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EX-31.(A) - EX-31.(A) - INTERNATIONAL BANCSHARES CORPiboc-20160331xex31a.htm
EX-32.(B) - EX-32.(B) - INTERNATIONAL BANCSHARES CORPiboc-20160331xex32b.htm
EX-31.(B) - EX-31.(B) - INTERNATIONAL BANCSHARES CORPiboc-20160331xex31b.htm
EX-32.(A) - EX-32.(A) - INTERNATIONAL BANCSHARES CORPiboc-20160331xex32a.htm

 

 

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 March 31, 2016

OR

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from              to           

 

Commission file number 000-09439

 

INTERNATIONAL BANCSHARES CORPORATION

(Exact name of registrant as specified in its charter)

 

 

 

 

Texas

 

74-2157138

(State or other jurisdiction of

 

(I.R.S. Employer Identification No.)

incorporation or organization)

 

 

 

1200 San Bernardo Avenue, Laredo, Texas 78042-1359

(Address of principal executive offices)

(Zip Code)

 

(956) 722-7611

 

(Registrant’s telephone number, including area code)

 

None

 

(Former name, former address and former fiscal year, if changed since last report)

 

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  No

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation 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  No

 

Indicate by check mark if 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

 

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 Exchange Act). Yes  No

 

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

 

 

 

 

Class

 

Shares Issued and Outstanding

Common Stock, $1.00 par value

 

65,943,727 shares outstanding at May 3, 2016

 

 

 

 


 

PART I - FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

 

Consolidated Statements of Condition (Unaudited)

 

(Dollars in Thousands)

 

 

 

 

 

 

 

 

 

 

March 31,

 

December 31,

 

 

    

2016

    

2015

 

Assets

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

258,470

 

$

273,053

 

Investment securities:

 

 

 

 

 

 

 

Held to maturity (Market value of $2,400 on March 31, 2016 and $2,400 on December 31, 2015)

 

 

2,400

 

 

2,400

 

Available for sale (Amortized cost of $4,290,424 on March 31, 2016 and $4,196,034 on December 31, 2015)

 

 

4,337,940

 

 

4,199,372

 

Total investment securities

 

 

4,340,340

 

 

4,201,772

 

Loans

 

 

5,935,574

 

 

5,950,914

 

Less allowance for probable loan losses

 

 

(61,784)

 

 

(66,988)

 

Net loans

 

 

5,873,790

 

 

5,883,926

 

Bank premises and equipment, net

 

 

515,477

 

 

516,716

 

Accrued interest receivable

 

 

29,550

 

 

31,572

 

Other investments

 

 

466,941

 

 

468,791

 

Identified intangible assets, net

 

 

121

 

 

153

 

Goodwill

 

 

282,532

 

 

282,532

 

Other assets

 

 

111,468

 

 

114,354

 

Total assets

 

$

11,878,689

 

$

11,772,869

 

 

1


 

INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

 

Consolidated Statements of Condition, continued (Unaudited)

 

(Dollars in Thousands)

 

 

 

 

 

 

 

 

 

 

 

March 31,

 

December 31,

 

 

    

2016

    

2015

 

Liabilities and Shareholders’ Equity

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

Deposits:

 

 

 

 

 

 

 

Demand—non-interest bearing

 

$

3,176,647

 

$

3,149,618

 

Savings and interest bearing demand

 

 

3,117,289

 

 

3,020,222

 

Time

 

 

2,319,797

 

 

2,366,413

 

Total deposits

 

 

8,613,733

 

 

8,536,253

 

Securities sold under repurchase agreements

 

 

784,262

 

 

827,772

 

Other borrowed funds

 

 

499,650

 

 

505,750

 

Junior subordinated deferrable interest debentures

 

 

161,416

 

 

161,416

 

Other liabilities

 

 

119,331

 

 

76,175

 

Total liabilities

 

 

10,178,392

 

 

10,107,366

 

Shareholders’ equity:

 

 

 

 

 

 

 

Common shares of $1.00 par value. Authorized 275,000,000 shares; issued 95,875,943 shares on March 31, 2016 and 95,866,218 shares on December 31, 2015

 

 

95,876

 

 

95,866

 

Surplus

 

 

168,367

 

 

167,980

 

Retained earnings

 

 

1,697,461

 

 

1,683,600

 

Accumulated other comprehensive income (including $(3,925) on March 31, 2016 and $(4,026) on December 31, 2015 of comprehensive loss related to other-than-temporary impairment for non-credit related issues)

 

 

30,662

 

 

2,167

 

 

 

 

1,992,366

 

 

1,949,613

 

Less cost of shares in treasury, 29,934,516 shares on March 31, 2016 and 29,585,646 on December 31, 2015

 

 

(292,069)

 

 

(284,110)

 

Total shareholders’ equity

 

 

1,700,297

 

 

1,665,503

 

Total liabilities and shareholders’ equity

 

$

11,878,689

 

$

11,772,869

 

 

See accompanying notes to consolidated financial statements.

2


 

INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

 

Consolidated Statements of Income (Unaudited)

 

(Dollars in Thousands, except per share data)

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

    

2016

    

2015

 

Interest income:

 

 

 

 

 

 

 

Loans, including fees

 

$

74,251

 

$

72,443

 

Investment securities:

 

 

 

 

 

 

 

Taxable

 

 

20,120

 

 

23,883

 

Tax-exempt

 

 

2,647

 

 

2,773

 

Other interest income

 

 

39

 

 

36

 

 

 

 

 

 

 

 

 

Total interest income

 

 

97,057

 

 

99,135

 

 

 

 

 

 

 

 

 

Interest expense:

 

 

 

 

 

 

 

Savings deposits

 

 

961

 

 

877

 

Time deposits

 

 

2,574

 

 

2,874

 

Securities sold under repurchase agreements

 

 

5,559

 

 

5,994

 

Other borrowings

 

 

627

 

 

475

 

Junior subordinated deferrable interest debentures

 

 

1,096

 

 

1,024

 

 

 

 

 

 

 

 

 

Total interest expense

 

 

10,817

 

 

11,244

 

 

 

 

 

 

 

 

 

Net interest income

 

 

86,240

 

 

87,891

 

 

 

 

 

 

 

 

 

Provision for probable loan losses

 

 

9,134

 

 

2,377

 

 

 

 

 

 

 

 

 

Net interest income after provision for probable loan losses

 

 

77,106

 

 

85,514

 

 

 

 

 

 

 

 

 

Non-interest income:

 

 

 

 

 

 

 

Service charges on deposit accounts

 

 

18,110

 

 

19,192

 

Other service charges, commissions and fees

 

 

 

 

 

 

 

Banking

 

 

10,377

 

 

10,453

 

Non-banking

 

 

1,297

 

 

1,110

 

Investment securities transactions, net

 

 

(133)

 

 

(1)

 

Other investments, net

 

 

7,851

 

 

4,255

 

Other income

 

 

3,429

 

 

1,825

 

 

 

 

 

 

 

 

 

Total non-interest income

 

 

40,931

 

 

36,834

 

 

3


 

INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

 

Consolidated Statements of Income, continued (Unaudited)

 

(Dollars in Thousands, except per share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

    

 

March 31,

 

 

 

    

2016

    

2015

 

Non-interest expense:

 

 

 

 

 

 

 

 

Employee compensation and benefits

 

 

$

30,783

 

$

31,752

 

Occupancy

 

 

 

6,166

 

 

6,179

 

Depreciation of bank premises and equipment

 

 

 

6,180

 

 

6,226

 

Professional fees

 

 

 

3,293

 

 

3,247

 

Deposit insurance assessments

 

 

 

1,493

 

 

1,490

 

Net expense, other real estate owned

 

 

 

878

 

 

1,468

 

Amortization of identified intangible assets

 

 

 

32

 

 

119

 

Advertising

 

 

 

2,105

 

 

2,007

 

Impairment charges (Total other-than-temporary impairment charges, $32 net of $(156), and $122, net of $(349), included in other comprehensive income)

 

 

 

124

 

 

227

 

Other

 

 

 

16,864

 

 

14,908

 

 

 

 

 

 

 

 

 

 

Total non-interest expense

 

 

 

67,918

 

 

67,623

 

 

 

 

 

 

 

 

 

 

Income before income taxes

 

 

 

50,119

 

 

54,725

 

 

 

 

 

 

 

 

 

 

Provision for income taxes

 

 

 

17,135

 

 

18,863

 

 

 

 

 

 

 

 

 

 

Net income

 

 

$

32,984

 

$

35,862

 

 

 

 

 

 

 

 

 

 

Basic earnings per common share:

 

 

 

 

 

 

 

 

Weighted average number of shares outstanding

 

 

 

66,014,114

 

 

66,416,252

 

Net income

 

 

$

0.50

 

$

.54

 

 

 

 

 

 

 

 

 

 

Fully diluted earnings per common share:

 

 

 

 

 

 

 

 

Weighted average number of shares outstanding

 

 

 

66,118,082

 

 

66,555,392

 

Net income

 

 

$

0.50

 

$

.54

 

 

See accompanying notes to consolidated financial statements.

4


 

INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

 

Consolidated Statements of Comprehensive Income (Unaudited)

 

(Dollars in Thousands)

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

    

March 31,

 

 

 

2016

    

2015

    

 

 

 

 

 

 

 

 

Net income

 

$

32,984

 

$

35,862

 

Other comprehensive (loss) income, net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net unrealized holding (losses) gains on securities available for sale arising during period (net of tax effects of $15,254 and $11,756)

 

 

28,328

 

 

21,833

 

Reclassification adjustment for losses (gains) on securities available for sale included in net income (net of tax effects of $47 and $(-))

 

 

86

 

 

(1)

 

Reclassification adjustment for impairment charges on available for sale securities included in net income (net of tax effects of $43 and $79)

 

 

81

 

 

148

 

 

 

 

28,495

 

 

21,980

 

 

 

 

 

 

 

 

 

Comprehensive income

 

$

61,479

 

$

57,842

 

 

See accompanying notes to consolidated financial statements.

5


 

INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

 

Consolidated Statements of Cash Flows (Unaudited)

 

(Dollars in Thousands)

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

    

March 31,

 

 

 

2016

    

2015

 

Operating activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

32,984

 

$

35,862

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

Provision for probable loan losses

 

 

9,134

 

 

2,377

 

Specific reserve, other real estate owned

 

 

47

 

 

 —

 

Depreciation of bank premises and equipment

 

 

6,180

 

 

6,226

 

Gain on sale of bank premises and equipment

 

 

(22)

 

 

(91)

 

Loss (gain) on sale of other real estate owned

 

 

40

 

 

(28)

 

Accretion of investment securities discounts

 

 

(121)

 

 

(444)

 

Amortization of investment securities premiums

 

 

6,132

 

 

7,217

 

Investment securities transactions, net

 

 

133

 

 

1

 

Impairment charges on available for sale securities

 

 

124

 

 

227

 

Amortization of identified intangible assets

 

 

32

 

 

119

 

Stock based compensation expense

 

 

285

 

 

292

 

Earnings from affiliates and other investments

 

 

(3,223)

 

 

(3,286)

 

Deferred tax expense (benefit)

 

 

1,250

 

 

(1,415)

 

Decrease in accrued interest receivable

 

 

2,022

 

 

1,134

 

Decrease in other assets

 

 

4,275

 

 

1,273

 

Net increase in other liabilities

 

 

7,100

 

 

17,319

 

 

 

 

 

 

 

 

 

Net cash provided by operating activities

 

 

66,372

 

 

66,783

 

 

 

 

 

 

 

 

 

Investing activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Proceeds from maturities of securities

 

 

 —

 

 

1,075

 

Proceeds from sales and calls of available for sale securities

 

 

38,661

 

 

6,290

 

Purchases of available for sale securities

 

 

(319,660)

 

 

(238,290)

 

Principal collected on mortgage backed securities

 

 

180,342

 

 

201,856

 

Net increase in loans

 

 

(159)

 

 

(102,699)

 

Purchases of other investments

 

 

(759)

 

 

(550)

 

Distributions from other investments

 

 

4,162

 

 

343

 

Purchases of bank premises and equipment

 

 

(4,941)

 

 

(7,806)

 

Proceeds from sales of bank premises and equipment

 

 

22

 

 

3,831

 

Proceeds from sales of other real estate owned

 

 

1,354

 

 

744

 

 

 

 

 

 

 

 

 

Net cash used in investing activities

 

$

(100,978)

 

$

(135,206)

 

 

6


 

INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

 

Consolidated Statements of Cash Flows, continued (Unaudited)

 

(Dollars in Thousands)

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

    

March 31,

 

 

 

2016

    

2015

 

Financing activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net increase in non-interest bearing demand deposits

 

$

27,029

 

$

108,597

 

Net increase in savings and interest bearing demand deposits

 

 

97,067

 

 

113,714

 

Net decrease in time deposits

 

 

(46,616)

 

 

(12,014)

 

Net (decrease) increase in securities sold under repurchase agreements

 

 

(43,510)

 

 

15,055

 

Net decrease in other borrowed funds

 

 

(6,100)

 

 

(132,487)

 

Purchase of treasury stock

 

 

(7,959)

 

 

(1,245)

 

Proceeds from stock transactions

 

 

112

 

 

53

 

 

 

 

 

 

 

 

 

Net cash provided by financing activities

 

 

20,023

 

 

91,673

 

 

 

 

 

 

 

 

 

(Decrease) increase in cash and cash equivalents

 

 

(14,583)

 

 

23,250

 

 

 

 

 

 

 

 

 

Cash and cash equivalents at beginning of year

 

 

273,053

 

 

255,146

 

 

 

 

 

 

 

 

 

Cash and cash equivalents at end of year

 

$

258,470

 

$

278,396

 

 

 

 

 

 

 

 

 

Supplemental cash flow information:

 

 

 

 

 

 

 

Interest paid

 

$

11,132

 

$

11,549

 

Income taxes paid

 

 

100

 

 

50

 

Non-cash investing and financing activities:

 

 

 

 

 

 

 

Dividends declared, not yet paid on common stock

 

$

19,123

 

$

19,258

 

Net transfers from loans to other real estate owned

 

 

1,161

 

 

2,248

 

 

See accompanying notes to consolidated financial statements.

7


 

INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

 

Notes to Consolidated Financial Statements

 

(Unaudited)

 

Note 1 — Basis of Presentation

 

The accounting and reporting policies of International Bancshares Corporation (the “Corporation”) and Subsidiaries (the Corporation and Subsidiaries collectively referred to herein as the “Company”) conform to accounting principles generally accepted in the United States of America and to general practices within the banking industry.  The consolidated financial statements include the accounts of the Corporation and its wholly-owned subsidiaries, International Bank of Commerce, Laredo (“IBC”), Commerce Bank, International Bank of Commerce, Zapata, International Bank of Commerce, Brownsville and the Corporation’s wholly-owned non-bank subsidiaries, IBC Subsidiary Corporation, IBC Life Insurance Company, IBC Trading Company, Premier Tierra Holdings, Inc., IBC Charitable and Community Development Corporation, and IBC Capital Corporation.  All significant inter-company balances and transactions have been eliminated in consolidation.  The consolidated financial statements are unaudited, but include all adjustments, which, in the opinion of management, are necessary for a fair presentation of the results of the periods presented.  All such adjustments were of a normal and recurring nature.  These financial statements should be read in conjunction with the financial statements and the notes thereto in the Company’s latest Annual Report on Form 10-K.  The consolidated statement of condition at December 31, 2015 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements.  Certain reclassifications have been made to make prior periods comparable. Operating results for the three months ended March 31, 2016 are not necessarily indicative of the results for the year ending December 31, 2016 or any future period.

 

The Company operates as one segment.  The operating information used by the Company’s chief executive officer for purposes of assessing performance and making operating decisions about the Company is the consolidated statements presented in this report.  The Company has four active operating subsidiaries, namely, the bank subsidiaries, known as International Bank of Commerce, Laredo, Commerce Bank, International Bank of Commerce, Zapata and International Bank of Commerce, Brownsville. The Company applies the provisions of Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”), FASB ASC 280, “Segment Reporting,” in determining its reportable segments and related disclosures.

 

The Company has evaluated all events or transactions that occurred through the date the Company issued these financial statements. During this period, the Company did not have any material recognizable or non-recognizable subsequent events.

 

Note 2 — Fair Value Measurements

 

ASC Topic 820, “Fair Value Measurements and Disclosures” (“ASC 820”) defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements.  ASC 820 applies to all financial instruments that are being measured and reported on a fair value basis.  ASC 820 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 at the measurement date; it also establishes a fair value hierarchy that prioritizes the inputs used in valuation methodologies into the following three levels:

 

·

Level 1 Inputs - Unadjusted quoted prices in active markets for identical assets or liabilities.

·

Level 2 Inputs - Observable inputs other than Level 1 inputs, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

·

Level 3 Inputs - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.  Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or other

8


 

valuation techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation.

 

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

 

The following table represents assets and liabilities reported on the consolidated balance sheets at their fair value on a recurring basis as of March 31, 2016 by level within the fair value measurement hierarchy:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurements at

 

 

 

 

 

 

Reporting Date Using

 

 

 

 

 

 

(in Thousands)

 

 

 

 

 

 

Quoted

 

 

 

 

 

 

 

 

 

 

 

 

Prices in

 

 

 

 

 

 

 

 

 

 

 

 

Active

 

Significant

 

 

 

 

 

 

Assets/Liabilities

 

Markets for

 

Other

 

Significant

 

 

 

Measured at

 

Identical

 

Observable

 

Unobservable

 

 

 

Fair Value

 

Assets

 

Inputs

 

Inputs

 

 

 

March 31, 2016

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

Measured on a recurring basis:

    

 

    

    

 

    

    

 

    

    

 

    

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Available-for-sale securities

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential mortgage-backed securities

 

$

4,030,513

 

$

 —

 

$

4,010,298

 

$

20,215

 

States and political subdivisions

 

 

278,556

 

 

 —

 

 

278,556

 

 

 —

 

Other

 

 

28,871

 

 

28,871

 

 

 —

 

 

 —

 

 

 

$

4,337,940

 

$

28,871

 

$

4,288,854

 

$

20,215

 

 

The following table represents assets and liabilities reported on the consolidated balance sheets at their fair value on a recurring basis as of December 31, 2015 by level within the fair value measurement hierarchy:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurements at

 

 

 

 

 

 

Reporting Date Using

 

 

 

 

 

 

(in Thousands)

 

 

 

 

 

 

Quoted

 

 

 

 

 

 

 

 

 

 

 

 

Prices in

 

 

 

 

 

 

 

 

 

 

 

 

Active

 

Significant

 

 

 

 

 

 

Assets/Liabilities

 

Markets for

 

Other

 

Significant

 

 

 

Measured at

 

Identical

 

Observable

 

Unobservable

 

 

 

Fair Value

 

Assets

 

Inputs

 

Inputs

 

 

 

December 31, 2015

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

Measured on a recurring basis:

    

 

    

    

 

    

    

 

    

    

 

    

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Available-for-sale securities

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential mortgage - backed securities

 

$

3,893,210

 

$

 —

 

$

3,871,981

 

$

21,229

 

States and political subdivisions

 

 

277,705

 

 

 —

 

 

277,705

 

 

 —

 

Other

 

 

28,457

 

 

28,457

 

 

 —

 

 

 —

 

 

 

$

4,199,372

 

$

28,457

 

$

4,149,686

 

$

21,229

 

 

Investment securities available-for-sale are classified within Level 2 and Level 3 of the valuation hierarchy, with the exception of certain equity investments that are classified within Level 1.  For investments classified as Level 2 in the fair value hierarchy, the Company obtains fair value measurements for investment securities from an independent pricing service.  The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the bond’s terms and conditions, among other things.  Investment securities classified as Level 3 are non-agency mortgage-backed securities.  The non-agency mortgage-backed securities held by the Company are traded in inactive markets and markets that have experienced significant decreases in volume and level of activity, as evidenced by few recent transactions, a significant decline or absence of new issuances, price quotations that are not based on comparable securities transactions and wide bid-ask spreads among other factors.  As a result of the inability to

9


 

use quoted market prices to determine fair value for these securities, the Company determined that fair value, as determined by level 3 inputs in the fair value hierarchy, is more appropriate for financial reporting and more consistent with the expected performance of the investments.  For the investments classified within level 3 of the fair value hierarchy, the Company used a discounted cash flow model to determine fair value.  Inputs in the model included both historical performance and expected future performance based on information currently available.

 

Assumptions used in the discounted cash flow model as of March 31, 2016 and December 31, 2015 were applied separately to those portions of the bond where the underlying residential mortgage loans had been performing under original contract terms for at least the prior 24 months and those where the underlying residential mortgages had not been meeting the original contractual obligation for the same period.  Unobservable inputs included in the model are estimates on future principal prepayment rates and default and loss severity rates.  For that portion of the bond where the underlying residential mortgage had been meeting the original contract terms for at least 24 months, the Company used the following estimates in the model: (i) a voluntary prepayment rate of 7%, (ii) a 1% default rate, (iii) a loss severity rate of 25%, and (iv) a discount rate of 13%.  The assumptions used in the model for the rest of the bond included the following estimates:  (i) a voluntary prepayment rate of 2%, (ii) a default rate of 4.5%, (iii) a loss severity rate that started at 60% for the first year (2012)  then declines by 5% for the following five years (2013, 2014, 2015, 2016 and 2017) and remains at 25% thereafter (2018 and beyond), and (iv) a discount rate of 13%.  The estimates used in the model to determine fair value are based on observable historical data of the underlying collateral.  The model anticipates that the housing market will gradually improve and that the underlying collateral will eventually all perform in accordance with the original contract terms on the bond.  Should the number of loans in the underlying collateral that default and go into foreclosure or the severity of the losses in the underlying collateral significantly change, the results of the model would be impacted.  The Company will continue to evaluate the actual historical performance of the underlying collateral and will modify the assumptions used in the model as necessary.

 

The following table presents a reconciliation of activity for such mortgage-backed securities on a net basis (Dollars in Thousands):

 

 

 

 

 

 

Balance at December 31, 2015

    

$

21,229

 

Principal paydowns

 

 

(1,046)

 

Total unrealized gains (losses) included in:

 

 

 

 

Other comprehensive income

 

 

156

 

Impairment realized in earnings

 

 

(124)

 

 

 

 

 

 

Balance at March 31, 2016

 

$

20,215

 

 

Certain financial assets and financial liabilities are measured at fair value on a nonrecurring basis.  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).

 

10


 

The following table represents financial instruments measured at fair value on a non-recurring basis as of and for the period ended March 31, 2016 by level within the fair value measurement hierarchy:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurements at Reporting

 

 

 

 

 

 

 

 

 

Date Using

 

 

 

 

 

 

 

 

 

(in Thousands)

 

 

 

 

 

 

 

 

 

Quoted

 

 

 

 

 

 

 

 

 

 

 

 

Assets/Liabilities

 

Prices in

 

 

 

 

 

 

 

 

 

 

 

 

Measured at

 

Active

 

Significant

 

 

 

 

 

 

 

 

 

Fair Value

 

Markets for

 

Other

 

Significant

 

Net (Credit)

 

 

 

Year ended

 

Identical

 

Observable

 

Unobservable

 

Provision

 

 

 

March 31,

 

Assets

 

Inputs

 

Inputs

 

During

 

 

 

2016

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

Period

 

Measured on a non-recurring basis:

    

 

    

    

 

    

    

 

    

    

 

    

    

 

    

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Impaired loans

 

$

36,072

 

$

 —

 

$

 —

 

$

36,072

 

$

18,514

 

Other real estate owned

 

 

1,722

 

 

 —

 

 

 —

 

 

1,722

 

 

47

 

 

The following table represents financial instruments measured at fair value on a non-recurring basis as of and for the period ended December 31, 2015 by level within the fair value measurement hierarchy:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurements at Reporting

 

 

 

 

 

 

 

 

 

Date Using

 

 

 

 

 

 

 

 

 

(in Thousands)

 

 

 

 

 

 

 

 

 

Quoted

 

 

 

 

 

 

 

 

 

 

 

 

Assets/Liabilities

 

Prices in

 

 

 

 

 

 

 

 

 

 

 

 

Measured at

 

Active

 

Significant

 

 

 

 

 

 

 

 

 

Fair Value

 

Markets

 

Other

 

Significant

 

Net (Credit)

 

 

 

Year ended

 

for Identical

 

Observable

 

Unobservable

 

Provision

 

 

 

December 31,

 

Assets

 

Inputs

 

Inputs

 

During

 

 

 

2015

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

Period

 

Measured on a non-recurring basis:

    

 

    

    

 

    

    

 

    

    

 

    

    

 

    

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Impaired loans

 

$

52,400

 

$

 —

 

$

 —

 

$

52,400

 

$

13,439 

 

Other real estate owned

 

 

12,705

 

 

 —

 

 

 —

 

 

12,705

 

 

1,023

 

 

The Company’s assets measured at fair value on a non-recurring basis are limited to impaired loans and other real estate owned.  Impaired loans are classified within Level 3 of the valuation hierarchy.  The fair value of impaired loans is derived in accordance with FASB ASC 310, “Receivables”.  Impaired loans are primarily comprised of collateral-dependent commercial loans.   Understanding that as the primary sources of loan repayments decline, the secondary repayment source takes on greater significance and correctly evaluating the fair value of that secondary source, the collateral, becomes even more important.  Re-measurement of the impaired loan to fair value is done through a specific valuation allowance included in the allowance for probable loan losses.  The fair value of impaired loans is based on the fair value of the collateral, as determined through either an appraisal or evaluation process.  The basis for the Company’s appraisal and appraisal review process is based on regulatory guidelines and strives to comply with all regulatory appraisal laws, regulations, and the Uniform Standards of Professional Appraisal Practice. All appraisals and evaluations are “as is” (the property’s highest and best use) valuations based on the current conditions of the property/project at that point in time.  The determination of the fair value of the collateral is based on the net realizable value, which is the appraised value less any closing costs, when applicable.  As of March 31, 2016, the Company had $34,652,000 of impaired commercial collateral dependent loans, of which $17,067,000 had an appraisal performed within the immediately preceding twelve months, and of which $6,731,000 had an evaluation performed within the immediately preceding twelve months.  As of December 31, 2015, the Company had $51,021,000 of impaired commercial collateral dependent loans, of which $39,520,000 had an appraisal performed within the immediately preceding twelve months and of which $2,958,000 had an evaluation performed within the immediately preceding twelve months.

 

The determination to either seek an appraisal or to perform an evaluation begins in weekly credit quality meetings, where the committee analyzes the existing collateral values of the impaired loans and where obsolete

11


 

appraisals are identified.  In order to determine whether the Company would obtain a new appraisal or perform an internal evaluation to determine the fair value of the collateral, the credit committee reviews the existing appraisal to determine if the collateral value is reasonable in view of the current use of the collateral and the economic environment related to the collateral.  If the analysis of the existing appraisal does not find that the collateral value is reasonable under the current circumstances, the Company would obtain a new appraisal on the collateral or perform an internal evaluation of the collateral.  The ultimate decision to get a new appraisal rests with the independent credit administration group.  A new appraisal is not required if an internal evaluation, as performed by in-house experts, is able to appropriately update the original appraisal assumptions to reflect current market conditions and provide an estimate of the collateral’s market value for impairment analysis.  The internal evaluations must be in writing and contain sufficient information detailing the analysis, assumptions and conclusions and they must support performing an evaluation in lieu of ordering a new appraisal.  

 

Other real estate owned is comprised of real estate acquired by foreclosure and deeds in lieu of foreclosure. Other real estate owned is carried at the lower of the recorded investment in the property or its fair value less estimated costs to sell such property (as determined by independent appraisal) within level 3 of the fair value hierarchy.  Prior to foreclosure, the value of the underlying loan is written down to the fair value of the real estate to be acquired by a charge to the allowance for probable loan losses, if necessary.  The fair value is reviewed periodically and subsequent write-downs are made, accordingly, through a charge to operations.  Other real estate owned is included in other assets on the consolidated financial statements.  For the three months ended March 31, 2016 and the twelve months ended December 31, 2015, respectively, the Company recorded $232,000 and $696,000 in charges to the allowance for probable loan losses in connection with loans transferred to other real estate owned.  For the three months ended March 31, 2016 and the twelve months ended December 31, 2015, respectively, the Company recorded $47,000 and $1,023,000 in adjustments to fair value in connection with other real estate owned.

 

The fair value estimates, methods, and assumptions for the Company’s financial instruments at March 31, 2016 and December 31, 2015 are outlined below.

 

Cash and Cash Equivalents

 

For these short-term instruments, the carrying amount is a reasonable estimate of fair value.

 

Time Deposits with Banks

 

The carrying amounts of time deposits with banks approximate fair value.

 

Investment Securities Held-to-Maturity

 

The carrying amounts of investments held-to-maturity approximate fair value.

 

Investment Securities

 

For investment securities, which include U.S. Treasury securities, obligations of other U.S. government agencies, obligations of states and political subdivisions and mortgage pass through and related securities, fair values are from an independent pricing service.  The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the bond’s terms and conditions, among other things.  See disclosures of fair value of investment securities in Note 6.

 

Loans

 

Fair values are estimated for portfolios of loans with similar financial characteristics.  Loans are segregated by type such as commercial, real estate and consumer loans as outlined by regulatory reporting guidelines.  Each category is segmented into fixed and variable interest rate terms and by performing and non-performing categories.

 

12


 

For variable rate performing loans, the carrying amount approximates the fair value.  For fixed-rate performing loans, except residential mortgage loans, the fair value is calculated by discounting scheduled cash flows through the estimated maturity using estimated market discount rates that reflect the credit and interest rate risk inherent in the loan.  For performing residential mortgage loans, fair value is estimated by discounting contractual cash flows adjusted for prepayment estimates using discount rates based on secondary market sources or the primary origination market.  Fixed-rate performing loans are within Level 3 of the fair value hierarchy.  At March 31, 2016, and December 31, 2015, the carrying amount of fixed-rate performing loans was $1,347,214,000 and $1,383,836,000 respectively, and the estimated fair value was $1,320,755,000 and $1,362,248,000, respectively.

 

Accrued Interest

 

The carrying amounts of accrued interest approximate fair value.

 

Deposits

 

The fair value of deposits with no stated maturity, such as non-interest bearing demand deposit accounts, savings accounts and interest bearing demand deposit accounts, was equal to the amount payable on demand as of March 31, 2016 and December 31, 2015.  The fair value of time deposits is based on the discounted value of contractual cash flows.  The discount rate is based on currently offered rates.  Time deposits are within Level 3 of the fair value hierarchy.  At March 31, 2016 and December 31, 2015, the carrying amount of time deposits was $2,319,797,000 and $2,366,413,000, respectively, and the estimated fair value was $2,319,079,000 and $2,365,390,000, respectively.

 

Securities Sold Under Repurchase Agreements

 

Securities sold under repurchase agreements include both short and long-term maturities.  Due to the contractual terms of the short-term instruments, the carrying amounts approximated fair value at March 31, 2016 and December 31, 2015.  The fair value of the long-term instruments is based on established market spreads using option adjusted spread methodology.  Long-term repurchase agreements are within Level 3 of the fair value hierarchy.  At March 31, 2016 and December 31, 2015, the carrying amount of long-term repurchase agreements was $560,000,000 and $560,000,000, respectively, and the estimated fair value was $528,038,200 and $527,198,600, respectively.

 

Junior Subordinated Deferrable Interest Debentures

 

The Company currently has floating-rate junior subordinated deferrable interest debentures outstanding.  Due to the contractual terms of the floating-rate junior subordinated deferrable interest debentures, the carrying amounts approximated fair value at March 31, 2016 and December 31, 2015.

 

Other Borrowed Funds

 

The Company currently has short-term borrowings issued from the Federal Home Loan Bank (“FHLB”).  Due to the contractual terms of the short-term borrowings, the carrying amounts approximated fair value at March 31, 2016 and December 31, 2015. 

 

Commitments to Extend Credit and Letters of Credit

 

Commitments to extend credit and fund letters of credit are principally at current interest rates, and, therefore, the carrying amount approximates fair value.

 

Limitations

 

Fair value estimates are made at a point in time, based on relevant market information and information about the financial instrument.  These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company’s entire holdings of a particular financial instrument.  Because no market exists for a significant portion of the Company’s financial instruments, fair value estimates are based on judgments regarding future expected

13


 

loss experience, current economic conditions, risk characteristics of various financial instruments and other factors.  These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision.  Changes in assumptions could significantly affect the estimates.

 

Fair value estimates are based on existing on- and off-statement of condition financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments.  Other significant assets and liabilities that are not considered financial assets or liabilities include the bank premises and equipment and core deposit value.  In addition, the tax ramifications related to the effect of fair value estimates have not been considered in the above estimates.

 

Note 3 — Loans

 

A summary of loans, by loan type at March 31, 2016 and December 31, 2015 is as follows:

 

 

 

 

 

 

 

 

 

 

 

March 31,

 

December 31,

 

 

 

2016

 

2015

 

 

 

(Dollars in Thousands)

 

Commercial, financial and agricultural

    

$

3,025,604

    

$

3,101,748

 

Real estate - mortgage

 

 

969,212

 

 

962,582

 

Real estate - construction

 

 

1,708,152

 

 

1,649,827

 

Consumer

 

 

55,925

 

 

57,744

 

Foreign

 

 

176,681

 

 

179,013

 

Total loans

 

$

5,935,574

 

$

5,950,914

 

 

 

Note 4 — Allowance for Probable Loan Losses

 

The allowance for probable loan losses primarily consists of the aggregate loan loss allowances of the bank subsidiaries.  The allowances are established through charges to operations in the form of provisions for probable loan losses.  Loan losses or recoveries are charged or credited directly to the allowances.  The allowance for probable loan losses of each bank subsidiary is maintained at a level considered appropriate by management, based on estimated probable losses in the loan portfolio.  The allowance for probable loan losses is derived from the following elements:  (i) allowances established on specific impaired loans, which are based on a review of the individual characteristics of each loan, including the customer’s ability to repay the loan, the underlying collateral values, and the industry in which the customer operates; (ii) allowances based on actual historical loss experience for similar types of loans in the Company’s loan portfolio; and (iii) allowances based on general economic conditions, changes in the mix of loans, company resources, border risk and credit quality indicators, among other things.  All segments of the loan portfolio continue to be impacted by the prolonged economic recovery.  Loans secured by real estate could be impacted negatively by the continued economic environment and resulting decrease in collateral values.  Consumer loans may be impacted by continued and prolonged unemployment rates.

 

The Company’s management continually reviews the allowance for loan losses of the bank subsidiaries using the amounts determined from the allowances established on specific impaired loans, the allowance established on quantitative historical loss percentages, and the allowance based on qualitative data to establish an appropriate amount to maintain in the Company’s allowance for loan losses.  Should any of the factors considered by management in evaluating the adequacy of the allowance for probable loan losses change, the Company’s estimate of probable loan losses could also change, which could affect the level of future provisions for probable loan losses.  While the calculation of the allowance for probable loan losses utilizes management’s best judgment and all information reasonably available, the adequacy of the allowance is dependent on a variety of factors beyond the Company’s control, including, among other things, the performance of the entire loan portfolio, the economy, changes in interest rates and the view of regulatory authorities towards loan classifications.

 

The loan loss provision is determined using the following methods.  On a weekly basis, loan past due reports are reviewed by the credit quality committee to determine if a loan has any potential problems and if a loan should be placed on the Company’s internal classified report.  Additionally, the Company’s credit department reviews the majority of the Company’s loans for proper internal classification purposes, regardless of whether they are past due, and

14


 

segregates any loans with potential problems for further review.  The credit department will discuss the potential problem loans with the servicing loan officers to determine any relevant issues that were not discovered in the evaluation.  Also, an analysis of loans that is provided through examinations by regulatory authorities is considered in the review process.  After the above analysis is completed, the Company determines if a loan should be placed on an internal classified report because of issues related to the analysis of the credit, credit documents, collateral and/or payment history.

 

A summary of the transactions in the allowance for probable loan losses by loan class is as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 2016

 

 

 

 

 

 

Domestic

 

 

 

 

Foreign

 

 

 

 

 

    

 

 

    

Commercial

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

 

 

 

 

Real Estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other

 

Commercial

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Construction &

 

Real Estate:

 

Commercial

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Land

 

Farmland &

 

Real Estate:

 

Residential:

 

Residential:

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

Development

 

Commercial

 

Multifamily

 

First Lien

 

Junior Lien

 

Consumer

 

Foreign

 

Total

 

 

 

(Dollars in Thousands)