as for most financial institutions, substantially all of its assets and liabilities are considered financial instruments. Many of the Company’s financial instruments, however, lack an available trading market as characterized by a willing buyer and willing seller engaging in an exchange transaction.

The estimated fair value amounts of financial instruments have been determined by the Company using available market information and appropriate valuation methodologies. However, considerable judgment is required to interpret data to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts the Company could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.

In addition, reasonable comparability between financial institutions may not be likely due to the wide range of permitted valuation techniques and numerous estimates that must be made given the absence of active secondary markets for many of the financial instruments. This lack of uniform valuation methodologies also introduces a greater degree of subjectivity to these estimated fair values.

 

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Cash and due from banks, federal funds sold, interest-bearing deposits and time deposits in banks and accrued interest receivable and payable are liquid in nature and considered Levels 1 or 2 of the fair value hierarchy.

Financial instruments with stated maturities have been valued using a present value discounted cash flow with a discount rate approximating current market for similar assets and liabilities and are considered Levels 2 and 3 of the fair value hierarchy. Financial instrument liabilities with no stated maturities have an estimated fair value equal to both the amount payable on demand and the carrying value and are considered Level 1 of the fair value hierarchy.

The carrying value and the estimated fair value of the Company’s contractual off-balance-sheet unfunded lines of credit, loan commitments and letters of credit, which are generally priced at market at the time of funding, are not material.

The estimated fair values and carrying values of all financial instruments under current authoritative guidance at September 30, 2015 and 2014, and December 31, 2014, were as follows (in thousands):

 

     September 30, 2015      September 30, 2014      December 31, 2014         
     Carrying
Value
     Estimated
Fair Value
     Carrying
Value
     Estimated
Fair Value
     Carrying
Value
     Estimated
Fair Value
     Fair Value
Hierarchy
 

Cash and due from banks

   $ 133,340       $ 133,340       $ 149,957       $ 149,957       $ 190,387       $ 190,387         Level 1   

Federal funds sold

     2,790         2,790         4,785         4,785         8,760         8,760         Level 1   

Interest-bearing deposits in banks

     4,268         4,268         83,994         83,994         54,324         54,324         Level 1   

Interest-bearing time deposits in banks

     4,491         4,498         19,234         19,285         17,002         17,032         Level 2   

Available-for-sale Securities

     2,737,353         2,737,353         2,253,762         2,253,762         2,415,856         2,415,856         Levels 1 and 2   

Held-to-maturity securities

     286         291         554         560         441         447         Level 2   

Loans

     3,248,002         3,249,558         2,803,308         2,815,509         2,901,167         2,906,399         Level 3   

Accrued interest receivable

     26,888         26,888         23,420         23,420         28,998         28,998         Level 2   

Deposits with stated maturities

     652,919         654,705         664,221         666,123         648,992         650,893         Level 2   

Deposits with no stated maturities

     4,444,364         4,444,364         3,800,143         3,800,143         4,101,263         4,101,263         Level 1   

Short-term borrowings

     500,903         500,903         341,909         341,909         367,110         367,110         Level 2   

Accrued interest payable

     261         261         275         275         237         237         Level 2   

 

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Table of Contents

Note 11 - Recently Issued Authoritative Accounting Guidance

In 2014, the Financial Accounting Standards Board (the “FASB”) amended its authoritative guidance related to residential real estate to clarify that an in substance repossession or foreclosure occurs, and a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan, upon either (1) the creditor obtaining legal title to the residential real estate property upon completion of a foreclosure or (2) the borrower conveying all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. Additionally, the amendment requires interim and annual disclosure of both (1) the amount of foreclosed residential real estate property held by the creditor and (2) the recorded investment in consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure according to local requirements of the applicable jurisdiction. The new guidance was effective for the Company on January 1, 2015 and did not have a significant impact to the Company’s financial statements.

In 2014, the FASB issued a comprehensive new revenue recognition standard that will supersede substantially all existing revenue recognition guidance. The new standard’s core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. In doing so, companies will need to use more judgment and make more estimates than under existing guidance. These may include identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. The new standard will be effective in the first quarter of 2018. The Company is continuing to evaluate the potential impact to the Company’s financial statements.

In 2014, the FASB amended its authoritative guidance related to repurchase-to-maturity transactions to require that repurchase-to-maturity transactions be accounted for as secured borrowings consistent with the accounting for other repurchase agreements. In addition, the amendment requires separate accounting for repurchase financings, which entails the transfer of a financial asset executed contemporaneously with a repurchase agreement with the same counterparty. The amendment requires entities to disclose certain information about transfers accounted for as sales in transactions that are economically similar to repurchase agreements. In addition, the amendment requires disclosures related to collateral, remaining contractual term and of the potential risks associated with repurchase agreements, securities lending transactions and repurchase-to-maturity transactions. The amendment was effective for the Company on January 1, 2015 and did not have a significant impact on the Company’s financial statements.

In 2015, the FASB eliminated from U.S. GAAP the concept of extraordinary items, which, among other things, required an entity to show the item separately in the income statement, net of tax, after income from continuing operations. The new guidance is effective for the Company beginning January 1, 2016, though early adoption is permitted, and is not expected to have a significant impact on the Company’s financial statements.

Note 12 – Acquisition and Asset Purchase

On April 1, 2015, we entered into an agreement and plan of merger to acquire FBC Bancshares, Inc. and its wholly owned bank subsidiary, First Bank, N.A., Conroe, Texas. On July 31, 2015, the transaction was completed. Pursuant to the agreement, we issued 1,755,374 shares of the Company’s common stock in exchange for all of the outstanding shares of FBC Bancshares, Inc. At closing, FBC Bancshares, Inc. was merged into the Company and First Bank, N.A., Conroe, Texas, was merged into First Financial Bank, N.A., Abilene, Texas, a wholly owned subsidiary of the Company. The primary purpose of the acquisition was to expand the Company’s market share along Interstate Highway 45 in southern Texas, north of Houston. Factors that contributed to a purchase price resulting in goodwill include First Bank, N.A.’s historic record of earnings, strong local economic environment and opportunity for growth. The results of operations from this acquisition are included in the consolidated earnings of the Company commencing August 1, 2015.

 

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The assets acquired and liabilities assumed were recorded on the consolidated balance sheet at estimated fair value on the acquisition date. The acquisition was not considered to be a significant business combination. The following table presents the amounts recorded on the consolidated balance sheet on the acquisition date (dollars in thousands):

 

Fair value of consideration paid:

  

Common stock issued (1,755,374 shares)

   $ 59,648   
  

 

 

 

Fair value of identifiable assets acquired:

  

Cash and cash equivalents

     65,197   

Securities available-for-sale

     42,903   

Loans

     248,380   

Identifiable intangible assets

     2,343   

Other assets

     15,578   
  

 

 

 

Total identifiable assets acquired

     374,401   
  

 

 

 

Fair value of liabilities assumed:

  

Deposits

     343,583   

Subordinated debt

     13,125   

Other liabilities

     1,651   
  

 

 

 

Total liabilities assumed

     358,359   
  

 

 

 

Fair value of net identifiable assets acquired

     16,042   
  

 

 

 

Goodwill resulting from acquisition

   $ 43,606   
  

 

 

 

Goodwill recorded in the acquisition was accounted for in accordance with the authoritative business combination guidance. Accordingly, goodwill will not be amortized, but will be tested for impairment annually. The goodwill recorded is not deductible for federal income tax purposes.

The subordinated debt of $13,125,000 was paid off August 3, 2015, subsequent to closing.

The fair value of total loans acquired was $248,380,000 at acquisition compared to contractual amounts of $252,458,000. The fair value of purchased credit impaired loans at acquisition was $1,398,000 compared to contractual amounts of $1,704,000. Additional purchased credit impaired loan disclosures were omitted due to immateriality. All other acquired loans were considered performing loans.

First Bank, N.A. had branches in Conroe, Magnolia, Montgomery, Tomball, Cut and Shoot and Huntsville, all located north of Houston, Texas.

On April 8, 2015, the Company announced that it had entered into an asset purchase agreement with 4Trust Mortgage, Inc. for a cash purchase price of $1,900,000. The acquisition was finalized on May 31, 2015.

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements

This Form 10-Q contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. When used in this Form 10-Q, words such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” “predict,” “project,” and similar expressions, as they relate to us or management, identify forward-looking statements. These forward-looking statements are based on information currently available to our management. Actual results could differ materially from those contemplated by the forward-looking statements as a result of certain factors, including, but not limited, to those listed in “Item 1A- Risk Factors” in our Annual Report on Form 10-K and the following:

 

    general economic conditions, including our local, state and national real estate markets and employment trends;

 

    volatility and disruption in national and international financial markets;

 

    government intervention in the U.S. financial system including the effects of recent legislative, tax, accounting and regulatory actions and reforms, including the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), the Jumpstart Our Business Startups Act, the Consumer Financial Protection Bureau and the capital ratios of Basel III as adopted by the federal banking authorities;

 

    political instability;

 

    the ability of the Federal government to address the national economy and the fiscal cliff;

 

    competition from other financial institutions and financial holding companies;

 

    the effects of and changes in trade, monetary and fiscal policies and laws, including interest rate policies of the Board of Governors of the Federal Reserve System (the “Federal Reserve Board”);

 

    changes in the demand for loans;

 

    fluctuations in the value of collateral securing our loan portfolio and in the level of the allowance for loan losses;

 

    the accuracy of our estimates of future loan losses;

 

    the accuracy of our estimates and assumptions regarding the performance of our securities portfolio;

 

    soundness of other financial institutions with which we have transactions;

 

    inflation, interest rate, market and monetary fluctuations;

 

    changes in consumer spending, borrowing and savings habits;

 

    changes in commodity prices (e.g., oil and gas, cattle and wind energy);

 

    our ability to attract deposits;

 

    changes in our liquidity position;

 

    changes in the reliability of our vendors, internal control system or information systems;

 

    our ability to attract and retain qualified employees;

 

    acquisitions and integration of acquired businesses;

 

    the possible impairment of goodwill associated with our acquisitions;

 

    consequences of continued bank mergers and acquisitions in our market area, resulting in fewer but much larger and stronger competitors;

 

    expansion of operations, including branch openings, new product offerings and expansion into new markets;

 

    changes in compensation and benefit plans; and

 

    acts of God or of war or terrorism.

 

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Such forward-looking statements reflect the current views of our management with respect to future events and are subject to these and other risks, uncertainties and assumptions relating to our operations, results of operations, growth strategy and liquidity. All subsequent written and oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by this paragraph. We undertake no obligation to publicly update or otherwise revise any forward-looking statements, whether as a result of new information, future events or otherwise (except as required by law).

Introduction

As a financial holding company, we generate most of our revenue from interest on loans and investments, trust fees, and service charges. Our primary source of funding for our loans and investments are deposits held by our subsidiary, First Financial Bank, National Association, Abilene, Texas. Our largest expense is salaries and related employee benefits. We usually measure our performance by calculating our return on average assets, return on average equity, our regulatory leverage and risk based capital ratios and our efficiency ratio, which is calculated by dividing noninterest expense by the sum of net interest income on a tax equivalent basis and noninterest income.

The following discussion and analysis of operations and financial condition should be read in conjunction with the financial statements and accompanying footnotes included in Item 1 of this Form 10-Q as well as those included in the Company’s 2014 Annual Report on Form 10-K.

Critical Accounting Policies

We prepare consolidated financial statements based on generally accepted accounting principles and customary practices in the banking industry. These policies, in certain areas, require us to make significant estimates and assumptions.

We deem a policy critical if (1) the accounting estimate required us to make assumptions about matters that are highly uncertain at the time we make the accounting estimate; and (2) different estimates that reasonably could have been used in the current period, or changes in the accounting estimate that are reasonably likely to occur from period to period, would have a material impact on the financial statements.

We deem our most critical accounting policies to be (1) our allowance for loan losses and our provision for loan losses and (2) our valuation of securities. We have other significant accounting policies and continue to evaluate the materiality of their impact on our consolidated financial statements, but we believe these other policies either do not generally require us to make estimates and judgments that are difficult or subjective, or it is less likely they would have a material impact on our reported results for a given period. A discussion of (1) our allowance for loan losses and our provision for loan losses and (2) our valuation of securities is included in note 5 and note 4, respectively, to our notes to consolidated financial statements (unaudited) which begins on page 9.

Stock Split

On April 22, 2014, the Company’s Board of Directors declared a two-for-one stock split in the form of a 100% stock dividend effective for shareholders of record on May 15, 2014 that was distributed on June 2, 2014. All share and per share amounts in this report have been restated to reflect this stock split. An amount equal to the par value of the additional common shares issued pursuant to the stock split was reflected as a transfer from retained earnings to common stock on the consolidated financial statements as of and for the nine months ended September 30, 2014.

 

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Results of Operations

Performance Summary. Net earnings for the third quarter of 2015 were $25.89 million compared to $23.43 million for the same quarter in 2014, or a 10.48% increase.

Basic earnings per share for the third quarter of 2015 were $0.40 compared to $0.37 for the same quarter last year. The return on average assets was 1.61% for the third quarter of 2015, as compared to 1.71% for the same quarter of 2014. The return on average equity was 13.63% for the third quarter of 2015 as compared to 14.27% for the same quarter a year ago.

Net earnings for the nine-month period ended September 30, 2015 were $75.19 million compared to $66.97 million for the same period in 2014, or a 12.27% increase.

Basic earnings per share for the nine-month period ended September 30, 2015 were $1.16 compared to $1.05 for the same period in 2014. The return on average assets was 1.64% for the first nine months of 2015, as compared to 1.68% for the same period in 2014. The return on average equity was 13.99% for the first nine months of 2015, as compared to 14.24% a year ago.

Net Interest Income. Net interest income is the difference between interest income on earning assets and interest expense on liabilities incurred to fund those assets. Our earning assets consist primarily of loans and investment securities. Our liabilities to fund those assets consist primarily of noninterest-bearing and interest-bearing deposits.

Tax-equivalent net interest income was $62.08 million for the third quarter of 2015, as compared to $53.70 million for the same period last year. The increase in 2015 compared to 2014 was largely attributable to the increase in volume of interest earning assets. Average earning assets increased $861.72 million for the third quarter of 2015 over the same period in 2014. Average loans, taxable securities and tax exempt securities increased $347.15 million, $206.59 million and $318.40 million, respectively, for the third quarter of 2015 over the third quarter of 2014. Average interest bearing liabilities increased $591.01 million for the third quarter of 2015, as compared to the same period in 2014. The yield on earning assets decreased 6 basis points during the third quarter of 2015, whereas the rate paid on interest-bearing liabilities decreased 2 basis points in the third quarter of 2015, primarily due to the effects of lower interest rates.

Tax-equivalent net interest income was $176.37 million for the first nine months of 2015, as compared to $158.47 million for the same period last year. The increase in 2015 compared to 2014 was largely attributable to the increase in volume of interest earning assets. Average earning assets increased $757.79 million for the first nine months of 2015 over the same period in 2014. Average loans, taxable securities and tax exempt securities increased $265.70 million, $228.21 million and $258.58 million, respectively, for the first nine months of 2015 over the same period in 2014. Average interest bearing liabilities increased $473.86 million for the first nine month period of 2015, as compared to the same period in 2014. The yield of earning assets decreased 16 basis points during the first nine months of 2015, whereas the rate paid on interest-bearing liabilities decreased 2 basis points in the first nine months of 2015, primarily due to the effects of lower interest rates.

 

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Table 1 allocates the change in tax-equivalent net interest income between the amount of change attributable to volume and to rate.

Table 1 - Changes in Interest Income and Interest Expense (in thousands):

 

     Three Months Ended September 30,
2015 Compared to Three Months
Ended September 30, 2014
    Nine Months Ended September 30,
2015 Compared to Nine Months
Ended September 30, 2014
 
     Change Attributable to     Total
Change
    Change Attributable to     Total
Change
 
     Volume     Rate       Volume      Rate    

Short-term investments

   $ (14   $ (25   $ (39   $ 25       $ (111   $ (86

Taxable investment securities

     1,216        (776     440        4,177         (2,707     1,470   

Tax-exempt investment securities (1)

     3,842        (584     3,258        9,438         (1,915     7,523   

Loans (1) (2)

     4,323        396        4,719        9,924         (1,039     8,885   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Interest income

     9,367        (989     8,378        23,564         (5,772     17,792   

Interest-bearing deposits

     139        (206     (67     377         (510     (133

Short-term borrowings

     35        28        63        62         (30     32   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Interest expense

     174        (178     (4     439         (540     (101
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Net interest income

   $ 9,193      $ (811   $ 8,382      $ 23,125       $ (5,232   $ 17,893   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

 

(1) Computed on a tax-equivalent basis assuming a marginal tax rate of 35%.
(2) Non-accrual loans are included in loans.

The net interest margin for the third quarter of 2015 was 4.13%, a decrease of 5 basis points from the same period in 2014. The net interest margin for the nine months ended September 30, 2015 was 4.10%, a decrease of 15 basis points from the same period in 2014. Although interest rates may increase later in 2015 or in 2016 and future years, we expect interest rates to remain at lower levels based on comments made by the Federal Reserve, which will continue the downward pressure on our interest margin.

 

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The net interest margin, which measures tax-equivalent net interest income as a percentage of average earning assets, is illustrated in Table 2.

Table 2 - Average Balances and Average Yields and Rates (in thousands, except percentages):

 

     Three Months Ended September 30,  
     2015     2014  
     Average
Balance
    Income/
Expense
     Yield/
Rate
    Average
Balance
    Income/
Expense
     Yield/
Rate
 

Assets

              

Short-term investments (1)

   $ 50,417      $ 41         0.32   $ 60,832      $ 80         0.52

Taxable investment securities (2)

     1,372,834        7,296         2.13        1,166,248        6,856         2.35   

Tax-exempt investment securities (2)(3)

     1,376,119        16,021         4.66        1,057,715        12,763         4.83   

Loans (3)(4)

     3,161,229        39,789         4.99        2,814,083        35,070         4.94   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total earning assets

     5,960,599      $   63,147         4.20     5,098,878      $   54,769         4.26

Cash and due from banks

     146,921             143,102        

Bank premises and equipment, net

     113,662             100,266        

Other assets

     51,208             43,670        

Goodwill and other intangible assets, net

     129,962             97,424        

Allowance for loan losses

     (39,579          (36,093     
  

 

 

        

 

 

      

Total assets

   $ 6,362,773           $ 5,447,247        
  

 

 

        

 

 

      

Liabilities and Shareholders’ Equity

              

Interest-bearing deposits

   $ 3,295,411      $ 932         0.11   $ 2,892,065      $ 999         0.14

Short-term borrowings

     572,431        133         0.09        384,768        70         0.07   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total interest-bearing liabilities

     3,867,842      $ 1,065         0.11     3,276,833      $ 1,069         0.13

Noninterest-bearing deposits

     1,687,285             1,470,682        

Other liabilities

     54,034             48,225        
  

 

 

        

 

 

      

Total liabilities

     5,609,161             4,795,740        

Shareholders’ equity

     753,612             651,507        
  

 

 

        

 

 

      

Total liabilities and shareholders’ equity

   $ 6,362,773           $ 5,447,247        
  

 

 

        

 

 

      

Net interest income

     $ 62,082           $ 53,700      
    

 

 

        

 

 

    

Rate Analysis:

              

Interest income/earning assets

          4.20          4.26

Interest expense/earning assets

          0.07             0.08   
       

 

 

        

 

 

 

Net yield on earning assets

          4.13          4.18

 

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     Nine Months Ended September 30,  
     2015     2014  
     Average
Balance
    Income/
Expense
     Yield/
Rate
    Average
Balance
    Income/
Expense
     Yield/
Rate
 

Assets

              

Short-term investments (1)

   $ 63,833      $ 171         0.36   $ 58,538      $ 257         0.59

Taxable investment securities (2)

     1,377,363        22,502         2.18        1,149,156        21,032         2.44   

Tax-exempt investment securities (2)(3)

     1,288,242        45,102         4.67        1,029,661        37,579         4.87   

Loans (3)(4)

     3,016,686        111,632         4.95        2,750,983        102,747         4.99   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total earning assets

     5,746,124      $ 179,407         4.17     4,988,338      $ 161,615         4.33

Cash and due from banks

     146,676             142,023        

Bank premises and equipment, net

     107,394             97,436        

Other assets

     48,244             43,457        

Goodwill and other intangible assets, net

     108,478             97,458        

Allowance for loan losses

     (38,447          (35,276     
  

 

 

        

 

 

      

Total assets

   $ 6,118,469           $ 5,333,436        
  

 

 

        

 

 

      

Liabilities and Shareholders’ Equity

              

Interest-bearing deposits

   $ 3,231,925      $ 2,761         0.11   $ 2,859,269      $ 2,894         0.14

Short-term borrowings

     507,011        281         0.07        405,811        249         0.08   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total interest-bearing liabilities

     3,738,936      $ 3,042         0.11     3,265,080      $ 3,143         0.13

Noninterest-bearing deposits

     1,607,931             1,397,909        

Other liabilities

     53,077             41,473        
  

 

 

        

 

 

      

Total liabilities

     5,399,944             4,704,462        

Shareholders’ equity

     718,525             628,974        
  

 

 

        

 

 

      

Total liabilities and shareholders’ equity

   $ 6,118,469           $ 5,333,436        
  

 

 

        

 

 

      

Net interest income

     $ 176,365           $ 158,472      
    

 

 

        

 

 

    

Rate Analysis:

              

Interest income/earning assets

          4.17          4.33

Interest expense/earning assets

          0.07             0.08   
       

 

 

        

 

 

 

Net yield on earning assets

          4.10          4.25

 

(1) Short-term investments are comprised of Fed Funds sold, interest-bearing deposits in banks and interest-bearing time deposits in banks.
(2) Average balances include unrealized gains and losses on available-for-sale securities.
(3) Computed on a tax-equivalent basis assuming a marginal tax rate of 35%.
(4) Non-accrual loans are included in loans.

Noninterest Income. Noninterest income for the third quarter of 2015 was $20.45 million, an increase of $3.12 million compared to the same quarter in 2014. Real estate mortgage fees increased $1.66 million, ATM, interchange and credit card fees increased $701 thousand, service charges on deposit accounts increased $251 thousand and trust fees increased $46 thousand in the third quarter of 2015 compared to the same period in 2014. The increase in real estate mortgage fees primarily resulted from a stronger mortgage market and the Company’s asset purchase of 4Trust Mortgage, Inc. on May 31, 2015. The increases in ATM, interchange and credit card fees are primarily a result of increases in the number of net new accounts and debit cards boosted by the acquisition of First Bank, N.A., Conroe on July 31, 2015. The increase in service charges was also related to the increase in the number of net new accounts. The increase in trust fees resulted from an increase in assets under management over the prior year offsetting the effect of the decline in oil and gas prices that reduced related trust fees by $248 thousand compared to the same quarter in 2014. The fair value of our trust assets managed, which are not reflected in our consolidated balance sheets, totaled $3.83 billion at September 30, 2015 as compared to $3.66 billion a year ago.

 

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Noninterest income for the nine-month period ended September 30, 2015 was $54.15 million, an increase of $4.55 million over the same period in 2014. Real estate mortgage fees increased $2.49 million, ATM, interchange and credit card fees increased $1.92 million, and trust fees increased $392 thousand in the first nine months of 2015 compared to the same period in 2014. The increase in real estate mortgage fees primarily resulted from a stronger mortgage market and the Company’s asset purchase of 4Trust Mortgage, Inc. on May 31, 2015. The increases in ATM, interchange and credit card fees are primarily a result of increases in the number of net new accounts and debit cards. The increase in trust fees resulted from an increase in assets under management over the prior year offsetting the effect of the decline in oil and gas prices that reduced related trust fees by $754 thousand compared to the same period in 2014. The fair value of our trust assets managed, which are not reflected in our consolidated balance sheets, totaled $3.83 billion at September 30, 2015 as compared to $3.66 billion a year ago.

Offsetting these increases was a decrease in net gains on sales of foreclosed assets from 2014 to 2015 of $794 thousand. Also included in the noninterest income in the first nine months of 2014 was a $605 thousand gain on the settlement of a bank owned life insurance contract.

Table 3 - Noninterest Income (in thousands):

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2015     Increase
(Decrease)
    2014     2015     Increase
(Decrease)
    2014  

Trust fees

   $ 4,818      $ 46      $ 4,772      $ 14,289      $ 392      $ 13,897   

Service charges on deposit accounts

     4,653        251        4,402        12,442        (181     12,623   

ATM, interchange and credit card fees

     5,794        701        5,093        16,209        1,918        14,291   

Real estate mortgage operations

     3,742        1,663        2,079        7,321        2,486        4,835   

Net gain (loss) on sale of available-for-sale securities

     136        135        1        380        384        (4

Net gain (loss) on sale of foreclosed assets

     28        (277     305        10        (794     804   

Other:

        

Check printing fees

     59        4        55        169        11        158   

Safe deposit rental fees

     112        (3     115        416        (7     423   

Credit life and debt protection fees

     177        128        49        534        419        115   

Brokerage commissions

     210        (2     212        577        (93     670   

Interest on loan recoveries

     323        273        50        834        397        437   

Gain on sale of assets

     (11     20        (31     (11     (26     15   

Miscellaneous income

     405        183        222        982        (355     1,337   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other

     1,275        603        672        3,501        346        3,155   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Noninterest Income

   $ 20,446      $ 3,122      $ 17,324      $ 54,152      $ 4,551      $ 49,601   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Noninterest Expense. Total noninterest expense for the third quarter of 2015 was $39.97 million, an increase of $5.93 million as compared to the same quarter in 2014. An important measure in determining whether a financial institution effectively manages noninterest expense is the efficiency ratio, which is calculated by dividing noninterest expense by the sum of net interest income on a tax-equivalent basis and noninterest income. Lower ratios indicate better efficiency since more income is generated with a lower noninterest expense total. Our efficiency ratio for the third quarter of 2015 was 48.44%, compared to 47.93% in the same quarter last year.

Salaries and employee benefits for the third quarter of 2015 totaled $21.65 million, an increase of $3.70 million compared to the same quarter in 2014. The increase was largely the result of the addition of employees in compliance-related areas, the addition of 4Trust Mortgage and First Bank employees and annual pay increases.

 

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All other categories of noninterest expense for the third quarter of 2015 totaled $18.33 million, an increase of approximately $2.24 million as compared to the same quarter in 2014. Included in noninterest expense in the third quarter of 2015 were technology contract termination and conversion related costs totaling $1.14 million related to the First Bank acquisition. Also contributing to the increase in noninterest expense in the third quarter of 2015 when compared to the same quarter in 2014 were increases in net occupancy and equipment expenses of $753 thousand and $356 thousand, respectively. These increases primarily resulted from the addition of several new branches and the 4Trust Mortgage and First Bank acquisitions.

Total noninterest expense for the nine months ended September 30, 2015 was $109.12 million compared to $101.49 million in the same period of 2014. Our efficiency ratio for the first nine months of 2015 was 47.34%, compared to 48.78% from the same period in 2014.

Salaries and employee benefits for the first nine months of 2015 totaled $59.09 million, an increase of $6.45 million compared to the same period in 2014. The increase was largely the result of the addition of employees in compliance-related areas, the addition of 4Trust Mortgage and First Bank employees and annual pay increases.

All other categories of noninterest expense for the first nine months of 2015 totaled $50.04 million, an increase of approximately $1.19 million as compared to the same period in 2014. Included in noninterest expense for the nine-months ended September 30, 2015 were technology contract termination and conversion related costs totaling $1.14 million related to the First Bank acquisition. Also contributing to the increase in noninterest expense in the first nine months of 2015 when compared to the same period in 2014 were increases in legal, net occupancy and equipment expenses of $841 thousand, $836 thousand and $960 thousand, respectively. The increase in legal fees was primarily associated with the Company’s acquisition activities. The increases in net occupancy and equipment expenses largely resulted from the addition of several new branches and the 4Trust Mortgage and First Bank acquisitions.

 

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Table 4 - Noninterest Expense (in thousands):

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
     2015      Increase
(Decrease)
    2014      2015      Increase
(Decrease)
    2014  

Salaries

   $ 16,627       $ 3,047      $ 13,580       $ 45,378       $ 5,755      $ 39,623   

Medical

     1,455         310        1,145         3,882         (164     4,046   

Profit sharing

     1,641         45        1,596         4,190         382        3,808   

Pension

     83         (24     107         232         (89     321   

401(k) match expense

     542         112        430         1,513         224        1,289   

Payroll taxes

     1,118         200        918         3,348         329        3,019   

Stock option expense

     182         8        174         543         11        532   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total salaries and employee benefits

     21,648         3,698        17,950         59,086         6,448        52,638   

Net occupancy expense

     3,050         753        2,297         7,640         836        6,804   

Equipment expense

     3,114         356        2,758         9,005         960        8,045   

FDIC assessment fees

     819         126        693         2,316         281        2,035   

ATM, interchange and credit card expense

     1,509         (310     1,819         4,844         (151     4,995   

Professional and service fees

     1,148         (57     1,205         3,370         121        3,249   

Printing, stationery and supplies

     594         (38     632         1,662         (298     1,960   

Amortization of intangible assets

     200         138        62         362         152        210   

Other:

               

Data processing fees

     823         747        76         1,019         800        219   

Postage

     433         13        420         1,262         10        1,252   

Advertising

     919         1        918         2,509         (212     2,721   

Correspondent bank service charges

     238         16        222         686         20        666   

Telephone

     603         88        515         1,577         (39     1,616   

Public relations and business development

     645         (28     673         1,893         183        1,710   

Directors’ fees

     295         102        193         777         116        661   

Audit and accounting fees

     468         29        439         1,289         46        1,243   

Legal fees

     325         104        221         1,432         841        591   

Regulatory exam fees

     265         33        232         776         85        691   

Travel

     384         130        254         908         216        692   

Courier expense

     194         (41     235         619         19        600   

Operational and other losses

     397         4        393         907         (2,563     3,470   

Other real estate

     36         (92     128         108         (289     397   

Other miscellaneous expense

     1,866         161        1,705         5,075         51        5,024   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total other

     7,891         1,267        6,624         20,837         (716     21,553   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total Noninterest Expense

   $ 39,973       $ 5,933      $ 34,040       $ 109,122       $ 7,633      $ 101,489   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

 

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Balance Sheet Review

Loans. Our portfolio is comprised of loans made to businesses, professionals, individuals, and farm and ranch operations located in the primary trade areas served by our subsidiary bank. Real estate loans represent loans primarily for 1-4 family residences and owner-occupied commercial real estate. The structure of loans in the real estate mortgage area generally provides re-pricing intervals to minimize the interest rate risk inherent in long-term fixed rate loans. As of September 30, 2015, total loans held for investment were $3.27 billion, an increase of $337.63 million, as compared to December 31, 2014. As compared to December 31, 2014, commercial loans increased $58.45 million, agricultural loans decreased $6.46 million, real estate loans increased $265.15 million, and consumer loans increased $20.49 million. The acquisition of First Bank accounted for $248.38 million of the increase in loans. Loans averaged $3.16 billion during the third quarter of 2015, an increase of $347.15 million from the prior year third quarter average balances. Loans averaged $3.02 billion during the nine-month period ended September 30, 2015, an increase of $265.70 million from the prior year nine-month average balances.

Table 5 - Composition of Loans (in thousands):

 

     September 30,      December 31,
2014
 
     2015      2014     

Commercial

   $ 698,406       $ 612,092       $ 639,954   

Agricultural

     99,232         86,718         105,694   

Real estate

     2,088,002         1,774,639         1,822,854   

Consumer

     381,177         354,981         360,686   
  

 

 

    

 

 

    

 

 

 

Total loans held-for-investment

   $ 3,266,817       $ 2,828,430       $ 2,929,188   
  

 

 

    

 

 

    

 

 

 

At September 30, 2015, our real estate loans represent approximately 63.92% of our loan portfolio and are comprised of (i) 1-4 family residence loans of 44.90%, (ii) commercial real estate loans of 26.04%, generally owner occupied, (iii) other loans, which includes ranches, hospitals and universities, of 14.96%, (iv) residential development and construction loans of 9.36%, which includes our custom and speculation home construction loans and (v) commercial development and construction loans of 4.74%.

Loans held for sale, consisting of secondary market mortgage loans, totaled $21.61 million, $11.27 million and $8.80 million at September 30, 2015 and 2014, and December 31, 2014, respectively, which were recorded at cost as fair value approximated cost.

Asset Quality. The loan portfolio of our bank subsidiary is subject to periodic reviews by our centralized independent loan review group as well as periodic examinations by bank regulatory agencies. Loans are placed on nonaccrual status when, in the judgment of management, the collectability of principal or interest under the original terms becomes doubtful. Nonaccrual, past due 90 days or more and still accruing and restructured loans plus foreclosed assets were $22.74 million at September 30, 2015, as compared to $23.63 million at September 30, 2014 and $21.72 million at December 31, 2014. As a percent of loans and foreclosed assets, these assets were 0.69% at September 30, 2015, as compared to 0.83% at September 30, 2014 and 0.74% at December 31, 2014. As a percent of total assets, these assets were 0.35% at September 30, 2015 as compared to 0.42% at September 30, 2014 and 0.37% at December 31, 2014. We believe the level of these assets to be manageable and are not aware of any material classified credits not properly disclosed as nonperforming at September 30, 2015.

 

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Table 6 – Non-accrual, Past Due 90 Days or More and Still Accruing, Restructured Loans and Foreclosed Assets (in thousands, except percentages):

 

     September 30,     December 31,
2014
 
     2015     2014    

Non-accrual loans*

   $ 21,788      $ 22,093      $ 20,194   

Loans still accruing and past due 90 days or more

     49        263        261   

Troubled debt restructured loans**

     204        —          226   

Foreclosed assets

     701        1,273        1,035   
  

 

 

   

 

 

   

 

 

 

Total

   $ 22,742      $ 23,629      $ 21,716   
  

 

 

   

 

 

   

 

 

 

As a % of loans and foreclosed assets

     0.69     0.83     0.74

As a % of total assets

     0.35     0.42     0.37

 

* Includes $2.42 million, $2.38 million and $2.15 million of purchased credit impaired loans as of September 30, 2015 and 2014, and December 31, 2014, respectively.
** Troubled debt restructured loans of $6.46 million, $10.11 million and $9.07 million, whose interest collection, after considering economic and business conditions and collection efforts, is doubtful are included in non-accrual loans at September 30, 2015 and 2014, and December 31, 2014, respectively.

We record interest payments received on non-accrual loans as reductions of principal. Prior to the loans being placed on non-accrual, we recognized interest income on impaired loans as of December 31, 2014 of approximately $97 thousand during the year ended December 31, 2014. If interest on these impaired loans had been recognized on a full accrual basis during the year ended December 31, 2014, such income would have approximated $1.58 million. Such amounts for the 2015 and 2014 interim periods were insignificant.

Provision and Allowance for Loan Losses. The allowance for loan losses is the amount we determine as of a specific date to be appropriate to absorb probable losses on existing loans in which full collectability is unlikely based on our review and evaluation of the loan portfolio. For a discussion of our methodology, see note 5 to our notes to the consolidated financial statements (unaudited). The provision for loan losses was $2.66 million for the third quarter of 2015, as compared to $896 thousand for the third quarter of 2014. The provision for loan losses was $5.51 million for the nine month period ended September 30, 2015, as compared to $3.71 million for the same period in 2014. The continued provision for loan losses in 2015 and 2014 reflects the overall growth in loans and continuing levels of nonperforming and classified assets, including those related to the oil and gas industry. The Company’s direct exposure to the oil and gas industry remained at approximately 2.8% of total loans at September 30, 2015, consistent with December 31, 2014 year-end levels. As a percent of average loans, net loan charge-offs were 0.16% for the third quarter of 2015 compared to 0.06% during the third quarter of 2014. As a percent of average loans, net loan charge-offs were 0.08% for the first nine months of 2015, compared to 0.06% for the first nine months of 2014. The allowance for loan losses as a percent of loans was 1.23% as of September 30, 2015, as compared to 1.25% as of December 31, 2014 and 1.28% as of September 30, 2014. Included in Table 7 is further analysis of our allowance for loan losses.

 

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Table 7 - Loan Loss Experience and Allowance for Loan Losses (in thousands, except percentages):

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2015     2014     2015     2014  

Allowance for loan losses at period-end

   $ 40,420      $ 36,388      $ 40,420      $ 36,388   

Loans held for investment at period-end

     3,266,817        2,828,430        3,266,817        2,828,430   

Average loans for period

     3,161,229        2,814,083        3,016,686        2,750,983   

Net charge-offs/average loans (annualized)

     0.16     0.06     0.08     0.06

Allowance for loan losses/period-end loans

     1.23     1.28     1.23     1.28

Allowance for loan losses/non-accrual loans, past due 90 days still accruing and restructured loans

     183.39     162.77     183.29     162.77

Interest-Bearing Deposits in Banks. At September 30, 2015, our interest-bearing deposits in banks were $8.76 million compared with $103.23 million and $71.33 million as of September 30, 2014 and December 31, 2014, respectively. At September 30, 2015, interest-bearing deposits in banks included $4.49 million invested in FDIC-insured certificates of deposit, $4.01 million maintained at the Federal Reserve Bank of Dallas and $252 thousand on deposit with the FHLB.

Available-for-Sale and Held-to-Maturity Securities. At September 30, 2015, securities with a fair value of $2.74 billion were classified as securities available-for-sale and securities with an amortized cost of $286 thousand were classified as securities held-to-maturity. As compared to December 31, 2014, the available-for-sale portfolio at September 30, 2015 reflected (i) an increase of $25.44 million in obligations of U.S. government sponsored enterprises and agencies, (ii) an increase of $269.52 million in obligations of states and political subdivisions, (iii) a decrease of $7.45 million in corporate bonds and other, (iv) an increase of $23.58 million in mortgage-backed securities and (v) an increase of $10.40 million in U.S. Treasury securities. Our mortgage related securities are backed by GNMA, FNMA or FHLMC or are collateralized by securities backed by these agencies.

See note 4 to the consolidated financial statements (unaudited) for additional disclosures relating to the investment portfolio at September 30, 2015 and 2014, and December 31, 2014.

 

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Table 8 - Maturities and Yields of Available-for-Sale Securities Held at September 30, 2015 (in thousands, except percentages):

 

     Maturing  
     One Year
or Less
    After One Year
Through

Five Years
    After Five Years
Through

Ten Years
    After
Ten Years
    Total  

Available-for-Sale:

   Amount      Yield     Amount      Yield     Amount      Yield     Amount      Yield     Amount      Yield  

U.S. Treasury securities

   $ —           —     $ 10,917         1.12   $ —           —     $ —           —     $ 10,917         1.12

Obligations of U.S. government sponsored enterprises and agencies

     37,760         1.17        117,437         1.27        —           —          —           —          155,197         1.25   

Obligations of states and political subdivisions

     69,090         4.35        596,309         5.13        767,254         4.86        4,498         7.78        1,437,151         4.96   

Corporate bonds and other securities

     29,055         1.78        62,254         2.93        —           —          —           —          91,309         2.56   

Mortgage-backed securities

     2,258         4.46        833,255         2.30        207,134         2.43        132         2.14        1,042,779         2.33   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 138,163         2.94   $ 1,620,172         3.28   $ 974,388         4.35   $ 4,630         7.62   $ 2,737,353         3.65
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Amounts for held-to-maturity securities are not included herein due to insignificance.

All yields are computed on a tax-equivalent basis assuming a marginal tax rate of 35%. Yields on available-for-sale securities are based on amortized cost. Maturities of mortgage-backed securities are based on contractual maturities and could differ due to prepayments of underlying mortgages. Maturities of other securities are reported at the earlier of maturity date or call date.

As of September 30, 2015, the investment portfolio had an overall tax equivalent yield of 3.65%, a weighted average life of 4.43 years and modified duration of 3.95 years.

Deposits. Deposits held by our subsidiary bank represent our primary source of funding. Total deposits were $5.10 billion as of September 30, 2015, as compared to $4.46 billion as of September 30, 2014 and $4.75 billion as of December 31, 2014. Table 9 provides a breakdown of average deposits and rates paid for the three and nine-month periods ended September 30, 2015 and 2014.

 

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Table 9 — Composition of Average Deposits (in thousands, except percentages):

 

     Three Months Ended September 30,  
     2015     2014  
     Average
Balance
     Average
Rate
    Average
Balance
     Average
Rate
 

Noninterest-bearing deposits

   $ 1,687,285         —     $ 1,470,682         —  

Interest-bearing deposits:

          

Interest-bearing checking

     1,617,367         0.09        1,317,199         0.10   

Savings and money market accounts

     1,042,610         0.06        897,391         0.06   

Time deposits under $100,000

     273,734         0.21        277,113         0.25   

Time deposits of $100,000 or more

     361,700         0.32        400,362         0.34   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total interest-bearing deposits

     3,295,411         0.11     2,892,065         0.14
  

 

 

    

 

 

   

 

 

    

 

 

 

Total average deposits

   $ 4,982,696         $ 4,362,747      
  

 

 

      

 

 

    

 

     Nine Months Ended September 30,  
     2015     2014  
     Average
Balance
     Average
Rate
    Average
Balance
     Average
Rate
 

Noninterest-bearing deposits

   $ 1,607,931         —     $ 1,397,909         —  

Interest-bearing deposits:

          

Interest-bearing checking

     1,601,087         0.09        1,307,362         0.11   

Savings and money market accounts

     1,004,584         0.06        869,072         0.06   

Time deposits under $100,000

     263,031         0.21        283,469         0.23   

Time deposits of $100,000 or more

     363,223         0.31        399,366         0.31   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total interest-bearing deposits

     3,231,925         0.11     2,859,269         0.14
  

 

 

    

 

 

   

 

 

    

 

 

 

Total average deposits

   $ 4,839,856         $ 4,257,178      
  

 

 

      

 

 

    

Short-Term Borrowings. Included in short-term borrowings were federal funds purchased, securities sold under repurchase agreements and advances from the FHLB of $500.90 million and $341.91 million at September 30, 2015 and 2014, respectively. Securities sold under repurchase agreements are generally with significant customers of the Company that require short-term liquidity for their funds for which we pledge certain securities that have a fair value equal to at least the amount of the short-term borrowing. The average balance of federal funds purchased, securities sold under repurchase agreements and advances from the FHLB was $572.43 million and $384.77 million in the third quarters of 2015 and 2014, respectively. The weighted average interest rate paid on these short-term borrowings was 0.09% and 0.07% for the third quarters of 2015 and 2014, respectively. The average balances of federal funds purchased, securities sold under repurchase agreements and advances from the FHLB was $507.01 million and $405.81 million for the nine-month periods ended September 30, 2015 and 2014, respectively. The weighted average interest rate paid on these short-term borrowings was 0.07% and 0.08% for the first nine months of 2015 and 2014, respectively.

 

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Capital Resources

We evaluate capital resources by our ability to maintain adequate regulatory capital ratios to do business in the banking industry. Issues related to capital resources arise primarily when we are growing at an accelerated rate but not retaining a significant amount of our profits or when we experience significant asset quality deterioration.

Total shareholders’ equity was $792.03 million, or 12.25% of total assets at September 30, 2015, as compared to $658.77 million, or 11.81% of total assets, at September 30, 2014. Included in shareholders’ equity at September 30, 2015 and September 30, 2014, were $53.37 million and $43.22 million, respectively, in unrealized gains on investment securities available-for-sale, net of related income taxes. For the third quarter of 2015, total shareholders’ equity averaged $753.61 million, or 11.84% of average assets, as compared to $651.51 million, or 11.96% of average assets, during the same period in 2014. For the nine-months ended September 30, 2015, total shareholders’ equity averaged $718.53, or 11.74%, as compared to $628.97 million, or 11.79%, of total assets during the same period in 2014.

Banking regulators measure capital adequacy by means of the risk-based capital ratios and leverage ratio. The risk-based capital rules provide for the weighting of assets and off-balance-sheet commitments and contingencies according to prescribed risk categories ranging from 0% to 100%. Regulatory capital is then divided by risk-weighted assets to determine the risk-adjusted capital ratios. The leverage ratio is computed by dividing shareholders’ equity less intangible assets by quarter-to-date average assets less intangible assets.

As of September 30, 2015 and December 31, 2014, we had a total risk-based capital ratio of 16.78% and 17.16%, a Tier 1 capital to risk-weighted assets ratio of 15.73% and 16.05% and a Tier 1 leverage ratio of 9.96% and 9.89%, respectively. At September 30, 2015, we had a common equity Tier 1 to risk-weighted assets ratio of 15.73%. The regulatory capital ratios as of September 30, 2015 were calculated under Interim Final Basel III rules and the regulatory capital ratios as of December 31, 2014 were calculated under Basel I rules. There is no threshold for well-capitalized status for bank holding companies.

As of September 30, 2015 and December 31, 2014, the regulatory capital ratios of the Company and Bank exceeded the required minimums, as seen in the table below (dollars in thousands):

 

     Actual     For Capital
Adequacy Purposes:
    To Be Well
Capitalized Under
Prompt Corrective
Action Provisions:
 
     Amount      Ratio     Amount      Ratio     Amount      Ratio  

As of September 30, 2015:

               

Total Capital (to Risk-Weighted Assets):

               

Consolidated

   $ 655,429         17     ³ $314,032         ³ 8     N/A   

First Financial Bank, N.A.

   $ 567,379         14     ³ $313,379         ³ 8     ³ $391,724         ³ 10

Tier1 Capital (to Risk-Weighted Assets):

               

Consolidated

   $ 614,184         16     ³ $157,016         ³ 4     N/A   

First Financial Bank, N.A.

   $ 526,134         13     ³ $156,689         ³ 4     ³ $235,034         ³ 6

Common Equity Tier 1 Capital (to Risk-Weighted Assets):

               

Consolidated

   $ 614,184         16     ³ $157,016         ³ 4     N/A   

First Financial Bank, N.A.

   $ 526,134         13     ³ $156,689         ³ 4     ³ $235,034         ³ 6

Tier 1 Capital (to Average Assets) – Leverage:

               

Consolidated

   $ 614,184         10     ³ $185,088         ³ 3     N/A   

First Financial Bank, N.A.

   $ 526,134         8     ³ $188,281         ³ 3     ³ $313,802         ³ 5

As of December 31, 2014:

               

Total Capital (to Risk-Weighted Assets):

               

Consolidated

   $ 587,094         17     ³ $273,764         ³ 8     N/A   

First Financial Bank, N.A.

   $ 492,668         14     ³ $272,318         ³ 8     ³ $340,397         ³ 10

Tier1 Capital (to Risk-Weighted Assets):

               

Consolidated

   $ 549,124         16     ³ $136,882         ³ 4     N/A   

First Financial Bank, N.A.

   $ 454,698         13     ³ $136,159         ³ 4     ³ $204,238         ³ 6

Tier1 Capital (to Average Assets) – Leverage:

               

Consolidated

   $ 549,124         10     ³ $166,489         ³ 3     N/A   

First Financial Bank, N.A.

   $ 454,698         8     ³ $165,598         ³ 3     ³ $275,996         ³ 5

 

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We have performed a preliminary assessment using the regulatory capital estimation tool made available by the OCC and believe the Company is prepared to meet the new requirements upon full adoption of the Basel III Notice of Proposed Rulemaking.

Our subsidiary bank made the election to continue to exclude most accumulated other comprehensive income (“AOCI”) from capital in connection with its March 31, 2015 quarterly financial filing and, in effect, to retain the AOCI treatment under the prior capital rules.

Interest Rate Risk

Interest rate risk results when the maturity or repricing intervals of interest-earning assets and interest-bearing liabilities are different. Our exposure to interest rate risk is managed primarily through our strategy of selecting the types and terms of interest-earning assets and interest-bearing liabilities that generate favorable earnings while limiting the potential negative effects of changes in market interest rates. We use no off-balance-sheet financial instruments to manage interest rate risk.

Our subsidiary bank has an asset liability management committee that monitors interest rate risk and compliance with investment policies. The subsidiary bank utilizes an earnings simulation model as the primary quantitative tool in measuring the amount of interest rate risk associated with changing market rates. The model quantifies the effects of various interest rate scenarios on projected net interest income and net income over the next twelve months. The model measures the impact on net interest income relative to a base case scenario of hypothetical fluctuations in interest rates over the next twelve months. These simulations incorporate assumptions regarding balance sheet growth and mix, pricing and the re-pricing and maturity characteristics of the existing and projected balance sheet.

As of September 30, 2015, the model simulations projected that 100 and 200 basis point increases in interest rates would result in variances in net interest income of 0.15% and (0.03%), respectively, relative to the current financial statement structure over the next twelve months, while a decrease in interest rates of 50 basis points would result in a variance in net interest income of (2.57%) relative to the current financial statement structure over the next twelve months. We consider the likelihood of a decrease in interest rates beyond 50 basis points as of September 30, 2015 remote given current interest rate levels. These are good faith estimates and assume that the composition of our interest sensitive assets and liabilities existing at each year-end will remain constant over the relevant twelve month measurement period and that changes in market interest rates are instantaneous and sustained across the yield curve regardless of duration of pricing characteristics on specific assets or liabilities. Also, this analysis does not contemplate any actions that we might undertake in response to changes in market interest rates. We believe these estimates are not necessarily indicative of what actually could occur in the event of

 

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immediate interest rate increases or decreases of this magnitude. As interest-bearing assets and liabilities re-price in different time frames and proportions to market interest rate movements, various assumptions must be made based on historical relationships of these variables in reaching any conclusion. Since these correlations are based on competitive and market conditions, we anticipate that our future results will likely be different from the foregoing estimates, and such differences could be material.

Should we be unable to maintain a reasonable balance of maturities and repricing of our interest-earning assets and our interest-bearing liabilities, we could be required to dispose of our assets in an unfavorable manner or pay a higher than market rate to fund our activities. Our asset liability committee oversees and monitors this risk.

Liquidity

Liquidity is our ability to meet cash demands as they arise. Such needs can develop from loan demand, deposit withdrawals or acquisition opportunities. Potential obligations resulting from the issuance of standby letters of credit and commitments to fund future borrowings to our loan customers are other factors affecting our liquidity needs. Many of these obligations and commitments are expected to expire without being drawn upon; therefore the total commitment amounts do not necessarily represent future cash requirements affecting our liquidity position. The potential need for liquidity arising from these types of financial instruments is represented by the contractual notional amount of the instrument. Asset liquidity is provided by cash and assets which are readily marketable or which will mature in the near future. Liquid assets include cash, federal funds sold, and short-term investments in time deposits in banks. Liquidity is also provided by access to funding sources, which include core depositors and correspondent banks that maintain accounts with and sell federal funds to our subsidiary bank. Other sources of funds include our ability to borrow from short-term sources, such as purchasing federal funds from correspondent banks, sales of securities under agreements to repurchase and advances from the FHLB, which amounted to $500.90 million at September 30, 2015, and an unfunded $25.00 million revolving line of credit established with Frost Bank, a nonaffiliated bank, which matures on June 30, 2017 (see next paragraph). Our subsidiary bank also has federal funds purchased lines of credit with two non-affiliated banks totaling $130.00 million. At September 30, 2015, there were no amounts drawn on these lines of credit. Our subsidiary bank also has available a line of credit with the FHLB totaling $931.80 million, at September 30, 2015, secured by portions of our loan portfolio and certain investment securities. At September 30, 2015, $170.03 million in advances and $5.00 million in letters of credit issued by the FHLB were outstanding under this line of credit. The letters of credit were pledged as collateral for public funds held by our subsidiary bank.

The Company renewed its loan agreement, effective June 30, 2015, with Frost Bank. Under the loan agreement, as renewed and amended, we are permitted to draw up to $25.00 million on a revolving line of credit. Prior to June 30, 2017, interest is paid quarterly at The Wall Street Journal Prime Rate and the line of credit matures June 30, 2017. If a balance exists at June 30, 2017, the principal balance converts to a term facility payable quarterly over five years and interest is paid quarterly at our election at The Wall Street Journal Prime Rate plus 50 basis points or LIBOR plus 250 basis points. The line of credit is unsecured. Among other provisions in the credit agreement, we must satisfy certain financial covenants during the term of the loan agreement, including, without limitation, covenants that require us to maintain certain capital, tangible net worth, loan loss reserve, non-performing asset and cash flow coverage ratios. In addition, the credit agreement contains certain operational covenants, which among others, restricts the payment of dividends above 55% of consolidated net income, limits the incurrence of debt (excluding any amounts acquired in an acquisition) and prohibits the disposal of assets except in the ordinary course of business. Since 1995, we have historically declared dividends as a percentage of our consolidated net income in a range of 37% (low) in 1995 to 53% (high) in 2003 and 2006. The Company was in compliance with the financial and operational covenants at September 30, 2015. There was no outstanding balance under the line of credit as of September 30, 2015 or December 31, 2014.

 

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In addition, we anticipate that future acquisitions of financial institutions, expansion of branch locations or offerings of new products could also place a demand on our cash resources. Available cash and cash equivalents at the Company, which totaled $78.50 million at September 30, 2015, investment securities which totaled $12.07 million at September 30, 2015 which matures over 8 to 15 years, available dividends from our subsidiaries which totaled $125.86 million at September 30, 2015, utilization of available lines of credit, and future debt or equity offerings, are expected to be the source of funding for these potential acquisitions or expansions.

Given the strong core deposit base and relatively low loan to deposit ratios maintained at our subsidiary bank, we consider our current liquidity position to be adequate to meet our short-term and long-term liquidity needs.

Off-Balance Sheet Arrangements. We are a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of our customers. These financial instruments include unfunded lines of credit, commitments to extend credit and federal funds sold to correspondent banks and standby letters of credit. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in our consolidated balance sheets.

Our exposure to credit loss in the event of nonperformance by the counterparty to the financial instrument for unfunded lines of credit, commitments to extend credit and standby letters of credit is represented by the contractual notional amount of these instruments. We generally use the same credit policies in making commitments and conditional obligations as we do for on-balance-sheet instruments.

Unfunded lines of credit and commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. These commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. We evaluate each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, as we deem necessary upon extension of credit, is based on our credit evaluation of the counterparty. Collateral held varies but may include accounts receivable, inventory, property, plant, and equipment and income-producing commercial properties.

Standby letters of credit are conditional commitments we issue to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The average collateral value held on letters of credit usually exceeds the contract amount.

Table 10 – Commitments as of September 30, 2015 (in thousands):

 

     Total Notional
Amounts
Committed
 

Unfunded lines of credit

   $ 458,417   

Unfunded commitments to extend credit

     158,910   

Standby letters of credit

     36,589   
  

 

 

 

Total commercial commitments

   $ 653,916   
  

 

 

 

 

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We believe we have no other off-balance sheet arrangements or transactions with unconsolidated, special purpose entities that would expose us to liability that is not reflected on the face of the financial statements.

Parent Company Funding. Our ability to fund various operating expenses, dividends, and cash acquisitions is generally dependent on our own earnings (without giving effect to our subsidiaries), cash reserves and funds derived from our subsidiaries. These funds historically have been produced by intercompany dividends and management fees that are limited to reimbursement of actual expenses. We anticipate that our recurring cash sources will continue to include dividends and management fees from our subsidiaries. At September 30, 2015, approximately $125.86 million was available for the payment of intercompany dividends by our subsidiaries without the prior approval of regulatory agencies. Our subsidiaries paid aggregate dividends of $28.00 million and $34.00 million for the nine-month periods ended September 30, 2015 and 2014, respectively.