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EX-32.(B) - EX-32.(B) - INTERNATIONAL BANCSHARES CORPiboc-20160630xex32b.htm
EX-32.(A) - EX-32.(A) - INTERNATIONAL BANCSHARES CORPiboc-20160630xex32a.htm
EX-31.(B) - EX-31.(B) - INTERNATIONAL BANCSHARES CORPiboc-20160630xex31b.htm
EX-31.(A) - EX-31.(A) - INTERNATIONAL BANCSHARES CORPiboc-20160630xex31a.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 June 30, 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

 

65,948,190 shares outstanding at August 2, 2016

 

 

 

 


 

PART I - FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

 

Consolidated Statements of Condition (Unaudited)

 

(Dollars in Thousands)

 

 

 

 

 

 

 

 

 

 

June 30,

 

December 31,

 

 

    

2016

    

2015

 

Assets

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

245,351

 

$

273,053

 

Investment securities:

 

 

 

 

 

 

 

Held to maturity (Market value of $2,400 on June 30, 2016 and $2,400 on December 31, 2015)

 

 

2,400

 

 

2,400

 

Available for sale (Amortized cost of $4,169,804 on June 30, 2016 and $4,196,034 on December 31, 2015)

 

 

4,233,319

 

 

4,199,372

 

Total investment securities

 

 

4,235,719

 

 

4,201,772

 

Loans

 

 

5,951,597

 

 

5,950,914

 

Less allowance for probable loan losses

 

 

(62,033)

 

 

(66,988)

 

Net loans

 

 

5,889,564

 

 

5,883,926

 

Bank premises and equipment, net

 

 

511,485

 

 

516,716

 

Accrued interest receivable

 

 

31,347

 

 

31,572

 

Other investments

 

 

470,243

 

 

468,791

 

Identified intangible assets, net

 

 

89

 

 

153

 

Goodwill

 

 

282,532

 

 

282,532

 

Other assets

 

 

110,310

 

 

114,354

 

Total assets

 

$

11,776,640

 

$

11,772,869

 

 

1


 

INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

 

Consolidated Statements of Condition, continued (Unaudited)

 

(Dollars in Thousands)

 

 

 

 

 

 

 

 

 

 

 

June 30,

 

December 31,

 

 

    

2016

    

2015

 

Liabilities and Shareholders’ Equity

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

Deposits:

 

 

 

 

 

 

 

Demand—non-interest bearing

 

$

3,099,467

 

$

3,149,618

 

Savings and interest bearing demand

 

 

3,049,405

 

 

3,020,222

 

Time

 

 

2,275,990

 

 

2,366,413

 

Total deposits

 

 

8,424,862

 

 

8,536,253

 

Securities sold under repurchase agreements

 

 

794,939

 

 

827,772

 

Other borrowed funds

 

 

552,125

 

 

505,750

 

Junior subordinated deferrable interest debentures

 

 

161,416

 

 

161,416

 

Other liabilities

 

 

102,674

 

 

76,175

 

Total liabilities

 

 

10,036,016

 

 

10,107,366

 

Shareholders’ equity:

 

 

 

 

 

 

 

Common shares of $1.00 par value. Authorized 275,000,000 shares; issued 95,881,118 shares on June 30, 2016 and 95,866,218 shares on December 31, 2015

 

 

95,881

 

 

95,866

 

Surplus

 

 

168,687

 

 

167,980

 

Retained earnings

 

 

1,727,148

 

 

1,683,600

 

Accumulated other comprehensive income (including $(3,689) on June 30, 2016 and $(4,026) on December 31, 2015 of comprehensive loss related to other-than-temporary impairment for non-credit related issues)

 

 

40,977

 

 

2,167

 

 

 

 

2,032,693

 

 

1,949,613

 

Less cost of shares in treasury, 29,934,516 shares on June 30, 2016 and 29,585,646 on December 31, 2015

 

 

(292,069)

 

 

(284,110)

 

Total shareholders’ equity

 

 

1,740,624

 

 

1,665,503

 

Total liabilities and shareholders’ equity

 

$

11,776,640

 

$

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

 

Six Months Ended

 

 

    

June 30,

 

June 30,

 

 

 

2016

    

2015

    

2016

    

2015

 

Interest income:

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans, including fees

 

$

74,606

 

$

72,927

 

$

148,857

 

$

145,370

 

Investment securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Taxable

 

 

20,596

 

 

23,257

 

 

40,716

 

 

47,140

 

Tax-exempt

 

 

2,627

 

 

2,749

 

 

5,274

 

 

5,522

 

Other interest income

 

 

67

 

 

42

 

 

106

 

 

78

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total interest income

 

 

97,896

 

 

98,975

 

 

194,953

 

 

198,110

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense:

 

 

 

 

 

 

 

 

 

 

 

 

 

Savings deposits

 

 

1,199

 

 

901

 

 

2,160

 

 

1,778

 

Time deposits

 

 

2,394

 

 

2,833

 

 

4,968

 

 

5,707

 

Securities sold under repurchase agreements

 

 

5,552

 

 

6,062

 

 

11,111

 

 

12,056

 

Other borrowings

 

 

757

 

 

369

 

 

1,384

 

 

844

 

Junior subordinated deferrable interest debentures

 

 

1,122

 

 

1,045

 

 

2,218

 

 

2,069

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total interest expense

 

 

11,024

 

 

11,210

 

 

21,841

 

 

22,454

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income

 

 

86,872

 

 

87,765

 

 

173,112

 

 

175,656

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Provision for probable loan losses

 

 

7,097

 

 

7,767

 

 

16,231

 

 

10,144

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income after provision for probable loan losses

 

 

79,775

 

 

79,998

 

 

156,881

 

 

165,512

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-interest income:

 

 

 

 

 

 

 

 

 

 

 

 

 

Service charges on deposit accounts

 

 

17,854

 

 

19,850

 

 

35,964

 

 

39,042

 

    Other service charges, commissions and fees

 

 

 

 

 

 

 

 

 

 

 

 

 

Banking

 

 

10,957

 

 

13,075

 

 

21,334

 

 

23,528

 

Non-banking

 

 

1,694

 

 

1,856

 

 

2,991

 

 

2,966

 

Investment securities transactions, net

 

 

(227)

 

 

(427)

 

 

(360)

 

 

(428)

 

Other investments, net

 

 

2,766

 

 

3,462

 

 

10,617

 

 

7,717

 

Other income

 

 

3,567

 

 

2,328

 

 

6,996

 

 

4,153

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total non-interest income

 

$

36,611

 

$

40,144

 

$

77,542

 

$

76,978

 

 

3


 

INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

 

Consolidated Statements of Income, continued (Unaudited)

 

(Dollars in Thousands, except per share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

 

    

June 30,

 

June 30,

 

 

 

2016

    

2015

    

2016

    

2015

 

Non-interest expense:

 

 

 

 

 

 

 

 

 

 

 

 

 

Employee compensation and benefits

 

$

31,155

 

$

29,650

 

$

61,938

 

$

61,402

 

Occupancy

 

 

5,906

 

 

6,681

 

 

12,072

 

 

12,860

 

Depreciation of bank premises and equipment

 

 

6,208

 

 

6,332

 

 

12,388

 

 

12,558

 

Professional fees

 

 

3,446

 

 

4,020

 

 

6,739

 

 

7,267

 

Deposit insurance assessments

 

 

1,508

 

 

1,440

 

 

3,001

 

 

2,930

 

Net expense, other real estate owned

 

 

1,377

 

 

928

 

 

2,255

 

 

2,396

 

Amortization of identified intangible assets

 

 

32

 

 

161

 

 

64

 

 

280

 

Advertising

 

 

2,319

 

 

2,023

 

 

4,424

 

 

4,030

 

Software and software maintenance

 

 

3,723

 

 

2,563

 

 

7,034

 

 

5,129

 

Impairment charges (Total other-than-temporary impairment charges, $(300) net of $(367), $(54), net of $(278), $(332) net of $(523) and $(176), net of $(627), included in other comprehensive income)

 

 

67

 

 

224

 

 

191

 

 

451

 

Other

 

 

16,243

 

 

14,249

 

 

29,796

 

 

26,591

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total non-interest expense

 

 

71,984

 

 

68,271

 

 

139,902

 

 

135,894

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income before income taxes

 

 

44,402

 

 

51,871

 

 

94,521

 

 

106,596

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Provision for income taxes

 

 

14,714

 

 

17,996

 

 

31,849

 

 

36,859

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

29,688

 

$

33,875

 

$

62,672

 

$

69,737

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average number of shares outstanding

 

 

65,944,220

 

 

66,424,723

 

 

65,979,167

 

 

66,420,511

 

Net income

 

$

0.45

 

$

0.51

 

$

0.95

 

$

1.05

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fully diluted earnings per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average number of shares outstanding

 

 

66,159,105

 

 

66,684,136

 

 

66,138,593

 

 

66,619,788

 

Net income

 

$

0.45

 

$

0.51

 

$

0.95

 

$

1.05

 

 

 

 

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

 

Six Months Ended

 

    

June 30,

 

June 30,

 

 

2016

    

2015

    

2016

    

2015

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

29,688

 

$

33,875

 

$

62,672

 

$

69,737

Other comprehensive income, net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net unrealized holding gains (losses) on securities available for sale arising during period (net of tax effects of $5,451, $(13,610), $20,705, and $(1,854))

 

 

10,124

 

 

(25,275)

 

 

38,452

 

 

(3,443)

Reclassification adjustment for losses on securities available for sale included in net income (net of tax effects of $79, $149, $126, and $150)

 

 

148

 

 

278

 

 

234

 

 

278

Reclassification adjustment for impairment charges on available for sale securities included in net income (net of tax effects of $23, $78, $67, and $158)

 

 

44

 

 

146

 

 

124

 

 

293

 

 

 

10,316

 

 

(24,851)

 

 

38,810

 

 

(2,872)

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income

 

$

40,004

 

$

9,024

 

$

101,482

 

$

66,865

 

See accompanying notes to consolidated financial statements.

5


 

INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

 

Consolidated Statements of Cash Flows (Unaudited)

 

(Dollars in Thousands)

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended

 

 

    

June 30,

 

 

 

2016

    

2015

 

Operating activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

62,672

 

$

69,737

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

Provision for probable loan losses

 

 

16,231

 

 

10,144

 

Specific reserve, other real estate owned

 

 

570

 

 

118

 

Depreciation of bank premises and equipment

 

 

12,388

 

 

12,558

 

Gain on sale of bank premises and equipment

 

 

(40)

 

 

(143)

 

Gain on sale of other real estate owned

 

 

(55)

 

 

(205)

 

Accretion of investment securities discounts

 

 

(259)

 

 

(886)

 

Amortization of investment securities premiums

 

 

12,311

 

 

14,074

 

Investment securities transactions, net

 

 

360

 

 

428

 

Impairment charges on available for sale securities

 

 

191

 

 

451

 

Amortization of identified intangible assets

 

 

64

 

 

280

 

Stock based compensation expense

 

 

554

 

 

583

 

Earnings from affiliates and other investments

 

 

(5,555)

 

 

(6,527)

 

Deferred tax expense

 

 

386 

 

 

118

 

Decrease in accrued interest receivable

 

 

225

 

 

119

 

Increase in other assets

 

 

(1,894)

 

 

(972)

 

Net increase in other liabilities

 

 

5,006

 

 

511

 

 

 

 

 

 

 

 

 

Net cash provided by operating activities

 

 

103,155

 

 

100,388

 

 

 

 

 

 

 

 

 

Investing activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Proceeds from maturities of securities

 

 

 —

 

 

1,075

 

Proceeds from sales and calls of available for sale securities

 

 

195,538

 

 

30,282

 

Purchases of available for sale securities

 

 

(582,117)

 

 

(241,570)

 

Principal collected on mortgage backed securities

 

 

407,011

 

 

432,542

 

Net increase in loans

 

 

(23,852)

 

 

(115,735)

 

Purchases of other investments

 

 

(1,509)

 

 

(12,491)

 

Distributions from other investments

 

 

3,942

 

 

10,332

 

Purchases of bank premises and equipment

 

 

(7,160)

 

 

(11,983)

 

Proceeds from sales of bank premises and equipment

 

 

43

 

 

10,922

 

Proceeds from sales of other real estate owned

 

 

2,010

 

 

891

 

 

 

 

 

 

 

 

 

Net cash (used in) provided by investing activities

 

$

(6,094)

 

$

104,265

 

 

6


 

INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

 

Consolidated Statements of Cash Flows, continued (Unaudited)

 

(Dollars in Thousands)

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended

 

 

    

June 30,

 

 

 

2016

    

2015

 

Financing activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net (decrease) increase in non-interest bearing demand deposits

 

$

(50,151)

 

$

74,961

 

Net increase (decrease) in savings and interest bearing demand deposits

 

 

29,183

 

 

(10,341)

 

Net decrease in time deposits

 

 

(90,423)

 

 

(39,411)

 

Net (decrease) increase in securities sold under repurchase agreements

 

 

(32,833)

 

 

48,861

 

Net increase (decrease) in other borrowed funds

 

 

46,375

 

 

(253,619)

 

Purchase of treasury stock

 

 

(7,959)

 

 

(1,245)

 

Proceeds from stock transactions

 

 

168

 

 

645

 

Payments of cash dividends - common

 

 

(19,123)

 

 

(19,258)

 

 

 

 

 

 

 

 

 

Net cash used in financing activities

 

 

(124,763)

 

 

(199,407)

 

 

 

 

 

 

 

 

 

(Decrease ) increase in cash and cash equivalents

 

 

(27,702)

 

 

5,246

 

 

 

 

 

 

 

 

 

Cash and cash equivalents at beginning of year

 

 

273,053

 

 

255,146

 

 

 

 

 

 

 

 

 

Cash and cash equivalents at end of year

 

$

245,351

 

$

260,392

 

 

 

 

 

 

 

 

 

Supplemental cash flow information:

 

 

 

 

 

 

 

Interest paid

 

$

23,207

 

$

22,606

 

Income taxes paid

 

 

26,175

 

 

37,840

 

Non-cash investing and financing activities:

 

 

 

 

 

 

 

Purchases of available-for-sale securities not yet settled

 

 

6,804

 

 

2,279

 

Net transfers from loans to other real estate owned

 

 

1,983

 

 

6,084 

 

 

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 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 and six months ended June 30, 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.

 

In June 2016, the Financial Accounting Standards Board issued Accounting Standards Update No. 2016-13, to ASC 326, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.”   The update requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts and requires enhanced disclosures related to the significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an organization’s portfolio.  In addition, the update amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration.  The update will be effective on for interim and fiscal years ending after December 31, 2019.  The Company is currently evaluating the potential impact of the update on the Company’s consolidated financial statements.

 

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

8


 

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 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 June 30, 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

 

 

 

June 30, 2016

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

Measured on a recurring basis:

    

 

    

    

 

    

    

 

    

    

 

    

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Available for sale securities

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential mortgage-backed securities

 

$

3,925,794

 

$

 —

 

$

3,906,421

 

$

19,373

 

States and political subdivisions

 

 

278,596

 

 

 —

 

 

278,596

 

 

 —

 

Other

 

 

28,929

 

 

28,929

 

 

 —

 

 

 —

 

 

 

$

4,233,319

 

$

28,929

 

$

4,185,017

 

$

19,373

 

 

9


 

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

 

$

3,893,211

 

$

 —

 

$

3,871,982

 

$

21,229

 

States and political subdivisions

 

 

277,704

 

 

 —

 

 

277,704

 

 

 —

 

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 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 June 30, 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.

 

10


 

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

 

 

(2,188)

 

Total unrealized gains (losses) included in:

 

 

 

 

Other comprehensive income

 

 

523

 

Impairment realized in earnings

 

 

(191)

 

 

 

 

 

 

Balance at June 30, 2016

 

$

19,373

 

 

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).

 

The following table represents financial instruments measured at fair value on a non-recurring basis as of and for the period ended June 30, 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 Provision

 

 

 

Year ended

 

Identical

 

Observable

 

Unobservable

 

(Credit)

 

 

 

June 30,

 

Assets

 

Inputs

 

Inputs

 

During

 

 

 

2016

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

Period

 

Measured on a non-recurring basis:

    

 

    

    

 

    

    

 

    

    

 

    

    

 

    

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Impaired loans

 

$

34,468

 

$

 —

 

$

 —

 

$

34,468

 

$

17,057

 

Other real estate owned

 

 

4,338

 

 

 —

 

 

 —

 

 

4,338

 

 

570

 

 

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,