Attached files

file filename
EX-32.(B) - EX-32.(B) - INTERNATIONAL BANCSHARES CORPiboc-20180331xex32b.htm
EX-32.(A) - EX-32.(A) - INTERNATIONAL BANCSHARES CORPiboc-20180331xex32a.htm
EX-31.(B) - EX-31.(B) - INTERNATIONAL BANCSHARES CORPiboc-20180331xex31b.htm
EX-31.(A) - EX-31.(A) - INTERNATIONAL BANCSHARES CORPiboc-20180331xex31a.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

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

 

For the quarterly period ended March 31, 2018

OR

 

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

 

For the transition period from              to           

 

Commission file number 000-09439

 

INTERNATIONAL BANCSHARES CORPORATION

(Exact name of registrant as specified in its charter)

 

 

 

 

Texas

 

74-2157138

(State or other jurisdiction of

 

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

incorporation or organization)

 

 

 

1200 San Bernardo Avenue, Laredo, Texas 78042-1359

(Address of principal executive offices)

(Zip Code)

 

(956) 722-7611

 

(Registrant’s telephone number, including area code)

 

None

 

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

 

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

 

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

 

Indicate by check mark if the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company.  See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth 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 ☐

Emerging growth company ☐

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

 

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

 

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

 

 

 

 

Class

 

Shares Issued and Outstanding

Common Stock, $1.00 par value

 

66,111,459 shares outstanding at May 4, 2018

 

 

 

 


 

PART I - FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

 

Consolidated Statements of Condition (Unaudited)

 

(Dollars in Thousands)

 

 

 

 

 

 

 

 

 

 

March 31,

 

December 31,

 

 

    

2018

    

2017

 

Assets

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

254,622

 

$

265,357

 

Investment securities:

 

 

 

 

 

 

 

Held to maturity debt securities (Market value of $2,400 on March 31, 2018 and $2,400 on December 31, 2017)

 

 

2,400

 

 

2,400

 

Available for sale debt securities (Amortized cost of $3,955,525 on March 31, 2018 and $4,196,263 on December 31, 2017)

 

 

3,868,173

 

 

4,124,185

 

Equity securities with readily determinable fair values

 

 

27,301

 

 

27,885

 

Total investment securities

 

 

3,897,874

 

 

4,154,470

 

Loans

 

 

6,453,103

 

 

6,348,172

 

Less allowance for probable loan losses

 

 

(67,154)

 

 

(67,687)

 

Net loans

 

 

6,385,949

 

 

6,280,485

 

Bank premises and equipment, net

 

 

511,696

 

 

514,454

 

Accrued interest receivable

 

 

32,773

 

 

34,456

 

Other investments

 

 

558,410

 

 

571,415

 

Goodwill

 

 

282,532

 

 

282,532

 

Other assets

 

 

146,756

 

 

81,529

 

Total assets

 

$

12,070,612

 

$

12,184,698

 

 

1


 

INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

 

Consolidated Statements of Condition, continued (Unaudited)

 

(Dollars in Thousands)

 

 

 

 

 

 

 

 

 

 

 

March 31,

 

December 31,

 

 

    

2018

    

2017

 

Liabilities and Shareholders’ Equity

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

Deposits:

 

 

 

 

 

 

 

Demand—non-interest bearing

 

$

3,439,357

 

$

3,243,255

 

Savings and interest bearing demand

 

 

3,393,766

 

 

3,245,131

 

Time

 

 

2,021,789

 

 

2,056,506

 

Total deposits

 

 

8,854,912

 

 

8,544,892

 

Securities sold under repurchase agreements

 

 

258,953

 

 

353,805

 

Other borrowed funds

 

 

831,600

 

 

1,195,225

 

Junior subordinated deferrable interest debentures

 

 

160,416

 

 

160,416

 

Other liabilities

 

 

133,473

 

 

91,380

 

Total liabilities

 

 

10,239,354

 

 

10,345,718

 

Shareholders’ equity:

 

 

 

 

 

 

 

Common shares of $1.00 par value. Authorized 275,000,000 shares; issued 96,019,028 shares on March 31, 2018 and 95,910,143 shares on December 31, 2017

 

 

96,044

 

 

96,019

 

Surplus

 

 

172,416

 

 

171,816

 

Retained earnings

 

 

1,923,411

 

 

1,891,805

 

Accumulated other comprehensive loss (including $0 on March 31, 2018 and $(3,287) on December 31, 2017 of comprehensive loss related to other-than-temporary impairment for non-credit related issues)

 

 

(68,350)

 

 

(28,397)

 

 

 

 

2,123,521

 

 

2,131,243

 

Less cost of shares in treasury, 29,939,545 shares on March 31, 2018 and 29,934,675 on December 31, 2017

 

 

(292,263)

 

 

(292,263)

 

Total shareholders’ equity

 

 

1,831,258

 

 

1,838,980

 

Total liabilities and shareholders’ equity

 

$

12,070,612

 

$

12,184,698

 

 

See accompanying notes to consolidated financial statements.

2


 

INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

 

Consolidated Statements of Income (Unaudited)

 

(Dollars in Thousands, except per share data)

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

    

2018

    

2017

 

Interest income:

 

 

 

 

 

 

 

Loans, including fees

 

$

87,833

 

$

75,401

 

Investment securities:

 

 

 

 

 

 

 

Taxable

 

 

21,214

 

 

19,006

 

Tax-exempt

 

 

2,195

 

 

2,491

 

Other interest income

 

 

165

 

 

83

 

Total interest income

 

 

111,407

 

 

96,981

 

 

 

 

 

 

 

 

 

Interest expense:

 

 

 

 

 

 

 

Savings deposits

 

 

2,228

 

 

1,289

 

Time deposits

 

 

2,669

 

 

2,376

 

Securities sold under repurchase agreements

 

 

1,023

 

 

3,068

 

Other borrowings

 

 

4,689

 

 

1,263

 

Junior subordinated deferrable interest debentures

 

 

1,526

 

 

1,250

 

 

 

 

 

 

 

 

 

Total interest expense

 

 

12,135

 

 

9,246

 

 

 

 

 

 

 

 

 

Net interest income

 

 

99,272

 

 

87,735

 

 

 

 

 

 

 

 

 

Provision for probable loan losses

 

 

1,662

 

 

1,700

 

 

 

 

 

 

 

 

 

Net interest income after provision for probable loan losses

 

 

97,610

 

 

86,035

 

 

 

 

 

 

 

 

 

Non-interest income:

 

 

 

 

 

 

 

Service charges on deposit accounts

 

 

17,712

 

 

17,906

 

Other service charges, commissions and fees

 

 

 

 

 

 

 

Banking

 

 

11,122

 

 

10,385

 

Non-banking

 

 

1,360

 

 

1,335

 

Investment securities transactions, net

 

 

 —

 

 

927

 

Other investments, net

 

 

4,726

 

 

4,268

 

Other income

 

 

4,055

 

 

2,894

 

 

 

 

 

 

 

 

 

Total non-interest income

 

$

38,975

 

$

37,715

 

 

3


 

INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

 

Consolidated Statements of Income, continued (Unaudited)

 

(Dollars in Thousands, except per share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

    

 

March 31,

 

 

 

    

2018

    

2017

 

Non-interest expense:

 

 

 

 

 

 

 

 

Employee compensation and benefits

 

 

$

34,618

 

$

32,730

 

Occupancy

 

 

 

6,075

 

 

5,991

 

Depreciation of bank premises and equipment

 

 

 

6,273

 

 

6,227

 

Professional fees

 

 

 

2,572

 

 

3,716

 

Deposit insurance assessments

 

 

 

1,000

 

 

390

 

Net expense, other real estate owned

 

 

 

(271)

 

 

914

 

Amortization of identified intangible assets

 

 

 

 —

 

 

25

 

Advertising

 

 

 

1,839

 

 

2,268

 

Early termination fee—securities sold under repurchase agreements

 

 

 

 —

 

 

5,765

 

Software and software maintenance

 

 

 

4,072

 

 

3,791

 

Other

 

 

 

12,731

 

 

13,809

 

 

 

 

 

 

 

 

 

 

Total non-interest expense

 

 

 

68,909

 

 

75,626

 

 

 

 

 

 

 

 

 

 

Income before income taxes

 

 

 

67,676

 

 

48,124

 

 

 

 

 

 

 

 

 

 

Provision for income taxes

 

 

 

14,256

 

 

16,120

 

 

 

 

 

 

 

 

 

 

Net income

 

 

$

53,420

 

$

32,004

 

 

 

 

 

 

 

 

 

 

Basic earnings per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average number of shares outstanding

 

 

 

66,092,379

 

 

65,994,201

 

Net income

 

 

$

0.81

 

$

.48

 

 

 

 

 

 

 

 

 

 

Fully diluted earnings per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average number of shares outstanding

 

 

 

66,863,895

 

 

66,747,499

 

Net income

 

 

$

0.80

 

$

.48

 

 

 

 

See accompanying notes to consolidated financial statements

4


 

INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

 

Consolidated Statements of Comprehensive Income (Unaudited)

 

(Dollars in Thousands)

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

    

March 31,

 

 

 

 

2018

    

2017

    

 

 

 

 

 

 

 

 

 

 

Net income

 

$

53,420

 

$

32,004

 

 

Other comprehensive income, net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net unrealized holding gains (losses) on securities available for sale arising during period (net of tax effects of $(9,427) and $7,198)

 

 

(39,953)

 

 

13,369

 

 

Reclassification adjustment for losses on securities available for sale included in net income (net of tax effects of $0, and $(324))

 

 

 —

 

 

(603)

 

 

 

 

 

(39,953)

 

 

12,766

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income

 

$

13,467

 

$

44,770

 

 

 

See accompanying notes to consolidated financial statements.

5


 

INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

 

Consolidated Statements of Cash Flows (Unaudited)

 

(Dollars in Thousands)

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

    

March 31,

 

 

 

2018

    

2017

 

Operating activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

53,420

 

$

32,004

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

Provision for probable loan losses

 

 

1,662

 

 

1,700

 

Specific reserve, other real estate owned

 

 

71

 

 

45

 

Depreciation of bank premises and equipment

 

 

6,273

 

 

6,227

 

Gain on sale of bank premises and equipment

 

 

(8)

 

 

(15)

 

Gain on sale of other real estate owned

 

 

(2)

 

 

(4)

 

Accretion of investment securities discounts

 

 

(75)

 

 

(120)

 

Amortization of investment securities premiums

 

 

5,700

 

 

7,021

 

Investment securities transactions, net

 

 

 —

 

 

(927)

 

Unrealized loss on equity securities with readily determinable fair values

 

 

774

 

 

 —

 

Amortization of identified intangible assets

 

 

 —

 

 

25

 

Stock based compensation expense

 

 

185

 

 

268

 

Earnings from affiliates and other investments

 

 

(4,303)

 

 

(2,890)

 

Deferred tax expense

 

 

269

 

 

229

 

Increase in accrued interest receivable

 

 

1,683

 

 

2,047

 

(Increase) decrease in other assets

 

 

(42,473)

 

 

3,794

 

Net increase in other liabilities

 

 

30,001

 

 

14,990

 

 

 

 

 

 

 

 

 

Net cash provided by operating activities

 

 

53,177

 

 

64,394

 

 

 

 

 

 

 

 

 

Investing activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Proceeds from maturities of securities

 

 

1,075

 

 

 —

 

Proceeds from sales and calls of available for sale securities

 

 

18,145

 

 

121,549

 

Purchases of available for sale securities

 

 

(1,075)

 

 

(385,594)

 

Principal collected on mortgage backed securities

 

 

188,893

 

 

187,386

 

Net increase in loans

 

 

(107,206)

 

 

(46,999)

 

Purchases of other investments

 

 

(17,963)

 

 

(2,903)

 

Distributions from other investments

 

 

5,367

 

 

4,557

 

Purchases of bank premises and equipment

 

 

(3,519)

 

 

(3,962)

 

Proceeds from sales of bank premises and equipment

 

 

12

 

 

681

 

Proceeds from sales of other real estate owned

 

 

376

 

 

205

 

 

 

 

 

 

 

 

 

Net cash provided by (used in) investing activities

 

$

84,105

 

$

(125,080)

 

 

6


 

INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

 

Consolidated Statements of Cash Flows, continued (Unaudited)

 

(Dollars in Thousands)

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

    

March 31,

 

 

 

2018

    

2017

 

Financing activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net increase in non-interest bearing demand deposits

 

$

196,102

 

$

197,317

 

Net increase in savings and interest bearing demand deposits

 

 

148,635

 

 

82,579

 

Net decrease in time deposits

 

 

(34,717)

 

 

(25,667)

 

Net decrease in securities sold under repurchase agreements

 

 

(94,852)

 

 

(195,208)

 

Net (decrease) increase in other borrowed funds

 

 

(363,625)

 

 

29,625

 

Purchase of treasury stock

 

 

 —

 

 

(97)

 

Proceeds from stock transactions

 

 

440

 

 

744

 

 

 

 

 

 

 

 

 

Net cash (used in) provided by financing activities

 

 

(148,017)

 

 

89,293

 

 

 

 

 

 

 

 

 

(Decrease ) increase in cash and cash equivalents

 

 

(10,735)

 

 

28,607

 

 

 

 

 

 

 

 

 

Cash and cash equivalents at beginning of period

 

 

265,357

 

 

269,198

 

 

 

 

 

 

 

 

 

Cash and cash equivalents at end of period

 

$

254,622

 

$

297,805

 

 

 

 

 

 

 

 

 

Supplemental cash flow information:

 

 

 

 

 

 

 

Interest paid

 

$

12,052

 

$

10,411

 

Income taxes paid

 

 

 —

 

 

 —

 

Non-cash investing and financing activities:

 

 

 

 

 

 

 

Net transfers from loans to other real estate owned

 

 

80

 

 

 9

 

Dividends declared, not yet paid on common stock

 

$

21,814

 

$

21,793

 

 

See accompanying notes to consolidated financial statements.

7


 

INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

 

Notes to Consolidated Financial Statements

 

(Unaudited)

 

Note 1 — Basis of Presentation

 

The accounting and reporting policies of International Bancshares Corporation (the “Corporation”) and Subsidiaries (the Corporation and Subsidiaries collectively referred to herein as the “Company”) conform to accounting principles generally accepted in the United States of America and to general practices within the banking industry.  The consolidated financial statements include the accounts of the Corporation and its wholly-owned subsidiaries, International Bank of Commerce, Laredo (“IBC”), Commerce Bank, International Bank of Commerce, Zapata, International Bank of Commerce, Brownsville, International Bank of Commerce, Oklahoma and the Corporation’s wholly-owned non-bank subsidiaries, IBC Subsidiary Corporation, IBC Trading Company, Premier Tierra Holdings, Inc., IBC Charitable and Community Development Corporation, and IBC Capital Corporation.  All significant inter-company balances and transactions have been eliminated in consolidation.  The consolidated financial statements are unaudited, but include all adjustments, which, in the opinion of management, are necessary for a fair presentation of the results of the periods presented.  All such adjustments were of a normal and recurring nature.  These financial statements should be read in conjunction with the financial statements and the notes thereto in the Company’s latest Annual Report on Form 10-K.  The consolidated statement of condition at December 31, 2017 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements.  Certain reclassifications have been made to make prior periods comparable. Operating results for the three months ended March 31, 2018 are not necessarily indicative of the results for the year ending December 31, 2018 or any future period.

 

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

 

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

 

On January 1, 2018, the Company adopted the provisions of ASU 2016-01, “Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities,”  and ASU 2018-03, “Technical Corrections and Improvements to Financial Instruments – Overall,” which affects current US GAAP as it relates to the accounting for equity investments, financial liability under the fair value option, and the presentation and disclosure requirements for financial instruments.  ASU 2016-01 also supersedes the guidance that requires:  (i) the classification of equity securities with readily determinable fair values into different categories, and (ii) recognition in changes in fair value of available-for-sale securities in other comprehensive income.  The main effect resulting from the adoption of the new standards is that beginning on January 1, 2018, equity securities with readily determinable fair values are now reported in a single line item on the face of the Company’s consolidated statement of condition under the caption, “Equity securities with readily determinable fair values.”  Additionally, the changes in fair value of the equity securities is now recognized in net income and is included in other non-interest expense on the face of the Company’s consolidated income statement. Prior to January 1, 2018, the equity securities were classified as available-for-sale and stated at fair value with unrealized gains and losses included in accumulated comprehensive income, net of tax and had a net unrealized loss of $189,000.  Other equity securities without readily determinable fair values are recorded at cost less any impairment, if any and included in other investments in the Company’s consolidated financial statements.

 

8


 

On January 1, 2018, the Company adopted the provisions of ASU 2014-09 to ASC 606, “Revenue from Contracts with Customers.”  ASC 606 sets a common standard that defines revenue and the principals for recognizing revenue.  The core principle of the accounting standards update requires an entity to recognize revenue in a manner that reflects the consideration that an entity is expected to receive in exchange for goods or services as performance obligations are satisfied.  The Company’s revenue is primarily comprised of net interest income on financial assets and financial liabilities, which is explicitly excluded from the scope of ASC 606.  The Company has evaluated the impact of the accounting standards update on certain other non-interest revenue streams that the provisions of the update apply to and has determined that the adoption of the new provisions to ASC 606 did not have a significant impact to the Company’s consolidated financial statements or operations. 

 

 

Note 2 — Fair Value Measurements

 

ASC Topic 820, “Fair Value Measurements and Disclosures” (“ASC 820”), defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements.  ASC 820 applies to all financial instruments that are being measured and reported on a fair value basis.  ASC 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date; it also establishes a fair value hierarchy that prioritizes the inputs used in valuation methodologies into the following three levels:

 

·

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

·

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

·

Level 3 Inputs - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.  Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or other valuation techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation.

 

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

 

The following table represents assets and liabilities reported on the consolidated balance sheets at their fair value on a recurring basis as of March 31, 2018 by level within the fair value measurement hierarchy:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurements at

 

 

 

 

 

 

Reporting Date Using

 

 

 

 

 

 

(in Thousands)

 

 

 

 

 

 

Quoted

 

 

 

 

 

 

 

 

 

 

 

 

Prices in

 

 

 

 

 

 

 

 

 

 

 

 

Active

 

Significant

 

 

 

 

 

 

Assets/Liabilities

 

Markets for

 

Other

 

Significant

 

 

 

Measured at

 

Identical

 

Observable

 

Unobservable

 

 

 

Fair Value

 

Assets

 

Inputs

 

Inputs

 

 

 

March 31, 2018

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

Measured on a recurring basis:

    

 

    

    

 

    

    

 

    

    

 

    

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Available for sale debt securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential mortgage-backed securities

 

$

3,656,083

 

$

 —

 

$

3,656,083

 

$

 —

 

States and political subdivisions

 

 

212,090

 

 

 —

 

 

212,090

 

 

 —

 

Equity securities

 

 

27,301

 

 

27,301

 

 

 —

 

 

 —

 

 

 

$

3,895,474

 

$

27,301

 

$

3,868,173

 

$

 —

 

 

9


 

The following table represents assets and liabilities reported on the consolidated balance sheets at their fair value on a recurring basis as of December 31, 2017 by level within the fair value measurement hierarchy:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurements at

 

 

 

 

 

 

Reporting Date Using

 

 

 

 

 

 

(in Thousands)

 

 

 

 

 

 

Quoted

 

 

 

 

 

 

 

 

 

 

 

 

Prices in

 

 

 

 

 

 

 

 

 

 

 

 

Active

 

Significant

 

 

 

 

 

 

Assets/Liabilities

 

Markets for

 

Other

 

Significant

 

 

 

Measured at

 

Identical

 

Observable

 

Unobservable

 

 

 

Fair Value

 

Assets

 

Inputs

 

Inputs

 

 

 

December 31, 2017

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

Measured on a recurring basis:

    

 

    

    

 

    

    

 

    

    

 

    

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Available for sale securities

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential mortgage - backed securities

 

$

3,891,233

 

$

 —

 

$

3,891,233

 

$

 —

 

States and political subdivisions

 

 

232,951

 

 

 —

 

 

232,951

 

 

 —

 

Equity Securities

 

 

27,886

 

 

27,886

 

 

 —

 

 

 —

 

 

 

$

4,152,070

 

$

27,886

 

$

4,124,184

 

$

 —

 

 

Available-for-sale debt securities are classified within Level 2 of the valuation hierarchy.  Equity securities with readily determinable fair values are classified within Level 1.  For debt investments classified as Level 2 in the fair value hierarchy, the Company obtains fair value measurements from an independent pricing service.  The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the bond’s terms and conditions, among other things.

 

Certain financial assets and financial liabilities are measured at fair value on a non-recurring basis.  The instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment).

 

The following table represents financial instruments measured at fair value on a non-recurring basis as of and for the period ended March 31, 2018 by level within the fair value measurement hierarchy:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurements at Reporting

 

 

 

 

 

 

 

 

 

Date Using

 

 

 

 

 

 

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

Quoted

 

 

 

 

 

 

 

 

 

 

 

 

Assets/Liabilities

 

Prices in

 

 

 

 

 

 

 

 

 

 

 

 

Measured at

 

Active

 

Significant

 

 

 

 

 

 

 

 

 

Fair Value

 

Markets for

 

Other

 

Significant

 

Net Provision

 

 

 

Period ended

 

Identical

 

Observable

 

Unobservable

 

(Credit)

 

 

 

March 31,

 

Assets

 

Inputs

 

Inputs

 

During

 

 

 

2018

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

Period

 

Measured on a non-recurring basis:

    

 

    

    

 

    

    

 

    

    

 

    

    

 

    

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Impaired loans

 

$

23,404

 

$

 —

 

$

 —

 

$

23,404

 

$

8,907

 

Other real estate owned

 

 

63

 

 

 —

 

 

 —

 

 

63

 

 

71

 

 

10


 

The following table represents financial instruments measured at fair value on a non-recurring basis as of and for the period ended December 31, 2017 by level within the fair value measurement hierarchy:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurements at Reporting

 

 

 

 

 

 

 

 

 

Date Using

 

 

 

 

 

 

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

Quoted

 

 

 

 

 

 

 

 

 

 

 

 

Assets/Liabilities

 

Prices in

 

 

 

 

 

 

 

 

 

 

 

 

Measured at

 

Active

 

Significant

 

 

 

 

 

 

 

 

 

Fair Value

 

Markets

 

Other

 

Significant

 

Net (Credit)

 

 

 

Year ended

 

for Identical

 

Observable

 

Unobservable

 

Provision

 

 

 

December 31,

 

Assets

 

Inputs

 

Inputs

 

During

 

 

 

2017

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

Period

 

Measured on a non-recurring basis:

    

 

    

    

 

    

    

 

    

    

 

    

    

 

    

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Impaired loans

 

$

11,210

 

$

 —

 

$

 —

 

$

11,210

 

$

2,138

 

Other real estate owned

 

 

2,000

 

 

 —

 

 

 —

 

 

2,000

 

 

710

 

 

The Company’s assets measured at fair value on a non-recurring basis are limited to impaired loans and other real estate owned.  Impaired loans are classified within Level 3 of the valuation hierarchy.  The fair value of impaired loans is derived in accordance with FASB ASC 310, “Receivables”.  Impaired loans are primarily comprised of collateral-dependent commercial loans.   As the primary sources of loan repayments decline, the secondary repayment source, the collateral, takes on greater significance.  Correctly evaluating the fair value becomes even more important.  Re-measurement of the impaired loan to fair value is done through a specific valuation allowance included in the allowance for probable loan losses.  The fair value of impaired loans is based on the fair value of the collateral, as determined through either an appraisal or evaluation process.  The basis for the Company’s appraisal and appraisal review process is based on regulatory guidelines and strives to comply with all regulatory appraisal laws, regulations, and the Uniform Standards of Professional Appraisal Practice. All appraisals and evaluations are “as is” (the property’s highest and best use) valuations based on the current conditions of the property/project at that point in time.  The determination of the fair value of the collateral is based on the net realizable value, which is the appraised value less any closing costs, when applicable.  As of March 31, 2018, the Company had $56,826,000 of impaired commercial collateral dependent loans, of which $20,687,000 had an appraisal performed within the immediately preceding twelve months, and of which $29,897,0000 had an evaluation performed within the immediately preceding twelve months.  As of December 31, 2017, the Company had $53,267,000 of impaired commercial collateral dependent loans, of which $18,585,000 had an appraisal performed within the immediately preceding twelve months and of which $0 had an evaluation performed within the immediately preceding twelve months.

 

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

 

Other real estate owned is comprised of real estate acquired by foreclosure and deeds in lieu of foreclosure. Other real estate owned is carried at the lower of the recorded investment in the property or its fair value less estimated costs to sell such property (as determined by independent appraisal) within Level 3 of the fair value hierarchy.  Prior to foreclosure, the value of the underlying loan is written down to the fair value of the real estate to be acquired by a charge to the allowance for probable loan losses, if necessary.  The fair value is reviewed periodically and subsequent write-

11


 

downs are made, accordingly, through a charge to operations.  Other real estate owned is included in other assets on the consolidated financial statements.  For the three months ended March 31, 2018 and the twelve months ended December 31, 2017, the Company recorded $24,000 and $30,000 respectively, in charges to the allowance for probable loan losses in connection with loans transferred to other real estate owned.  For the three months ended March 31, 2018 and the twelve months ended December 31, 2017, the Company recorded $71,000 and $710,000, respectively, in adjustments to fair value in connection with other real estate owned.

 

The fair value estimates, methods, and assumptions for the Company’s financial instruments at March 31, 2018 and December 31, 2017 are outlined below.

 

Cash and Cash Equivalents

 

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

 

Time Deposits with Banks

 

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

 

Investment Securities Held-to-Maturity

 

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

 

Investment Securities

 

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

 

Loans

 

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

 

For variable rate performing loans, the carrying amount approximates the fair value.  For fixed-rate performing loans, except residential mortgage loans, the fair value is calculated by discounting scheduled cash flows through the estimated maturity using estimated market discount rates that reflect the credit and interest rate risk inherent in the loan.  For performing residential mortgage loans, fair value is estimated by discounting contractual cash flows adjusted for prepayment estimates using discount rates based on secondary market sources or the primary origination market.  Fixed-rate performing loans are within Level 3 of the fair value hierarchy.  At March 31, 2018, and December 31, 2017, the carrying amount of fixed-rate performing loans was $1,540,426,000 and $1,505,531,000, respectively, and the estimated fair value was $1,491,579,000 and $1,454,434,000, respectively.

 

Accrued Interest

 

The carrying amounts of accrued interest approximate fair value.

 

Deposits

 

The fair value of deposits with no stated maturity, such as non-interest bearing demand deposit accounts, savings accounts and interest bearing demand deposit accounts, was equal to the amount payable on demand as of March

12


 

31, 2018 and December 31, 2017.  The fair value of time deposits is based on the discounted value of contractual cash flows.  The discount rate is based on currently offered rates.  Time deposits are within Level 3 of the fair value hierarchy.  At March 31, 2018 and December 31, 2017, the carrying amount of time deposits was $2,021,789,000 and $2,056,506,000, respectively, and the estimated fair value was $2,024,312,000 and $2,058,621,000, respectively.

 

Securities Sold Under Repurchase Agreements

 

Securities sold under repurchase agreements include short- and long-term maturities.  Due to the contractual terms of the short-term instruments, the carrying amounts approximated fair value at March 31, 2018 and December 31, 2017.  The fair value of the long-term instruments is based on established market spreads using option adjusted spread methodology.  Long-term repurchase agreements are within Level 3 of the fair value hierarchy.  The only remaining long-term repurchase agreement outstanding matured in the first quarter of 2018 and was not renewed.  At December 31, 2017, the carrying amount of long-term repurchase agreements was $100,000,000 and the estimated fair value was $99,504,000.

 

Junior Subordinated Deferrable Interest Debentures

 

The Company currently has floating-rate junior subordinated deferrable interest debentures outstanding.  Due to the contractual terms of the floating-rate junior subordinated deferrable interest debentures, the carrying amounts approximated fair value at March 31, 2018 and December 31, 2017.

 

Other Borrowed Funds

 

The Company currently has short and long-term borrowings issued from the Federal Home Loan Bank (“FHLB”).  Due to the contractual terms of the short-term borrowings, the carrying amounts approximated fair value at March 31, 2018 and December 31, 2017.  The long-term borrowings outstanding at March 31, 2018 are fixed-rate borrowings and the fair value is based on established market spreads for similar types of borrowings.  The fixed rate long-term borrowings are included in Level 2 of the fair value hierarchy.  At March 31, 2018 and December 31, 2017, the carrying amount of the fixed rate long-term FHLB borrowings was $300,000,000 and $250,000,000, respectively, and the estimated fair value was $298,355,900.and $249,728,000, respectively. 

 

 

Commitments to Extend Credit and Letters of Credit

 

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

 

Limitations

 

Fair value estimates are made at a point in time, based on relevant market information and information about the financial instrument.  These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company’s entire holdings of a particular financial instrument.  Because no market exists for a significant portion of the Company’s financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments and other factors.  These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision.  Changes in assumptions could significantly affect the estimates.

 

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

 

13


 

Note 3 — Loans

 

A summary of loans, by loan type at March 31, 2018 and December 31, 2017 is as follows:

 

 

 

 

 

 

 

 

 

 

 

March 31,

 

December 31,

 

 

 

2018

 

2017

 

 

 

(Dollars in Thousands)

 

Commercial, financial and agricultural

    

$

3,394,251

    

$

3,322,668