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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, 2016

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  ☒    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  ☒    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      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  ☒

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 25, 2016

Common Stock, $0.01 par value per share   66,063,285

 

 

 


Table of Contents

TABLE OF CONTENTS

 

Item

   Page  
  PART I   
  FINANCIAL INFORMATION   
 

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

     34   
 

3.       Quantitative and Qualitative Disclosures About Market Risk

     53   
 

4.      Controls and Procedures

     53   
  PART II   
  OTHER INFORMATION   
 

1.      Legal Proceedings

     54   
 

1A.   Risk Factors

     54   
 

2.       Unregistered Sales of Equity Securities and Use of Proceeds

     54   
 

3.      Defaults Upon Senior Securities

     54   
 

4.      Mine Safety Disclosures

     54   
 

5.      Other Information

     54   
 

6.      Exhibits

     55   
 

 Signatures

     57   

 

2


Table of Contents

PART I

FINANCIAL INFORMATION

 

Item 1. Financial Statements.

The consolidated balance sheets of First Financial Bankshares, Inc. (the “Company” or “we”) at September 30, 2016 and 2015 and December 31, 2015, and the consolidated statements of earnings and comprehensive earnings for the three and nine months ended September 30, 2016 and 2015, and the consolidated statement of shareholders’ equity and cash flows for the nine months ended September 30, 2016 and 2015, 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,  
     2016     2015     2015  
     (Unaudited)        

ASSETS

    

CASH AND DUE FROM BANKS

   $ 166,981      $ 133,340      $ 179,140   

FEDERAL FUNDS SOLD

     3,400        2,790        3,810   

INTEREST-BEARING DEPOSITS IN BANKS

     117,334        4,268        89,936   
  

 

 

   

 

 

   

 

 

 

Total cash and cash equivalents

     287,715        140,398        272,886   

INTEREST-BEARING TIME DEPOSITS IN BANKS

     1,707        4,491        3,495   

SECURITIES AVAILABLE-FOR-SALE, at fair value

     2,729,030        2,737,353        2,733,899   

SECURITIES HELD-TO-MATURITY (fair value of $133, $291 and $283 at September 30, 2016 and 2015, and December 31, 2015, respectively)

     129        286        278   

LOANS:

      

Held for investment

     3,337,793        3,266,817        3,317,050   

Less - allowance for loan losses

     (45,298     (40,420     (41,877
  

 

 

   

 

 

   

 

 

 

Net loans held for investment

     3,292,495        3,226,397        3,275,173   

Held for sale

     31,591        21,605        33,543   
  

 

 

   

 

 

   

 

 

 

Net loans

     3,324,086        3,248,002        3,308,716   

BANK PREMISES AND EQUIPMENT, net

     122,725        116,803        115,712   

INTANGIBLE ASSETS

     143,729        144,296        144,449   

OTHER ASSETS

     77,615        76,016        85,635   
  

 

 

   

 

 

   

 

 

 

Total assets

   $ 6,686,736      $ 6,467,645      $ 6,665,070   
  

 

 

   

 

 

   

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

      

NONINTEREST-BEARING DEPOSITS

   $ 1,702,993      $ 1,720,383      $ 1,745,952   

INTEREST-BEARING DEPOSITS

     3,532,471        3,376,900        3,444,217   
  

 

 

   

 

 

   

 

 

 

Total deposits

     5,235,464        5,097,283        5,190,169   

DIVIDENDS PAYABLE

     11,891        10,551        10,558   

SHORT-TERM BORROWINGS

     513,759        500,903        615,675   

OTHER LIABILITIES

     57,678        66,874        43,682   
  

 

 

   

 

 

   

 

 

 

Total liabilities

     5,818,792        5,675,611        5,860,084   
  

 

 

   

 

 

   

 

 

 

COMMITMENTS AND CONTINGENCIES

      

SHAREHOLDERS’ EQUITY:

      

Common stock - ($0.01 par value, authorized 120,000,000 shares; 66,063,285, 65,942,155, and 65,990,234 shares issued at September 30, 2016 and 2015, and December 31, 2015, respectively)

     661        659        660   

Capital surplus

     371,170        367,444        368,925   

Retained earnings

     431,765        373,372        388,006   

Treasury stock (shares at cost: 510,955, 524,163, and 520,651 at September 30, 2016 and 2015, and December 31, 2015, respectively)

     (6,566     (6,207     (6,296

Deferred compensation

     6,566        6,207        6,296   

Accumulated other comprehensive earnings

     64,348        50,559        47,395   
  

 

 

   

 

 

   

 

 

 

Total shareholders’ equity

     867,944        792,034        804,986   
  

 

 

   

 

 

   

 

 

 

Total liabilities and shareholders’ equity

   $ 6,686,736      $ 6,467,645      $ 6,665,070   
  

 

 

   

 

 

   

 

 

 

See notes to consolidated financial statements.

 

4


Table of Contents

FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF EARNINGS - (UNAUDITED)

(Dollars in thousands, except per share amounts)

 

     Three Months Ended September 30,     Nine Months Ended September 30,  
     2016     2015     2016      2015  

INTEREST INCOME:

         

Interest and fees on loans

   $ 40,411      $ 39,368      $ 120,700       $ 110,464   

Interest on investment securities:

         

Taxable

     6,775        7,298        21,167         22,502   

Exempt from federal income tax

     10,808        10,457        32,220         29,439   

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

     99        40        222         171   
  

 

 

   

 

 

   

 

 

    

 

 

 

Total interest income

     58,093        57,163        174,309         162,576   

INTEREST EXPENSE:

         

Interest on deposits

     1,112        932        3,197         2,761   

Other

     254        133        811         281   
  

 

 

   

 

 

   

 

 

    

 

 

 

Total interest expense

     1,366        1,065        4,008         3,042   
  

 

 

   

 

 

   

 

 

    

 

 

 

Net interest income

     56,727        56,098        170,301         159,534   

PROVISION FOR LOAN LOSSES

     3,833        2,664        8,219         5,508   
  

 

 

   

 

 

   

 

 

    

 

 

 

Net interest income after provision for loan losses

     52,894        53,434        162,082         154,026   
  

 

 

   

 

 

   

 

 

    

 

 

 

NONINTEREST INCOME:

         

Trust fees

     5,066        4,818        14,446         14,289   

Service charges on deposit accounts

     4,796        4,653        13,614         12,442   

ATM, interchange and credit card fees

     6,000        5,794        17,521         16,209   

Real estate mortgage operations

     4,697        3,742        11,849         7,321   

Net gain on sale of available-for-sale securities (includes $239 and $136 for the three months ended September 30, 2016 and 2015, respectively, and $1,153 and $380 for the nine months ended September 30, 2016 and 2015, respectively, related to accumulated other comprehensive earnings reclassifications)

     239        136        1,153         380   

Net gain (loss) on sale of foreclosed assets

     (10     28        343         10   

Net gain (loss) on sale of assets

     (168     (11     271         (11

Interest on loan recoveries

     709        323        1,970         834   

Other

     823        963        2,243         2,678   
  

 

 

   

 

 

   

 

 

    

 

 

 

Total noninterest income

     22,152        20,446        63,410         54,152   

NONINTEREST EXPENSE:

         

Salaries and employee benefits

     22,931        21,648        67,668         59,086   

Net occupancy expense

     2,672        3,050        7,886         7,640   

Equipment expense

     3,420        3,114        10,186         9,005   

FDIC insurance premiums

     513        819        2,155         2,316   

ATM, interchange and credit card expenses

     1,859        1,509        5,352         4,844   

Professional and service fees

     1,883        1,148        5,099         3,370   

Printing, stationery and supplies

     536        594        1,504         1,662   

Amortization of intangible assets

     172        200        570         362   

Other

     8,017        7,891        23,420         20,837   
  

 

 

   

 

 

   

 

 

    

 

 

 

Total noninterest expense

     42,003        39,973        123,840         109,122   
  

 

 

   

 

 

   

 

 

    

 

 

 

EARNINGS BEFORE INCOME TAXES

     33,043        33,907        101,652         99,056   

INCOME TAX EXPENSE (includes $84 and $48 for the three months ended September 30, 2016 and 2015, respectively, and $404 and $133 for the nine months ended September 30, 2016 and 2015, respectively, related to income tax expense from reclassification items)

     7,440        8,021        23,544         23,867   
  

 

 

   

 

 

   

 

 

    

 

 

 

NET EARNINGS

   $ 25,603      $ 25,886      $ 78,108       $ 75,189   
  

 

 

   

 

 

   

 

 

    

 

 

 

EARNINGS PER SHARE, BASIC

   $ 0.39      $ 0.40      $ 1.18       $ 1.16   
  

 

 

   

 

 

   

 

 

    

 

 

 

EARNINGS PER SHARE, ASSUMING DILUTION

   $ 0.39      $ 0.40      $ 1.18       $ 1.16   
  

 

 

   

 

 

   

 

 

    

 

 

 

DIVIDENDS PER SHARE

   $ 0.18      $ 0.16      $ 0.52       $ 0.46   
  

 

 

   

 

 

   

 

 

    

 

 

 

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,  
     2016     2015     2016     2015  

NET EARNINGS

   $ 25,603      $ 25,886      $ 78,108      $ 75,189   

OTHER ITEMS OF COMPREHENSIVE EARNINGS (LOSS):

        

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

     (18,984     23,025        27,235        5,318   

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

     (239     (136     (1,153     (380

Minimum liability pension adjustment, before income taxes

     —          (108     —          (216
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other items of comprehensive earnings (losses)

     (19,223     22,781        26,082        4,722   

Income tax benefit (expense) related to:

        

Investment securities

     6,728        (8,011     (9,129     (1,728

Minimum liability pension adjustment

     —          38        —          76   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total income tax benefit (expense)

     6,728        (7,973     (9,129     (1,652
  

 

 

   

 

 

   

 

 

   

 

 

 

COMPREHENSIVE EARNINGS

   $ 13,108      $ 40,694      $ 95,061      $ 78,259   
  

 

 

   

 

 

   

 

 

   

 

 

 

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)

 

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

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 purchased 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   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balances at December 31, 2015

    65,990,234      $ 660      $ 368,925      $ 388,006        (520,651   $ (6,296   $ 6,296      $ 47,395      $ 804,986   

Net earnings (unaudited)

    —          —          —          78,108        —          —          —          —          78,108   

Stock option exercises (unaudited)

    66,866        1        988        —          —          —          —          —          989   

Restricted stock grant (unaudited)

    6,185        —          250        —          —          —          —          —          250   

Cash dividends declared, $0.52 per share (unaudited)

    —          —          —          (34,349     —          —          —          —          (34,349

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

    —          —          —          —          —          —          —          16,953        16,953   

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

    —          —          345        —          —          —          —          —          345   

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

    —          —          —          —          9,696        (270     270        —          —     

Stock option expense (unaudited)

    —          —          662        —          —          —          —          —          662   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balances at September 30, 2016 (unaudited)

    66,063,285      $ 661      $ 371,170      $ 431,765        (510,955   $ (6,566   $ 6,566      $ 64,348      $ 867,944   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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,  
     2016     2015  

CASH FLOWS FROM OPERATING ACTIVITIES:

    

Net earnings

   $ 78,108      $ 75,189   

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

    

Depreciation and amortization

     8,627        8,069   

Provision for loan losses

     8,219        5,508   

Securities premium amortization (discount accretion), net

     21,275        20,493   

Gain on sale of assets, net

     (1,767     (379

Deferred federal income tax expense (benefit)

     825        (1,487

Change in loans held for sale

     1,952        (12,801

Change in other assets

     10,059        (9,655

Change in other liabilities

     530        8,983   
  

 

 

   

 

 

 

Total adjustments

     49,720        18,731   
  

 

 

   

 

 

 

Net cash provided by operating activities

     127,828        93,920   
  

 

 

   

 

 

 

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

     1,788        12,511   

Activity in available-for-sale securities:

    

Sales

     20,792        34,541   

Maturities

     2,830,522        2,189,905   

Purchases

     (2,835,964     (2,501,587

Activity in held-to-maturity securities - maturities

     148        155   

Net increase in loans

     (27,446     (91,259

Purchases of bank premises and equipment and other assets

     (17,151     (12,437

Proceeds from sale of other assets

     2,960        727   
  

 

 

   

 

 

 

Net cash used in investing activities

     (24,351     (304,178
  

 

 

   

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

    

Net increase (decrease) in noninterest-bearing deposits

     (42,959     (2,096

Net decrease in interest-bearing deposits

     88,254        5,540   

Net increase (decrease) in short-term borrowings

     (101,916     120,668   

Common stock transactions:

    

Proceeds from stock issuances

     989        1,290   

Dividends paid

     (33,016     (28,217
  

 

 

   

 

 

 

Net cash (used in) provided by financing activities

     (88,648     97,185   
  

 

 

   

 

 

 

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

     14,829        (113,073

CASH AND CASH EQUIVALENTS, beginning of period

     272,886        253,471   
  

 

 

   

 

 

 

CASH AND CASH EQUIVALENTS, end of period

   $ 287,715      $ 140,398   
  

 

 

   

 

 

 

SUPPLEMENTAL INFORMATION AND NONCASH TRANSACTIONS:

    

Interest paid

   $ 4,018      $ 3,066   

Federal income tax paid

     21,631        22,179   

Transfer of loans to foreclosed assets

     1,905        97   

Investment securities purchased but not settled

     4,521        17,869   

See notes to consolidated financial statements.

 

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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, 2016, we had 69 financial centers across Texas, with eleven locations in Abilene, three locations in San Angelo and Weatherford, two locations in Cleburne, Conroe, Stephenville and Granbury, and one location each in Acton, Albany, Aledo, Alvarado, Beaumont, Boyd, Bridgeport, Brock, Burleson, Cisco, Clyde, Cut and Shoot, Decatur, Eastland, Fort Worth, Glen Rose, Grapevine, Hereford, Huntsville, 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, all in Texas. Our trust subsidiary has eight locations which are located in Abilene, Fort Worth, Lubbock, Odessa, Beaumont, San Angelo, Stephenville and Sweetwater.

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, 2015. All adjustments were of a normal recurring nature. However, the results of operations for the three months and nine months ended September 30, 2016, are not necessarily indicative of the results to be expected for the year ending December 31, 2016, 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.

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 Repurchase

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, 2016, no shares were repurchased under this authorization.

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 months and nine months ended September 30, 2016 and 2015, 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 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, 2016 and 2015 were 66,023,069 and 65,335,457 shares, respectively. The weighted average common shares outstanding used in computing basic earnings per common share for the nine months ended September 30, 2016 and 2015 were 66,004,797 and 64,540,034 shares, respectively. The weighted average common shares outstanding used in computing fully diluted earnings per common share for the three months ended September 30, 2016 and 2015 were 66,147,202 and 65,501,697 shares, respectively. The weighted average common shares outstanding used in computing fully diluted earnings per common share for the nine months ended September 30, 2016 and 2015 were 66,135,918 and 64,736,155 shares, respectively.

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

Interest-bearing time deposits in banks totaled $1,707,000, $4,491,000 and $3,495,000 at September 30, 2016 and 2015 and December 31, 2015, respectively, and have original maturities generally ranging from one to three years.

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 states 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, 2016  
     Amortized
Cost Basis
     Gross
Unrealized
Holding Gains
     Gross
Unrealized
Holding Losses
     Estimated
Fair Value
 

U.S. Treasury securities

   $ 10,685       $ 54       $ —         $ 10,739   

Obligations of U.S. government sponsored enterprises and agencies

     114,918         802         —           115,720   

Obligations of states and political subdivisions

     1,419,737         83,694         (715      1,502,716   

Corporate bonds and other

     68,285         1,325         (1      69,609   

Residential mortgage-backed securities

     750,673         17,125         (1,299      766,499   

Commercial mortgage-backed securities

     259,636         4,200         (89      263,747   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total securities available-for-sale

   $ 2,623,934       $ 107,200       $ (2,104    $ 2,729,030   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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     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   
  

 

 

    

 

 

    

 

 

    

 

 

 
     December 31, 2015  
     Amortized
Cost Basis
     Gross
Unrealized
Holding Gains
     Gross
Unrealized
Holding Losses
     Estimated
Fair Value
 

U.S. Treasury securities

   $ 10,792       $ 5       $ (2    $ 10,795   

Obligations of U.S. government sponsored enterprises and agencies

     148,393         268         (107      148,554   

Obligations of states and political subdivisions

     1,379,879         71,382         (134      1,451,127   

Corporate bonds and other

     86,182         1,778         (5      87,955   

Residential mortgage-backed securities

     781,648         10,993         (3,759      788,882   

Commercial mortgage-backed securities

     247,991         429         (1,834      246,586   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total securities available-for-sale

   $ 2,654,885       $ 84,855       $ (5,841    $ 2,733,899   
  

 

 

    

 

 

    

 

 

    

 

 

 

Disclosures related to the Company’s held-to-maturity securities, which totaled $129,000, $286,000 and $278,000 at September 30, 2016 and 2015, and December 31, 2015, 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, 2016 were computed by using scheduled amortization of balances and historical prepayment rates. At September 30, 2016 and 2015, and December 31, 2015, 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, 2016, by contractual and expected maturity, are shown below (in thousands):

 

     Amortized
Cost Basis
     Estimated
Fair Value
 

Due within one year

   $ 195,637       $ 197,334   

Due after one year through five years

     675,403         710,096   

Due after five years through ten years

     740,541         788,744   

Due after ten years

     2,044         2,610   

Mortgage-backed securities

     1,010,309         1,030,246   
  

 

 

    

 

 

 

Total

   $ 2,623,934       $ 2,729,030   
  

 

 

    

 

 

 

The following tables disclose, as of September 30, 2016 and 2015, and December 31, 2015, 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, 2016

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

Obligations of states and political subdivisions

   $ 82,131       $ 711       $ 741       $ 4       $ 82,872       $ 715   

Corporate bonds and other

     12,257         1         —           —           12,257         1   

Residential mortgage-backed securities

     80,015         267         57,334         1,032         137,349         1,299   

Commercial mortgage-backed securities

     10,213         25         13,692         64         23,905         89   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 184,616       $ 1,004       $ 71,767       $ 1,100       $ 256,383       $ 2,104   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     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  

December 31, 2015

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

U.S. Treasury securities

   $ 5,110       $ 2       $ —         $ —         $ 5,110       $ 2   

Obligations of U.S. government sponsored enterprises and agencies

     50,388         107         —           —           50,388         107   

Obligations of states and political subdivisions

     32,929         127         1,513         7         34,442         134   

Corporate bonds and other

     7,004         5         —           —           7,004         5   

Residential mortgage-backed securities

     231,481         1,765         63,919         1,994         295,400         3,759   

Commercial mortgage-backed securities

     196,163         1,752         9,345         82         205,508         1,834   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 523,075       $ 3,758       $ 74,777       $ 2,083       $ 597,852       $ 5,841   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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The number of investments in an unrealized loss position totaled 89 at September 30, 2016. 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, 2016 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, 2016, 81.51% of our available-for-sale securities that are obligations of states and political subdivisions were issued within the State of Texas, of which 32.00% are guaranteed by the Texas Permanent School Fund.

At September 30, 2016, $1,805,813,000 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, 2016 and 2015, sales of investment securities that were classified as available-for-sale totaled $7,410,000 and $27,910,000, respectively. Gross realized gains from security sales during the third quarter of 2016 and 2015 totaled $239,000 and $142,000, respectively. Gross realized losses from security sales during the third quarter of 2015 totaled $6,000. There were no gross realized losses during the third quarter of 2016. During the nine months ended September 30, 2016 and 2015, sales of investment securities that were classified as available-for-sale totaled $20,792,000 and $34,541,000, respectively. Gross realized gains from security sales during the nine-month periods ended September 30, 2016 and 2015 totaled $1,158,000 and $390,000, respectively. Gross realized losses from security sales during the nine-month periods ended September 30, 2016 and 2015 totaled $5,000 and $10,000, 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.

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.

 

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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.

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 decline in the economy and employment rates 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

 

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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, 2016 and 2015, and December 31, 2015, 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, 2016 and 2015, and December 31, 2015, 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 nine 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.

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 the acquired loan portfolio.

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

 

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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, 2016 and 2015, and December 31, 2015, was $1,853,000, $2,422,000 and $2,178,000, respectively, compared to a contractual balance of $2,528,000, $3,213,000, and $2,936,000, 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,  
     2016      2015      2015  

Commercial

   $ 663,581       $ 698,406       $ 696,163   

Agricultural

     84,716         99,232         102,351   

Real estate

     2,191,260         2,088,002         2,136,233   

Consumer

     398,236         381,177         382,303   
  

 

 

    

 

 

    

 

 

 

Total loans held-for-investment

   $ 3,337,793       $ 3,266,817       $ 3,317,050   
  

 

 

    

 

 

    

 

 

 

Loans held for sale totaled $31,591,000, $21,605,000 and $33,543,000 at September 30, 2016 and 2015, and December 31, 2015, respectively, which are valued using the lower of cost or market method.

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,  
     2016      2015      2015  

Non-accrual loans*

   $ 33,712       $ 21,788       $ 28,601   

Loans still accruing and past due 90 days or more

     107         49         341   

Troubled debt restructured loans**

     750         204         199   
  

 

 

    

 

 

    

 

 

 

Total

   $ 34,569       $ 22,041       $ 29,141   
  

 

 

    

 

 

    

 

 

 

 

* Includes $1,853,000, $2,422,000 and $2,178,000 of purchased credit impaired loans as of September 30, 2016 and 2015, and December 31, 2015, respectively.
** Troubled debt restructured loans of $7,513,000, $6,462,000 and $6,113,000, whose interest collection, after considering economic and business conditions and collection efforts, is doubtful are included in non-accrual loans at September 30, 2016 and 2015, and December 31, 2015, respectively.

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

 

September 30, 2016

   

September 30, 2015

   

December 31, 2015

 

Recorded
Investment

    Valuation
Allowance
    Recorded
Investment
    Valuation
Allowance
    Recorded
Investment
    Valuation
Allowance
 
$ 33,712      $ 7,042      $ 21,788      $ 4,645      $ 28,601      $ 5,071   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

The Company had $34,938,000, $22,742,000 and $29,768,000 in non-accrual, past due 90 days or more and still accruing, restructured loans and foreclosed assets at September 30, 2016 and 2015, and December 31, 2015, respectively. Non-accrual loans at September 30, 2016 and 2015, and December 31, 2015, consisted of the following by class of financing receivables (in thousands):

 

     September 30,      December 31,  
     2016      2015      2015  

Commercial

   $ 12,714       $ 5,077       $ 8,761   

Agricultural

     167         75         97   

Real estate

     19,582         16,124         18,766   

Consumer

     1,249         512         977   
  

 

 

    

 

 

    

 

 

 

Total

   $ 33,712       $ 21,788       $ 28,601   
  

 

 

    

 

 

    

 

 

 

No significant additional funds are committed to be advanced in connection with impaired loans as of September 30, 2016.

The Company’s impaired loans and related allowance as of September 30, 2016 and 2015, and December 31, 2015, 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, 2016

   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

   $ 21,696       $ 1,067       $ 11,647       $ 12,714       $ 3,983       $ 8,421       $ 14,238   

Agricultural

     168         —           167         167         41         83         84   

Real Estate

     24,130         5,626         13,956         19,582         2,566         17,021         19,436   

Consumer

     1,479         324         925         1,249         452         989         1,166   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 47,473       $ 7,017       $ 26,695       $ 33,712       $ 7,042       $ 26,514       $ 34,924   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

* Includes $1,853,000 of purchased credit impaired loans.

 

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.

 

December 31, 2015

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

Commercial

   $ 10,056       $ 608       $ 8,153       $ 8,761       $ 2,030       $ 5,812   

Agricultural

     97         —           97         97         70         48   

Real Estate

     23,710         5,314         13,452         18,766         2,827         15,211   

Consumer

     1,167         624         353         977         144         664   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 35,030       $ 6,546       $ 22,055       $ 28,601       $ 5,071       $ 21,735   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

* Includes $2,178,000 of purchased credit impaired loans.

 

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Table of Contents

The Company recognized interest income on impaired loans prior to being recognized as impaired of approximately $922,000 during the year ended December 31, 2015. Such amounts for the three-month and nine-month periods ended September 30, 2016 and 2015 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 weaknesses 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.

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, 2016 and 2015, and December 31, 2015 (in thousands):

 

September 30, 2016

   Pass      Special
Mention
     Substandard      Doubtful      Total  

Commercial

   $ 614,900       $ 6,108       $ 42,573       $ —         $ 663,581   

Agricultural

     82,400         —           2,316         —           84,716   

Real Estate

     2,118,807         19,064         53,389         —           2,191,260   

Consumer

     395,086         316         2,832         2         398,236   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 3,211,193       $ 25,488       $ 101,110       $ 2       $ 3,337,793   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

December 31, 2015

   Pass      Special
Mention
     Substandard      Doubtful      Total  

Commercial

   $ 633,083       $ 9,762       $ 53,318       $ —         $ 696,163   

Agricultural

     99,862         1,398         1,091         —           102,351   

Real Estate

     2,054,738         29,000         52,458         37         2,136,233   

Consumer

     379,941         416         1,946         —           382,303   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 3,167,624       $ 40,576       $ 108,813       $ 37       $ 3,317,050   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

At September 30, 2016 and 2015, and December 31, 2015, the Company’s past due loans are as follows (in thousands):

 

September 30, 2016

   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

   $ 4,707       $ 841       $ 6,950       $ 12,498       $ 651,083       $ 663,581       $ 61   

Agricultural

     523         63         —           586         84,130         84,716         —     

Real Estate

     13,444         1,496         3,376         18,316         2,172,944         2,191,260         34   

Consumer

     1,418         314         180         1,912         396,324         398,236         12   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 20,092       $ 2,714       $ 10,506       $ 33,312       $ 3,304,481       $ 3,337,793       $ 107   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

December 31, 2015

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

Commercial

   $ 3,099       $ 3,652       $ 1,024       $ 7,775       $ 688,388       $ 696,163       $ 54   

Agricultural

     348         83         —           431         101,920         102,351         —     

Real Estate

     12,247         2,226         2,874         17,347         2,118,886         2,136,233         217   

Consumer

     1,645         183         266         2,094         380,209         382,303         70   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 17,339       $ 6,144       $ 4,164       $ 27,647       $ 3,289,403       $ 3,317,050       $ 341   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

* 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, 2016 and 2015, and December 31, 2015, by portfolio segment (in thousands). There were no allowances for purchased credit impaired loans at September 30, 2016 and 2015, and December 31, 2015. 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, 2016

   Commercial      Agricultural      Real Estate      Consumer      Total  

Loans individually evaluated for impairment

   $ 3,983       $ 41       $ 2,566       $ 452       $ 7,042   

Loans collectively evaluated for impairment

     9,733         1,027         23,655         3,841         38,256   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 13,716       $ 1,068       $ 26,221       $ 4,293       $ 45,298   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

20


Table of Contents

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   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

December 31, 2015

   Commercial      Agricultural      Real Estate      Consumer      Total  

Loans individually evaluated for impairment

   $ 2,030       $ 70       $ 2,827       $ 144       $ 5,071   

Loans collectively evaluated for impairment

     10,614         1,121         21,548         3,523         36,806   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 12,644       $ 1,191       $ 24,375       $ 3,667       $ 41,877   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Changes in the allowance for loan losses for the three and nine months ended September 30, 2016 and 2015, are summarized as follows by portfolio segment (in thousands):

 

Three months ended September 30, 2016

   Commercial     Agricultural     Real Estate     Consumer     Total  

Beginning balance

   $ 14,026      $ 1,451      $ 25,644      $ 3,939      $ 45,060   

Provision for loan losses

     3,248        (358     296        647        3,833   

Recoveries

     298        4        367        108        777   

Charge-offs

     (3,856     (29     (86     (401     (4,372
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 13,716      $ 1,068      $ 26,221      $ 4,293      $ 45,298   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

Nine months ended September 30, 2016

   Commercial     Agricultural     Real Estate     Consumer     Total  

Beginning balance

   $ 12,644      $ 1,191      $ 24,375      $ 3,667      $ 41,877   

Provision for loan losses

     6,239        41        367        1,572        8,219   

Recoveries

     839        20        1,957        427        3,243   

Charge-offs

     (6,006     (184     (478     (1,373     (8,041
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 13,716      $ 1,068      $ 26,221      $ 4,293      $ 45,298   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

21


Table of Contents

The Company’s recorded investment in loans as of September 30, 2016 and 2015, and December 31, 2015 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 $1,853,000, $2,422,000 and $2,178,000 at September 30, 2016 and 2015, and December 31, 2015, respectively, are included in loans individually evaluated for impairment.

 

September 30, 2016

   Commercial      Agricultural      Real Estate      Consumer      Total  

Loans individually evaluated for impairment

   $ 12,714       $ 167       $ 19,582       $ 1,249       $ 33,712   

Loans collectively evaluated for impairment

     650,867         84,549         2,171,678         396,987         3,304,081   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 663,581       $ 84,716       $ 2,191,260       $ 398,236       $ 3,337,793   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2015

   Commercial      Agricultural      Real Estate      Consumer      Total  

Loans individually evaluated for impairment

   $ 8,761       $ 97       $ 18,766       $ 977       $ 28,601   

Loans collectively evaluated for impairment

     687,402         102,254         2,117,467         381,326         3,288,449   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 696,163       $ 102,351       $ 2,136,233       $ 382,303       $ 3,317,050   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The Company’s loans that were modified in the three and nine months ended September 30, 2016 and 2015 and considered troubled debt restructurings are as follows (in thousands):

 

     Three Months Ended September 30, 2016      Nine Months Ended September 30, 2016  
           

Pre-

Modification

     Post-
Modification
           

Pre-

Modification

     Post-
Modification
 
            Recorded      Recorded             Recorded      Recorded  
     Number      Investment      Investment      Number      Investment      Investment  

Commercial

     3       $ 230       $ 230         14       $ 3,156       $ 3,156   

Agricultural

     —           —           —           —           —           —     

Real Estate

     3         706         706         5         1,169         1,169   

Consumer

     1         44         44         5         162         162   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     7       $ 980       $ 980         24       $ 4,487       $ 4,487   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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

Pre-

Modification

     Post-
Modification
           

Pre-

Modification

     Post-
Modification
 
            Recorded      Recorded             Recorded      Recorded  
     Number      Investment      Investment      Number      Investment      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   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

22


Table of Contents

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, 2016 and 2015 (in thousands):

 

     Three Months Ended September 30, 2016      Nine Months Ended September 30, 2016  
     Adjusted
Interest
Rate
     Extended
Maturity
     Combined
Rate and
Maturity
     Adjusted
Interest Rate
     Extended
Maturity
     Combined
Rate and
Maturity
 

Commercial

   $ —         $ 112       $ 118         —         $ 2,561       $ 595   

Agricultural

     —           —           —           —           —           —     

Real Estate

     —           185         521         —           298         871   

Consumer

     —           —           44         —           43         119   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ —         $ 297       $ 683         —         $ 2,902       $ 1,585   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     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   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

During the three months ended September 30, 2016, two loans were modified as troubled debt restructured loan within the previous 12 months and for which there was a payment default. There were no such defaults in the three months ended September 30, 2015. During the nine months ended September 30, 2016 and 2015, three loans and one loan, respectively, were modified 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):

 

     Three Months Ended September 30, 2016      Nine Months Ended September 30, 2016  
     Number      Balance      Number      Balance  

Commercial

     1       $ 62         1       $ 62   

Agriculture

     —           —           —           —     

Real Estate

     1         112         2         462   

Consumer

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     2       $ 174         3       $ 524   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     Three Months Ended September 30, 2015      Nine Months Ended September 30, 2015  
     Number      Balance      Number      Balance  

Commercial

     —         $ —           1       $ 111   

Agriculture

     —           —           —           —     

Real Estate

     —           —           —           —     

Consumer

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     —         $ —           1       $ 111   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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As of September 30, 2016, 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, 2016, $2,037,821,000 in loans held by our bank subsidiary were subject to blanket liens as security for this line of credit. At September 30, 2016, $160,000,000 were outstanding under this line of credit.

Note 6 – Borrowings

Borrowings at September 30, 2016 and 2015, and December 31, 2015 consisted of the following (dollars in thousands):

 

     September 30,      December 31,  
     2016      2015      2015  

Securities sold under agreements with customers to repurchase

   $ 345,559       $ 324,150       $ 310,330   

Federal funds purchased

     8,200         6,725         6,325   

Advances from Federal Home Loan Bank of Dallas

     160,000         170,028         299,020   
  

 

 

    

 

 

    

 

 

 

Total

   $ 513,759       $ 500,903       $ 615,675   
  

 

 

    

 

 

    

 

 

 

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 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 $7,440,000 for the third quarter of 2016 as compared to $8,021,000 for the same period in 2015. The Company’s effective tax rates on pretax income were 22.52% and 23.66% for the third quarters of 2016 and 2015, respectively. Income tax expense was $23,544,000 for the nine months ended September 30, 2016 as compared to $23,867,000 for the same period in 2015. The Company’s effective tax rates on pretax income were 23.16% and 24.09% for the nine months ended September 30, 2016 and 2015, 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 Option Plan and Restricted Stock Plan

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, 2016, no options have been granted in 2016. On October 27, 2015, the Company granted 455,000 shares in incentive stock options at an exercise price of $33.89 to its employees. The Company recorded stock option expense totaling $220,000 and $182,000 for the three-month periods ended September 30, 2016 and 2015, respectively. The Company recorded stock option expense totaling $661,000 and $543,000 for the nine months ended September 30, 2016 and 2015, respectively. The additional disclosure requirements under authoritative accounting guidance have been omitted due to the amounts being insignificant.

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 was expensed over the period

 

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from grant date to April 26, 2016, the annual shareholders’ meeting at which these director’s term expired. On April 26, 2016, upon re-election of existing directors, 7,660 shares with a total value of $250,000 were granted to the ten non-employee directors and is being expensed over the period from grant day to April 25, 2017, the next scheduled annual shareholders’ meeting at which the current directors’ current term will expire. The Company recorded director expense related to these restricted stock grants of $63,000 and $56,000, respectively, for the three months ended September 30, 2016 and 2015 and $215,000 and $56,000, respectively, for the nine months ended September 30, 2016 and 2015. On October 27, 2015, the Company also granted 32,748 shares with a total value of $1,110,000 to certain officers that is being expensed over the vesting period of three years. The Company recorded restricted stock grant expense for officers of $88,000 for the three month period ended September 30, 2016. The Company recorded restricted stock grant expense for officers of $262,000 for the nine month period ended September 30, 2016.

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 a contribution totaling $500,000 in 2015 and through September 30, 2016 has made a contribution of $500,000.

Net periodic benefit costs totaling $82,000 and $83,000 were recorded for the three months ended September 30, 2016 and 2015, respectively. Net periodic benefit costs totaling $247,000 and $232,000 were recorded for the nine months ended September 30, 2016 and 2015, 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

 

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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.

 

    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, 2016 and 2015, and the year ended December 31, 2015.

 

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The following table summarizes financial assets and financial liabilities measured at fair value on a recurring basis as of September 30, 2016 and 2015, and December 31, 2015, respectively, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value (dollars in thousands):

 

 

September 30, 2016

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

Available-for-sale investment securities:

           

U.S. Treasury securities

   $ 10,739       $ —         $ —         $ 10,739   

Obligations of U. S. government sponsored enterprises and agencies

     —           115,720         —           115,720   

Obligations of states and political subdivisions

     —           1,502,716         —           1,502,716   

Corporate bonds

     —           65,037         —           65,037   

Residential mortgage-backed securities

     —           766,499         —           766,499   

Commercial mortgage-backed securities

     —           263,747         —           263,747   

Other securities

     4,572         —           —           4,572   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 15,311       $ 2,713,719       $ —         $ 2,729,030   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

December 31, 2015

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

Available-for-sale investment securities:

           

U.S. Treasury securities

   $ 10,795       $ —         $ —         $ 10,795   

Obligations of U. S. government sponsored enterprises and agencies

     —           148,554         —           148,554   

Obligations of states and political subdivisions

     —           1,451,127         —           1,451,127   

Corporate bonds

     —           83,254         —           83,254   

Residential mortgage-backed securities

     —           788,882         —           788,882   

Commercial mortgage-backed securities

     —           246,586         —           246,586   

Other securities

     4,701         —           —           4,701   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 15,496       $ 2,718,403       $ —         $ 2,733,899   
  

 

 

    

 

 

    

 

 

    

 

 

 

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

 

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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, 2016:

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, 2016, impaired loans with a carrying value of $33,712,000 were reduced by specific valuation reserves totaling $7,042,000 resulting in a net fair value of $26,670,000.

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, 2016, the Company’s mortgage loans held-for-sale were recorded at cost as fair value exceeded cost.

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 months and nine months ended September 30, 2016 and 2015 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. Re-evaluation 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,
 
     2016      2015  

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

   $ —         $ —     

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

     —           —     
  

 

 

    

 

 

 

Fair value

   $ —         $ —     
  

 

 

    

 

 

 

 

     Nine Months Ended
September 30,
 
     2016      2015  

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

   $ —         $ 351   

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

     —           (95
  

 

 

    

 

 

 

Fair value

   $ —         $ 256   
  

 

 

    

 

 

 

At September 30, 2016 and 2015, and December 31, 2015, other real estate owned totaled $241,000, $360,000, and $153,000, respectively.

 

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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.

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.

 

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The estimated fair values and carrying values of all financial instruments under current authoritative guidance at September 30, 2016 and 2015, and December 31, 2015, were as follows (in thousands):

 

     September 30,      December 31,       
     2016      2015      2015       
     Carrying
Value
     Estimated
Fair Value
     Carrying
Value
     Estimated
Fair Value
     Carrying
Value
     Estimated
Fair Value
     Fair Value
Hierarchy

Cash and due from banks

   $ 166,981       $ 166,981       $ 133,340       $ 133,340       $ 179,140       $ 179,140       Level 1

Federal funds sold

     3,400         3,400         2,790         2,790         3,810         3,810       Level 1

Interest-bearing deposits in banks

     117,334         117,334         4,268         4,268         89,936         89,936       Level 1

Interest-bearing time deposits in banks

     1,707         1,709         4,491         4,498         3,495         3,500       Level 2

Available-for-sale Securities

     2,729,030         2,729,030         2,737,353         2,737,353         2,733,899         2,733,899       Levels 1
and 2

Held-to-maturity securities

     129         133         286         291         278         283       Level 2

Loans

     3,324,086         3,334,965         3,248,002         3,249,558         3,308,716         3,316,243       Level 3

Accrued interest receivable

     26,209         26,209         26,888         26,888         34,697         34,697       Level 2

Deposits with stated maturities

     535,793         537,167         652,919         654,705         620,852         622,572       Level 2

Deposits with no stated maturities

     4,699,671         4,699,671         4,444,364         4,444,364         4,569,317         4,569,317       Level 1

Borrowings

     513,759         513,759         500,903         500,903         615,675         615,675       Level 2

Accrued interest Payable

     230         230         261         261         240         240       Level 2

Note 11 - Recently Issued Authoritative Accounting Guidance

Accounting Standards Update (“ASU”) 2014-09, “Revenue from Contracts with Customers.” ASU 2014-09 implements 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 does not expect implementation of this new guidance to have a significant impact on the Company’s financial statements but is continuing to evaluate the potential impact to the Company’s financial statements.

ASU 2014-11, “Transfers and Servicing.” ASU 2014-11 amended 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

 

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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.

ASU 2014-14, “Receivables – Troubled Debt Restructuring by Creditors.” ASU 2014-14 clarified 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.

ASU 2015-01, “Income Statement – Extraordinary and Unusual Items.” ASU 2015-01 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 became effective for the Company beginning January 1, 2016, and did not have a significant impact on the Company’s financial statements.

ASU 2015-05, “Intangibles – Goodwill and Other – Internal-Use Software – Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement.” ASU 2015-05 addresses accounting for fees paid by a customer in cloud computing arrangements such as (i) software as a service, (ii) platform as a service, (iii) infrastructure as a service and (iv) other similar hosting arrangements. ASU 2015-05 provides guidance to customers about whether a cloud computing arrangement includes a software license. If a cloud computing arrangement includes a software license, then the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. ASU 2015-05 became effective on January 1, 2016 and did not have a significant impact on the Company’s financial statements.

ASU 2015-16, “Business Combinations – Simplifying the Accounting Measurement Period Adjustments.” ASU 2015-16 amended business combination guidance to require that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. The acquirer must record, in the same period’s financial statements, the effect of earnings on changes in depreciation, amortization, or other income effects, if any, as a result of the changes to the provisional amounts, calculated as if the accounting had been completed at the acquisition date. Additionally, the entity is required to present separately on the face of the income statement or disclose in the notes the portion of the amount recorded in current-period earnings by line item that would have been recorded in previous reporting periods if the adjustment to the provisional amounts had been recognized as of the acquisition date. The amended guidance became effective for the Company on January 1, 2016, and did not have a significant impact on the Company’s financial statements.

ASU 2016-1, “No. 2016-01, Financial Instruments – Overall: Recognition and Measurement of Financial Assets and Financial Liabilities.” ASU 2016-1, among other things, (i) requires equity investments, with certain exceptions, to be measured at fair value with changes in fair value recognized in net income, (ii) simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment, (iii) eliminates the requirement for public business entities to disclose the methods and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet, (iv) requires public business entities to use the exit price notion when measuring the fair value of financial

 

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instruments for disclosure purposes, (v) requires an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments, (vi) requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset on the balance sheet or the accompanying notes to the financial statements and (vii) clarifies that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities. ASU 2016-1 will be effective for us on January 1, 2018 and is not expected to have a significant impact on the Company’s financial statements.

ASU 2016-02, “Leases.” ASU 2016-02 will amend current lease accounting to require lessees to recognize (i) a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis, and (ii) a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. ASU 2016-02 does not significantly change lease accounting requirements applicable to lessors; however, certain changes were made to align, where necessary, lessor accounting with the lessee accounting model. The amended guidance will be effective in the first quarter of 2019 and will require transition using a modified retrospective approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The Company is evaluating the potential impact of ASU 2016-02 on the Company’s financial statements.

ASU 2016-09, “Compensation – Stock Compensation: Improvements to Employee Share-Based Payment Accounting.” ASU 2016-09 will amend current guidance such that all excess tax benefits and tax deficiencies related to share-based payment awards will be recognized as income tax expense or benefit in the income statement during the period in which they occur. Additionally, excess tax benefits will be classified along with other income tax cash flows as an operating activity rather than a financing activity. ASU 2016-09 also provides that any entity can make an entity-wide accounting policy election to either estimate the number of awards that are expected to vest, which is the current requirement, or account for forfeitures when they occur. ASU 2016-09 will be effective January 1, 2017 and is not expected to have a significant impact on our financial statements.

ASU 2016-13, “Financial Instruments – Credit Losses.” ASU 2016-13 implements a comprehensive change in estimating the allowances for loan losses from the current model of losses inherent in the loan portfolio to a current expected credit loss model that generally is expected to result in earlier recognition of allowances for losses. Additionally, purchase accounting rules have been modified as well as credit losses on held-to-maturity debt securities. ASU 2016-13 will be effective in the first quarter of 2020. While the Company generally expects that the implementation of ASU 2016-13 will increase their allowance for loan losses balance, the Company is continuing to evaluate the potential 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 reorganization to acquire FBC Bancshares, Inc. and its wholly owned bank subsidiary, First Bank, N.A., Conroe, Texas (“First Bank”). 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 was merged into First Financial Bank, National Association, 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’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

     15,262   
  

 

 

 

Total identifiable assets acquired

     374,085   
  

 

 

 

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

     15,726   
  

 

 

 

Goodwill resulting from acquisition

   $ 43,922   
  

 

 

 

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 had branches in Conroe, Magnolia, Montgomery, Tomball, Cut and Shoot and Huntsville, all located north of Houston, Texas. On February 26, 2016, the Company closed First Bank’s Huntsville location and consolidated the branch with the Company’s existing Huntsville location.

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 asset purchase was finalized on May 31, 2015, which we refer to herein as the “4Trust asset purchase.” The total asset purchase price exceeded the estimated fair value of assets purchased by approximately $1,750,000 and the Company recorded such excess as goodwill.

 

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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 and commodity 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;

 

    changes in our competitive environment from other financial institutions and financial service providers;

 

    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”);

 

    the effect of changes in accounting policies and practices, as may be adopted by the regulatory agencies, as well as the Public Company Accounting Oversight Board, the Financial Accounting Standards Board and other accounting standard setters;

 

    the effect of changes in laws and regulations (including laws and regulations concerning taxes, banking, securities and insurance) with which we and our subsidiaries must comply;

 

    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 and increase market share;

 

    changes in our liquidity position;

 

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

 

    cyber attacks on our technology 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 2015 Annual Report on Form 10-K.

Critical Accounting Policies

We prepare consolidated financial statements based on GAAP 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.

 

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Results of Operations

Performance Summary. Net earnings for the third quarter of 2016 were $25.60 million compared to $25.89 million for the same quarter in 2015, or a 1.09% decrease.

Basic earnings per share for the third quarter of 2016 were $0.39 compared to $0.40 for the same quarter last year. The return on average assets was 1.54% for the third quarter of 2016, as compared to 1.61% for the third quarter of 2016. The return on average equity was 11.72% for the third quarter of 2016 as compared to 13.63% for the third quarter of 2015.

Net earnings for the nine-month period ended September 30, 2016 were $78.11 million compared to $75.19 million for the same period in 2015, or a 3.88% increase.

Basic earnings per share for the first nine months of 2016 were $1.18 compared to $1.16 for the same period in 2015, or a 1.72% increase. The return on average assets was 1.59% for the first nine months of 2016, as compared to 1.64% for the same period in 2015. The return on average equity was 12.33% for the first nine months of 2016, as compared to 13.99% 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 $63.00 million for the third quarter of 2016, as compared to $62.08 million for the same period last year. The increase in 2016 compared to 2015 was largely attributable to the increase in volume of interest earning assets due primarily to the First Bank acquisition. Average earning assets increased $246.56 million for the third quarter of 2016 over the same period in 2015. Average loans and tax exempt securities increased $188.23 million and $102.60 million, respectively, for the third quarter of 2016 over the same quarter of 2015. Average interest bearing liabilities increased $162.25 million for the third quarter of 2016, as compared to the same period in 2015. The yield on earning assets decreased seven basis points and the rate paid on interest-bearing liabilities increased two basis points for the third quarter of 2016 over the third quarter of 2015.

Tax-equivalent net interest income was $188.86 million for the first nine months of 2016, as compared to $176.37 million for the same period last year. The increase in 2016 compared to 2015 was largely attributable to the increase in volume of interest earning assets due primarily to the First Bank acquisition. Average earning assets increased $402.99 million for the first nine months of 2016 over the same period in 2015. Average loans and tax exempt securities increased $302.65 million and $160.69 million, respectively, for the first nine months of 2016 over the same period of 2015. Average interest bearing liabilities increased $266.10 million for the first nine months of 2016, as compared to the same period in 2015. The yield on earning assets increased two basis points and the rate paid on interest-bearing liabilities increased two basis points for the first nine months of 2016 over the first nine months of 2015.

 

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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, 2016
Compared to Three Months Ended
September 30, 2015
    Nine Months Ended September 30, 2016
Compared to Nine Months Ended

September 30,  2015
 
     Change Attributable to     Total
Change
    Change Attributable to     Total
Change
 
     Volume     Rate       Volume     Rate    

Short-term investments

   $ 17      $ 41      $ 58      $ (24   $ 74      $ 50   

Taxable investment securities

     (360     (161     (521     (840     (495     (1,335

Tax-exempt investment securities (1)

     1,194        (674     520        5,626        (1,415     4,211   

Loans (1) (2)

     2,369        (1,210     1,159        11,200        (670     10,530   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Interest income

     3,220        (2,004     1,216        15,962        (2,506     13,456   

Interest-bearing deposits

     47        132        179        171        265        436   

Short-term borrowings

     —          121        121        37        493        530   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Interest expense

     47        253        300        208        758        966   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income

   $ 3,173      $ (2,257   $ 916      $ 15,754      $ (3,264   $ 12,490   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(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 2016 was 4.04%, a decrease of nine basis points from the same period in 2015. The net interest margin for the nine months ended September 30, 2016 was 4.10%, unchanged from the same period in 2015. Although the Federal Reserve slightly increased rates in late 2015 and continues to consider future increases in rates in the fourth quarter of 2016 and future years, we expect interest rates to remain at lower levels which will continue the downward pressure on our net 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,  
     2016     2015  
     Average
Balance
    Income/
Expense
     Yield/
Rate
    Average
Balance
    Income/
Expense
     Yield/
Rate
 

Assets

              

Short-term investments (1)

   $ 73,881      $ 99         0.53   $ 50,417      $ 41         0.32

Taxable investment securities (2)

     1,305,103        6,775         2.08        1,372,834        7,296         2.13   

Tax-exempt investment securities (2)(3)

     1,478,719        16,541         4.47        1,376,119        16,021         4.66   

Loans (3)(4)

     3,349,458        40,948         4.86        3,161,229        39,789         4.99   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total earning assets

     6,207,161      $ 64,363         4.13     5,960,599      $ 63,147         4.20

Cash and due from banks

     152,080             146,921        

Bank premises and equipment, net

     122,944             113,662        

Other assets

     55,358             51,208        

Goodwill and other intangible assets, net

     143,854             129,962        

Allowance for loan losses

     (45,997          (39,579     
  

 

 

        

 

 

      

Total assets

   $ 6,635,400           $ 6,362,773        
  

 

 

        

 

 

      

Liabilities and Shareholders’ Equity

              

Interest-bearing deposits

   $ 3,460,208      $ 1,111         0.13   $ 3,295,411      $ 932         0.11

Short-term borrowings

     569,883        254         0.18        572,431        133         0.09   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total interest-bearing liabilities

     4,030,091      $ 1,365         0.13     3,867,842      $ 1,065         0.11

Noninterest-bearing deposits

     1,663,460             1,687,285        

Other liabilities

     72,611             54,034        
  

 

 

        

 

 

      

Total liabilities

     5,766,162             5,609,161        

Shareholders’ equity

     869,238             753,612        
  

 

 

        

 

 

      

Total liabilities and shareholders’ equity

   $ 6,635,400           $ 6,362,773        
  

 

 

        

 

 

      

Net interest income

     $ 62,998           $ 62,082      
    

 

 

        

 

 

    

Rate Analysis:

              

Interest income/earning assets

          4.13          4.20

Interest expense/earning assets

          0.09             0.07   
       

 

 

        

 

 

 

Net yield on earning assets

          4.04          4.13

 

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     Nine Months Ended September 30,  
     2016     2015  
     Average
Balance
    Income/
Expense
     Yield/
Rate
    Average
Balance
    Income/
Expense
     Yield/
Rate
 

Assets

              

Short-term investments (1)

   $ 54,908      $ 221         0.54   $ 63,833      $ 171         0.36

Taxable investment securities (2)

     1,325,935        21,167         2.13        1,377,363        22,502         2.18   

Tax-exempt investment securities (2)(3)

     1,448,933        49,313         4.54        1,288,242        45,102         4.67   

Loans (3)(4)

     3,319,337        122,162         4.92        3,016,686        111,632         4.95   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total earning assets

     6,149,113      $ 192,863         4.19     5,746,124      $ 179,407         4.17

Cash and due from banks

     151,485             146,676        

Bank premises and equipment, net

     119,664             107,394        

Other assets

     55,094             48,244        

Goodwill and other intangible assets, net

     144,091             108,478        

Allowance for loan losses

     (44,487          (38,447     
  

 

 

        

 

 

      

Total assets

   $ 6,574,960           $ 6,118,469        
  

 

 

        

 

 

      

Liabilities and Shareholders’ Equity

              

Interest-bearing deposits

   $ 3,431,572      $ 3,197         0.12   $ 3,231,925      $ 2,761         0.11

Short-term borrowings

     573,464        811         0.19        507,011        281         0.07   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total interest-bearing liabilities

     4,005,036      $ 4,008         0.13     3,738,936      $ 3,042         0.11

Noninterest-bearing deposits

     1,656,935             1,607,931        

Other liabilities

     66,855             53,077        
  

 

 

        

 

 

      

Total liabilities

     5,728,826             5,399,944        

Shareholders’ equity

     846,134             718,525        
  

 

 

        

 

 

      

Total liabilities and shareholders’ equity

   $ 6,574,960           $ 6,118,469        
  

 

 

        

 

 

      

Net interest income

     $ 188,855           $ 176,365      
    

 

 

        

 

 

    

Rate Analysis:

              

Interest income/earning assets

          4.19          4.17

Interest expense/earning assets

          0.09             0.07   
       

 

 

        

 

 

 

Net yield on earning assets

          4.10          4.10

 

(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 2016 was $22.15 million, an increase of $1.71 million compared to the same period in 2015. ATM, interchange and credit card fees and service charges on deposit accounts increased 3.56 percent and 3.07 percent, respectively, to $6.00 million and $4.80 million compared with $5.79 million and $4.65 million, respectively, in the same quarter last year due to continued growth in net new accounts and debit cards. Real estate mortgage fees increased 25.52 percent in the third quarter of 2016 to $4.70 million compared with $3.74 million in the same quarter a year ago. Trust fees increased to $5.07 million in the third quarter of 2016 compared with $4.82 million in the same quarter last year, due to continued growth in the fair value of Trust assets managed to $4.22 billion from $3.83 billion a year ago. This growth offset a $76 thousand decline in Trust oil and gas fee income in the third quarter of 2016 compared to the same quarter a year ago due to the decrease in oil and gas prices. Interest on loan recoveries increased $386 thousand in the third quarter of 2016 over the same period in 2015.

Noninterest income for the nine-month period ended September 30, 2016 was $63.41 million, an increase of $9.26 million compared to the same period in 2015. ATM, interchange and credit card fees and service charges on deposit accounts increased 8.09 percent and 9.42 percent, respectively, to $17.52 million and $13.61 million compared with $16.21 million and $12.44 million, respectively, in the same period last year due primarily to the First Bank acquisition and the continued growth in net new accounts and debit cards. Real estate mortgage fees increased 61.85 percent in the first nine months of 2016 to $11.85

 

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million compared with $7.32 million in the same period a year ago, primarily resulting from additional loan origination production from the 4Trust asset purchase. Trust fees increased $157 thousand to $14.45 million in the first nine months of 2016 compared with $14.29 million in the same period in 2015, due to continued growth in the fair value of Trust assets managed to $4.22 billion from $3.83 billion a year ago. This growth offset a $447 thousand decline in Trust oil and gas fee income in the first nine months of 2016 compared to the same period a year ago due to the decrease in oil and gas prices. Gain on sale of available-for-sale securities totaled $1.15 million in the first nine months of 2016 compared to $380 thousand in the same period in 2015. Interest on loan recoveries increased $1.14 million for the nine months ended September 30, 2016 compared to the same period in 2015.

ATM and interchange fees are charges that merchants pay to us and other card-issuing banks for processing electronic payment transactions. ATM and interchange fees consist of income from debit card usage, point of sale income for debit card transactions and ATM service fees. Federal Reserve rules applicable to financial institutions that have assets of $10 billion or more provide that the maximum permissible interchange fee for an electronic debit transaction is the sum of 21 cents per transaction and 5 basis points multiplied by the value of the transaction. While we currently have assets under $10 billion, we are monitoring the effect of this reduction in per transaction fee income as we approach the $10 billion asset level.

Table 3 - Noninterest Income (in thousands):

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2016     Increase
(Decrease)
    2015     2016      Increase
(Decrease)
    2015  

Trust fees

   $ 5,066      $ 248      $ 4,818      $ 14,446       $ 157      $ 14,289   

Service charges on deposit accounts

     4,796        143        4,653        13,614         1,172        12,442   

ATM, interchange and credit card fees

     6,000        206        5,794        17,521         1,312        16,209   

Real estate mortgage operations

     4,697        955        3,742        11,849         4,528        7,321   

Net gain on sale of available-for-sale securities

     239        103        136        1,153         773        380   

Net gain (loss) on sale of foreclosed assets

     (10     (38     28        343         333        10   

Gain (loss) on sale of assets

     (168     (157     (11     271         282        (11

Interest on loan recoveries

     709        386        323        1,970         1,136        834   

Other:

             

Check printing fees

     51        (8     59        137         (32     169   

Safe deposit rental fees

     115        3        112        426         10        416   

Credit life and debt protection fees

     240        63        177        474         (60     534   

Brokerage commissions

     47        (163     210        300         (277     577   

Miscellaneous income

     370        (35     405        906         (76     982   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total other

     823        (140     963        2,243         (435     2,678   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total Noninterest Income

   $ 22,152      $ 1,706      $ 20,446      $ 63,410       $ 9,258      $ 54,152   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Noninterest Expense. Total noninterest expense for the third quarter of 2016 was $42.00 million, an increase of $2.03 million compared to the same period in 2015. 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 2016 was 49.33%, compared to 48.44% from the same period in 2015.

Salaries and employee benefits for the third quarter of 2016 totaled $22.93 million, an increase of $1.28 million compared to the same period in 2015. The increase was primarily driven by the addition of First Bank employees and annual merit pay increases. In addition, our healthcare claims increased $767 thousand in the third quarter of 2016 over the same quarter in 2015, which was offset by lower profit sharing expense of $903 thousand.

 

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All other categories of noninterest expense for the third quarter of 2016 totaled $19.07 million, an increase of $747 thousand compared to the same quarter in 2015. This increase primarily resulted from increases in equipment, ATM, interchange and credit card, telephone and professional fee expenses also largely driven by the 4Trust asset purchase and First Bank acquisition. 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.

Total noninterest expense for the first nine months of 2016 was $123.84 million compared to $109.12 million in the same period of 2015. Our efficiency ratio for the first nine months of 2016 was 49.09%, compared to 47.34% from the same period in 2015.

Salaries and employee benefits for the first nine months of 2016 totaled $67.67 million, an increase of $8.58 million compared to the same period in 2015. The increase was primarily driven by the addition of 4Trust and First Bank employees and annual pay increases. In addition, our healthcare claims increased $2.57 million in the first nine months of 2016 over the same period in 2015, which was offset by lower profit sharing expense of $2.30 million.

All other categories of noninterest expense for the first nine months of 2016 totaled $56.17 million, an increase of approximately $6.14 million, as compared to the same period in 2015. The increase primarily resulted from increases in equipment, ATM, interchange and credit card, telephone and professional fee expenses also largely driven by the 4Trust asset purchase and First Bank acquisition.

 

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Table 4 - Noninterest Expense (in thousands):

 

     Three Months Ended September 30,      Nine Months Ended September 30,  
     2016      Increase
(Decrease)
    2015      2016      Increase
(Decrease)
    2015  

Salaries

   $ 17,846       $ 1,219      $ 16,627       $ 52,583       $ 7,205      $ 45,378   

Medical

     2,222         767        1,455         6,449         2,567        3,882   

Profit sharing

     738         (903     1,641         1,893         (2,297     4,190   

Pension

     82         (1     83         247         15        232   

401(k) match expense

     591         49        542         1,794         281        1,513   

Payroll taxes

     1,143         25        1,118         3,778         430        3,348   

Stock option and stock grant expense

     309         127        182         924         381        543   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total salaries and employee benefits

     22,931         1,283        21,648         67,668         8,582        59,086   

Net occupancy expense

     2,672         (378     3,050         7,886         246        7,640   

Equipment expense

     3,420         306        3,114         10,186         1,181        9,005   

FDIC assessment fees

     513         (306     819         2,155         (161     2,316   

ATM, interchange and credit card expense

     1,859         350        1,509         5,352         508        4,844   

Professional and service fees

     1,883         735        1,148         5,099         1,729        3,370   

Printing, stationery and supplies

     536         (58     594         1,504         (158     1,662   

Amortization of intangible assets

     172         (28     200         570         208        362   

Other:

               

Data processing fees

     119         (704     823         333         (686     1,019   

Postage

     406         (27     433         1,223         (39     1,262   

Advertising

     924         5        919         2,655         146        2,509   

Correspondent bank service charges

     240         2        238         726         40        686   

Telephone

     883         280        603         2,488         911        1,577   

Public relations and business development

     805         160        645         2,055         162        1,893   

Directors’ fees

     301         6        295         1,000         223        777   

Audit and accounting fees

     440         (28     468         1,340         51        1,289   

Legal fees

     479         154        325         1,532         100        1,432   

Regulatory exam fees

     281         16        265         848         72        776   

Travel

     332         (52     384         938         30        908   

Courier expense

     222         28        194         625         6        619   

Operational and other losses

     533         136        397         1,452         545        907   

Other real estate

     34         (2     36         176         68        108   

Other miscellaneous expense

     2,018         152        1,866         6,029         954        5,075   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total other

     8,017         126        7,891         23,420         2,583        20,837   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total Noninterest Expense

   $ 42,003       $ 2,030      $ 39,973       $ 123,840       $ 14,718      $ 109,122   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

 

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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 commercial real estate, which are primarily owner-occupied. 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, 2016, total loans held for investment were $3.34 billion, an increase of $20.74 million, as compared to December 31, 2015 balances. As compared to December 31, 2015, commercial loans decreased $32.58 million, agricultural loans decreased $17.64 million, real estate loans increased $55.03 million, and consumer loans increased $15.93 million. Loans averaged $3.35 billion during the third quarter of 2016, an increase of $188.23 million from the prior year third quarter average balances. Loans averaged $3.32 billion during the nine-month period ended September 30, 2016, an increase of $302.65 million from the prior year nine-month average balances.

Table 5 - Composition of Loans (in thousands):

 

     September 30,      December 31,  
     2016      2015      2015  

Commercial

   $ 663,581       $ 698,406       $ 696,163   

Agricultural

     84,716         99,232         102,351   

Real estate

     2,191,260         2,088,002         2,136,233   

Consumer

     398,236         381,177         382,303   
  

 

 

    

 

 

    

 

 

 

Total loans held-for-investment

   $ 3,337,793       $ 3,266,817       $ 3,317,050   
  

 

 

    

 

 

    

 

 

 

At September 30, 2016, our real estate loans represent approximately 65.65% of our loan portfolio and are comprised of (i) 1-4 family residence loans of 44.87%, (ii) commercial real estate loans of 24.22%, generally owner occupied, (iii) other loans, which includes ranches, hospitals and universities, of 16.63%, (iv) residential development and construction loans of 9.19%, which includes our custom and speculation home construction loans and (v) commercial development and construction loans of 5.09%.

Loans held for sale, consisting of secondary market mortgage loans, totaled $31.59 million, $21.61 million, and $33.54 million at September 30, 2016 and 2015, and December 31, 2015, respectively, which are valued using the lower of cost or market method.

Asset Quality. Our loan portfolio 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 $34.94 million at September 30, 2016, as compared to $22.74 million at September 30, 2015 and $29.77 million at December 31, 2015. As a percent of loans and foreclosed assets, these assets were 1.04% at September 30, 2016, as compared to 0.69% at September 30, 2015 and 0.89% at December 31, 2015. As a percent of total assets, these assets were 0.52% at September 30, 2016, as compared to 0.35% at September 30, 2015 and 0.45% at December 31, 2015. The increase in the Company’s nonperforming assets as a percentage of loans and foreclosed assets ratio and total assets at September 30, 2016 primarily resulted from the addition of one commercial loan to the Company’s quarter-end nonaccrual balances. 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, 2016.

 

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Supplemental Oil and Gas Information. As of September 30, 2016, the Company’s exposure to the oil and gas industry remained at 2.58% of gross loans, or $86.79 million, down slightly from December 31, 2015 year-end levels, and consisted (based on collateral supporting the loan) of (i) development and production loans of 5.10%, (ii) oil and gas field servicing loans of 13.84%, (iii) real estate loans of 37.68%, (iv) accounts receivable and inventory of 18.99% and (v) other of 24.39%. These loans have experienced increased stress due to continued depressed oil and gas prices. The Company has instituted additional monitoring procedures for these loans and has classified, downgraded and charged-off loans as appropriate. The following oil and gas information is as of and for the quarters ended September 30, 2016 and 2015, and December 31, 2015:

 

     September 30,     December 31,  
     2016     2015     2015  

Oil and gas related loans

   $ 86,7