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 March 31, 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
nine locations which are located in Abilene, Fort Worth, Lubbock, Odessa, Beaumont, Hereford, 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 Companys financial position and unaudited results of operations and should be read in conjunction with the
Companys audited consolidated financial statements, and notes thereto in the Companys 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 ended March 31, 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 Companys shareholders approved an amendment to the Companys 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.
9
Note 2 Stock Repurchase
On October 28, 2014, the Companys 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 March 31, 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 ended March 31, 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 March 31, 2016 and 2015 were 65,974,559 and 64,122,965
shares, respectively. The weighted average common shares outstanding used in computing fully diluted earnings per common share for the three months ended March 31, 2016 and 2015 were 66,118,998 and 64,298,896 shares, respectively.
Note 4 - Interest-bearing Time Deposits in Banks and Securities
Interest-bearing time deposits in banks totaled $2,427,000, $9,170,000 and $3,495,000 at March 31, 2016 and 2015 and December 31, 2015, respectively, and
have original maturities generally ranging from one to three years. Of these amounts, $489,000 are time deposits with balances greater than $250,000, the FDIC insured limit at both March 31, 2015 and December 31, 2015. There were no
balances over this limit at March 31, 2016.
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.
10
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 Companys results of operations and financial condition.
The Companys 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.
11
A summary of the Companys available-for-sale securities follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2016
|
|
|
|
Amortized
Cost Basis
|
|
|
Gross
Unrealized
Holding Gains
|
|
|
Gross
Unrealized
Holding Losses
|
|
|
Estimated
Fair Value
|
|
|
|
|
|
|
U.S. Treasury securities
|
|
$
|
10,756
|
|
|
$
|
73
|
|
|
$
|
|
|
|
$
|
10,829
|
|
Obligations of U.S. government sponsored enterprises and agencies
|
|
|
131,484
|
|
|
|
1,061
|
|
|
|
|
|
|
|
132,545
|
|
Obligations of states and political subdivisions
|
|
|
1,388,369
|
|
|
|
82,693
|
|
|
|
(28
|
)
|
|
|
1,471,034
|
|
Corporate bonds and other
|
|
|
68,836
|
|
|
|
1,896
|
|
|
|
|
|
|
|
70,732
|
|
Residential mortgage-backed securities
|
|
|
793,509
|
|
|
|
17,180
|
|
|
|
(963
|
)
|
|
|
809,726
|
|
Commercial mortgage-backed securities
|
|
|
264,231
|
|
|
|
4,013
|
|
|
|
(71
|
)
|
|
|
268,173
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securities available-for-sale
|
|
$
|
2,657,185
|
|
|
$
|
106,916
|
|
|
$
|
(1,062
|
)
|
|
$
|
2,763,039
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2015
|
|
|
|
Amortized
Cost Basis
|
|
|
Gross
Unrealized
Holding Gains
|
|
|
Gross
Unrealized
Holding Losses
|
|
|
Estimated
Fair Value
|
|
|
|
|
|
|
U.S. Treasury securities
|
|
$
|
10,899
|
|
|
$
|
84
|
|
|
$
|
|
|
|
$
|
10,983
|
|
Obligations of U.S. government sponsored enterprises and agencies
|
|
|
173,777
|
|
|
|
1,340
|
|
|
|
|
|
|
|
175,117
|
|
Obligations of states and political subdivisions
|
|
|
1,238,354
|
|
|
|
65,922
|
|
|
|
(784
|
)
|
|
|
1,303,492
|
|
Corporate bonds and other
|
|
|
95,044
|
|
|
|
3,089
|
|
|
|
|
|
|
|
98,133
|
|
Residential mortgage-backed securities
|
|
|
900,831
|
|
|
|
20,752
|
|
|
|
(1,217
|
)
|
|
|
920,366
|
|
Commercial mortgage-backed securities
|
|
|
179,773
|
|
|
|
1,575
|
|
|
|
(109
|
)
|
|
|
181,239
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securities available-for-sale
|
|
$
|
2,598,678
|
|
|
$
|
92,762
|
|
|
$
|
(2,110
|
)
|
|
$
|
2,689,330
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 Companys held-to-maturity securities, which totaled $146,000, $310,000 and $278,000 at March
31, 2016 and 2015, and December 31, 2015, respectively, have not been presented due to insignificance.
12
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 March 31, 2016 were computed by using scheduled amortization of balances and historical prepayment rates. At March 31, 2016 and 2015, and December 31, 2015, the Company did
not hold CMOs that entail higher risks than standard mortgage-backed securities.
The amortized cost and estimated fair value of available-for-sale
securities at March 31, 2016, by contractual and expected maturity, are shown below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Amortized
Cost Basis
|
|
|
Estimated
Fair Value
|
|
Due within one year
|
|
$
|
168,837
|
|
|
$
|
170,475
|
|
Due after one year through five years
|
|
|
700,497
|
|
|
|
737,357
|
|
Due after five years through ten years
|
|
|
727,661
|
|
|
|
774,335
|
|
Due after ten years
|
|
|
2,450
|
|
|
|
2,973
|
|
Mortgage-backed securities
|
|
|
1,057,740
|
|
|
|
1,077,899
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,657,185
|
|
|
$
|
2,763,039
|
|
|
|
|
|
|
|
|
|
|
The following tables disclose, as of March 31, 2016 and 2015, and December 31, 2015, the Companys 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
|
|
March 31, 2016
|
|
Fair Value
|
|
|
Unrealized
Loss
|
|
|
Fair Value
|
|
|
Unrealized
Loss
|
|
|
Fair Value
|
|
|
Unrealized
Loss
|
|
|
|
|
|
|
|
|
Obligations of states and political subdivisions
|
|
$
|
6,804
|
|
|
$
|
23
|
|
|
$
|
1,071
|
|
|
$
|
5
|
|
|
$
|
7,875
|
|
|
$
|
28
|
|
Residential mortgage-backed securities
|
|
|
25,152
|
|
|
|
357
|
|
|
|
48,124
|
|
|
|
606
|
|
|
|
73,276
|
|
|
|
963
|
|
Commercial mortgage-backed securities
|
|
|
15,553
|
|
|
|
13
|
|
|
|
14,520
|
|
|
|
58
|
|
|
|
30,073
|
|
|
|
71
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
47,509
|
|
|
$
|
393
|
|
|
$
|
63,715
|
|
|
$
|
669
|
|
|
$
|
111,224
|
|
|
$
|
1,062
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 12 Months
|
|
|
12 Months or Longer
|
|
|
Total
|
|
March 31, 2015
|
|
Fair Value
|
|
|
Unrealized
Loss
|
|
|
Fair
Value
|
|
|
Unrealized
Loss
|
|
|
Fair Value
|
|
|
Unrealized
Loss
|
|
|
|
|
|
|
|
|
Obligations of states and political subdivisions
|
|
$
|
84,444
|
|
|
$
|
748
|
|
|
$
|
2,570
|
|
|
$
|
36
|
|
|
$
|
87,014
|
|
|
$
|
784
|
|
Residential mortgage-backed securities
|
|
|
12,917
|
|
|
|
13
|
|
|
|
67,164
|
|
|
|
1,204
|
|
|
|
80,081
|
|
|
|
1,217
|
|
Commercial mortgage-backed securities
|
|
|
19,842
|
|
|
|
57
|
|
|
|
9,564
|
|
|
|
52
|
|
|
|
29,406
|
|
|
|
109
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
117,203
|
|
|
$
|
818
|
|
|
$
|
79,298
|
|
|
$
|
1,292
|
|
|
$
|
196,501
|
|
|
$
|
2,110
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The number of investments in an unrealized loss position totaled 30 at March 31, 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 March 31, 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 March 31, 2016, $1,600,768,000 of
the Companys 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 March 31, 2016 and 2015, sales of investment securities that were classified as available-for-sale totaled $553,000 and $1,129,000,
respectively. Gross realized gains from security sales during the first quarter of 2016 and 2015 totaled $7,000 and $5,000, respectively. Gross realized losses from security sales during the first quarter of 2016 totaled $5,000. There
were no gross realized losses from security sales during the first quarter of 2015. 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 borrowers
ability to operate profitably and effectively. Underwriting standards are designed to determine whether the borrower
14
possesses sound business ethics and practices and to evaluate current and projected cash flows to determine the ability of the borrower to repay their obligations as agreed. Commercial loans
are primarily made based on the identified cash flows of the borrower and, secondarily, on the underlying collateral provided by the borrower. Most commercial loans are secured by the assets being financed or other business assets, such as
accounts receivable or inventory, and include personal guarantees.
Agricultural loans are subject to underwriting standards and processes similar to
commercial loans. These agricultural loans are based primarily on the identified cash flows of the borrower and secondarily on the underlying collateral provided by the borrower. Most agricultural loans are secured by the agriculture
related assets being financed, such as farm land, cattle or equipment, and include personal guarantees.
Real estate loans are also subject to
underwriting standards and processes similar to commercial and agricultural loans. These loans are underwritten primarily based on projected cash flows and, secondarily, as loans secured by real estate. The repayment of real estate loans is
generally largely dependent on the successful operation of the property securing the loans or the business conducted on the property securing the loan. Real estate loans may be more adversely affected by conditions in the real estate markets or in
the general economy. The properties securing the Companys 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 Companys risk.
Consumer loan underwriting
utilizes methodical credit standards and analysis to supplement the Companys underwriting policies and procedures. The Companys 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 Companys risk.
The allowance for loan losses is an amount which represents managements best estimate of probable losses that are inherent in the Companys 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). Managements 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 Companys 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 downturn in the economy and
employment could result in increased levels of non-performing assets and charge-offs, increased loan provisions and reductions in income. Additionally, bank regulatory agencies periodically review our allowance for loan losses and methodology
and could require, in accordance with generally accepted accounting principles, additional provisions to the allowance for loan losses based on their judgment of information available to them at the time of their examination as well as changes to
our methodology.
15
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 borrowers financial condition is such that collection of interest is doubtful. Except consumer loans, generally all loans past due greater than 90 days, based on
contractual terms, are placed on non-accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured. Consumer loans are generally charged-off
when a loan becomes past due 90 days. For other loans in the portfolio, facts and circumstances are evaluated in making charge-off decisions.
Loans are
considered impaired when, based on current information and events, management determines that it is probable we will be unable to collect all amounts due in accordance with the loan agreement, including scheduled principal and interest
payments. If a loan is impaired, a specific valuation allowance is allocated, if necessary. Interest payments on impaired loans are typically applied to principal unless collectability of the principal amount is reasonably assured, in which
case interest is recognized on a cash basis. Impaired loans, or portions thereof, are charged off when deemed uncollectable.
The Companys
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 loans observable market price. At March 31, 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 Companys troubled debt restructurings, the Company performs a
periodic, well-documented credit evaluation of the borrowers 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 March 31, 2016 and 2015, and December 31, 2015, substantially all of the Companys troubled debt restructured loans are included in the
non-accrual totals.
The Company originates certain mortgage loans for sale in the secondary market. Accordingly, these loans are classified as
held-for-sale and are carried at the lower of cost or fair value on an aggregate basis. The mortgage loan sales contracts contain indemnification clauses should the loans default, generally in the first three to six months, or if documentation is
determined not to be in compliance with regulations. The Companys 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 each loan.
16
Purchased credit impaired loans are those loans that showed evidence of deterioration of credit quality since
origination and for which it is probable, at acquisition, that the Company will be unable to collect all amounts contractually owed. Their acquisition fair value, which includes a credit component at the acquisition date, was based on the estimate
of cash flows, both principal and interest, expected to be collected or estimated collateral values if cash flows are not estimable, discounted at prevailing market rates of interest. The difference between the discounted cash flows expected at
acquisition and the investment in the loan is recognized as interest income on a level-yield method over the life of the loan, unless management was unable to reasonably forecast cash flows in which case the loans were placed on nonaccrual.
Contractually required payments for interest and principal that exceed the cash flows expected at acquisition are not recognized as a yield adjustment. Increases in expected cash flows subsequent to the initial investment are recognized
prospectively through adjustment of the yield on the loan over its remaining life. Decreases in expected cash flows subsequent to acquisition are recognized as impairment. Valuation allowances on these impaired loans reflect only losses
incurred after the acquisition. The carrying amount of purchased credit impaired loans at March 31, 2016 and 2015, and December 31, 2015, was $1,970,000, $2,037,000 and $2,178,000, respectively, compared to a contractual balance of $2,701,000,
$2,817,000, 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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2015
|
|
Commercial
|
|
$
|
669,525
|
|
|
$
|
651,723
|
|
|
$
|
696,163
|
|
Agricultural
|
|
|
87,490
|
|
|
|
90,610
|
|
|
|
102,351
|
|
Real estate
|
|
|
2,150,132
|
|
|
|
1,826,579
|
|
|
|
2,136,233
|
|
Consumer
|
|
|
375,052
|
|
|
|
359,564
|
|
|
|
382,303
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans held-for-investment
|
|
$
|
3,282,199
|
|
|
$
|
2,928,476
|
|
|
$
|
3,317,050
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans held for sale totaled $17,008,000, $10,231,000 and $33,543,000 at March 31, 2016 and 2015, and December 31, 2015,
respectively, which are valued using the lower of cost or market method.
The Companys non-accrual loans, loans still accruing and past due 90 days
or more and restructured loans are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2015
|
|
Non-accrual loans*
|
|
$
|
27,175
|
|
|
$
|
18,935
|
|
|
$
|
28,601
|
|
Loans still accruing and past due 90 days or more
|
|
|
59
|
|
|
|
184
|
|
|
|
341
|
|
Troubled debt restructured loans**
|
|
|
973
|
|
|
|
177
|
|
|
|
199
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
28,207
|
|
|
$
|
19,296
|
|
|
$
|
29,141
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*
|
Includes $1,970,000, $2,037,000 and $2,178,000 of purchased credit impaired loans as of March 31, 2016 and 2015, and December 31, 2015, respectively.
|
**
|
Troubled debt restructured loans of $8,527,000, $8,431,000 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 March 31, 2016 and 2015, and December 31, 2015, respectively.
|
17
The Companys recorded investment in impaired loans and the related valuation allowance are as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2016
|
|
|
March 31, 2015
|
|
|
December 31, 2015
|
|
Recorded
Investment
|
|
|
Valuation
Allowance
|
|
|
Recorded
Investment
|
|
|
Valuation
Allowance
|
|
|
Recorded
Investment
|
|
|
Valuation
Allowance
|
|
$
|
27,175
|
|
|
$
|
5,262
|
|
|
$
|
18,935
|
|
|
$
|
3,860
|
|
|
$
|
28,601
|
|
|
$
|
5,071
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The average recorded investment in impaired loans for the three months ended March 31, 2016 and 2015, and the year ended
December 31, 2015, was approximately $26,412,000, $20,263,000 and $21,735,000, respectively. The Company had $29,028,000, $20,377,000 and $29,768,000 in non-accrual, past due 90 days or more and still accruing, restructured loans and foreclosed
assets at March 31, 2016 and 2015, and December 31, 2015, respectively. Non-accrual loans at March 31, 2016 and 2015, and December 31, 2015, consisted of the following by class of financing receivables (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2015
|
|
Commercial
|
|
$
|
7,392
|
|
|
$
|
3,098
|
|
|
$
|
8,761
|
|
Agricultural
|
|
|
19
|
|
|
|
197
|
|
|
|
97
|
|
Real estate
|
|
|
18,473
|
|
|
|
14,983
|
|
|
|
18,766
|
|
Consumer
|
|
|
1,291
|
|
|
|
657
|
|
|
|
977
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
27,175
|
|
|
$
|
18,935
|
|
|
$
|
28,601
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
No significant additional funds are committed to be advanced in connection with impaired loans as of March 31, 2016.
The Companys impaired loans and related allowance as of March 31, 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2016
|
|
Unpaid
Contractual
Principal
Balance
|
|
|
Recorded
Investment
With No
Allowance*
|
|
|
Recorded
Investment
With
Allowance
|
|
|
Total
Recorded
Investment
|
|
|
Related
Allowance
|
|
|
Average
Recorded
Investment
|
|
Commercial
|
|
$
|
8,309
|
|
|
$
|
1,227
|
|
|
$
|
6,165
|
|
|
$
|
7,392
|
|
|
$
|
2,165
|
|
|
$
|
6,812
|
|
Agricultural
|
|
|
19
|
|
|
|
|
|
|
|
19
|
|
|
|
19
|
|
|
|
7
|
|
|
|
11
|
|
Real Estate
|
|
|
23,740
|
|
|
|
5,746
|
|
|
|
12,727
|
|
|
|
18,473
|
|
|
|
2,658
|
|
|
|
18,504
|
|
Consumer
|
|
|
1,478
|
|
|
|
210
|
|
|
|
1,081
|
|
|
|
1,291
|
|
|
|
432
|
|
|
|
1,085
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
33,546
|
|
|
$
|
7,183
|
|
|
$
|
19,992
|
|
|
$
|
27,175
|
|
|
$
|
5,262
|
|
|
$
|
26,412
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*
|
Includes $1,970,000 of purchased credit impaired loans.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2015
|
|
Unpaid
Contractual
Principal
Balance
|
|
|
Recorded
Investment
With No
Allowance*
|
|
|
Recorded
Investment
With
Allowance
|
|
|
Total
Recorded
Investment
|
|
|
Related
Allowance
|
|
|
Average
Recorded
Investment
|
|
Commercial
|
|
$
|
3,696
|
|
|
$
|
373
|
|
|
$
|
2,725
|
|
|
$
|
3,098
|
|
|
$
|
1,079
|
|
|
$
|
3,200
|
|
Agricultural
|
|
|
213
|
|
|
|
|
|
|
|
197
|
|
|
|
197
|
|
|
|
55
|
|
|
|
207
|
|
Real Estate
|
|
|
20,865
|
|
|
|
4,519
|
|
|
|
10,464
|
|
|
|
14,983
|
|
|
|
2,617
|
|
|
|
16,179
|
|
Consumer
|
|
|
870
|
|
|
|
406
|
|
|
|
251
|
|
|
|
657
|
|
|
|
109
|
|
|
|
677
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
25,644
|
|
|
$
|
5,298
|
|
|
$
|
13,637
|
|
|
$
|
18,935
|
|
|
$
|
3,860
|
|
|
$
|
20,263
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*
|
Includes $2,037,000 of purchased credit impaired loans.
|
18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
|
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 periods ended March 31, 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 Companys 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 Companys internal ratings of its loans held-for-investment by class of financing receivables and portfolio segments, which
are the same, at March 31, 2016 and 2015, and December 31, 2015 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2016
|
|
Pass
|
|
|
Special
Mention
|
|
|
Substandard
|
|
|
Doubtful
|
|
|
Total
|
|
Commercial
|
|
$
|
611,466
|
|
|
$
|
7,378
|
|
|
$
|
50,681
|
|
|
$
|
|
|
|
$
|
669,525
|
|
Agricultural
|
|
|
84,555
|
|
|
|
350
|
|
|
|
2,585
|
|
|
|
|
|
|
|
87,490
|
|
Real Estate
|
|
|
2,072,210
|
|
|
|
23,359
|
|
|
|
54,563
|
|
|
|
|
|
|
|
2,150,132
|
|
Consumer
|
|
|
371,826
|
|
|
|
399
|
|
|
|
2,827
|
|
|
|
|
|
|
|
375,052
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
3,140,057
|
|
|
$
|
31,486
|
|
|
$
|
110,656
|
|
|
$
|
|
|
|
$
|
3,282,199
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2015
|
|
Pass
|
|
|
Special
Mention
|
|
|
Substandard
|
|
|
Doubtful
|
|
|
Total
|
|
Commercial
|
|
$
|
631,100
|
|
|
$
|
9,384
|
|
|
$
|
11,239
|
|
|
$
|
|
|
|
$
|
651,723
|
|
Agricultural
|
|
|
90,030
|
|
|
|
164
|
|
|
|
416
|
|
|
|
|
|
|
|
90,610
|
|
Real Estate
|
|
|
1,771,889
|
|
|
|
20,809
|
|
|
|
33,782
|
|
|
|
99
|
|
|
|
1,826,579
|
|
Consumer
|
|
|
357,709
|
|
|
|
517
|
|
|
|
1,338
|
|
|
|
|
|
|
|
359,564
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,850,728
|
|
|
$
|
30,874
|
|
|
$
|
46,775
|
|
|
$
|
99
|
|
|
$
|
2,928,476
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 March 31, 2016 and 2015, and December 31, 2015, the Companys past due loans are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 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
|
|
$
|
3,338
|
|
|
$
|
1,228
|
|
|
$
|
1,498
|
|
|
$
|
6,064
|
|
|
$
|
663,461
|
|
|
$
|
669,525
|
|
|
$
|
42
|
|
Agricultural
|
|
|
320
|
|
|
|
|
|
|
|
|
|
|
|
320
|
|
|
|
87,170
|
|
|
|
87,490
|
|
|
|
|
|
Real Estate
|
|
|
10,979
|
|
|
|
1,560
|
|
|
|
3,684
|
|
|
|
16,223
|
|
|
|
2,133,909
|
|
|
|
2,150,132
|
|
|
|
|
|
Consumer
|
|
|
1,677
|
|
|
|
336
|
|
|
|
162
|
|
|
|
2,175
|
|
|
|
372,877
|
|
|
|
375,052
|
|
|
|
17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
16,314
|
|
|
$
|
3,124
|
|
|
$
|
5,344
|
|
|
$
|
24,782
|
|
|
$
|
3,257,417
|
|
|
$
|
3,282,199
|
|
|
$
|
59
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 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
|
|
$
|
4,514
|
|
|
$
|
283
|
|
|
$
|
208
|
|
|
$
|
5,005
|
|
|
$
|
646,718
|
|
|
$
|
651,723
|
|
|
$
|
|
|
Agricultural
|
|
|
485
|
|
|
|
35
|
|
|
|
|
|
|
|
520
|
|
|
|
90,090
|
|
|
|
90,610
|
|
|
|
|
|
Real Estate
|
|
|
13,077
|
|
|
|
1,116
|
|
|
|
1,368
|
|
|
|
15,561
|
|
|
|
1,811,018
|
|
|
|
1,826,579
|
|
|
|
144
|
|
Consumer
|
|
|
1,679
|
|
|
|
390
|
|
|
|
218
|
|
|
|
2,287
|
|
|
|
357,277
|
|
|
|
359,564
|
|
|
|
40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
19,755
|
|
|
$
|
1,824
|
|
|
$
|
1,794
|
|
|
$
|
23,373
|
|
|
$
|
2,905,103
|
|
|
$
|
2,928,476
|
|
|
$
|
184
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
|
20
The following table details the allowance for loan losses at March 31, 2016 and 2015, and December 31, 2015,
by portfolio segment (in thousands). There were no allowances for purchased credit impaired loans at March 31, 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2016
|
|
Commercial
|
|
|
Agricultural
|
|
|
Real Estate
|
|
|
Consumer
|
|
|
Total
|
|
Loans individually evaluated for impairment
|
|
$
|
2,165
|
|
|
$
|
7
|
|
|
$
|
2,658
|
|
|
$
|
432
|
|
|
$
|
5,262
|
|
Loans collectively evaluated for impairment
|
|
|
10,740
|
|
|
|
1,248
|
|
|
|
23,441
|
|
|
|
3,381
|
|
|
|
38,810
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
12,905
|
|
|
$
|
1,255
|
|
|
$
|
26,099
|
|
|
$
|
3,813
|
|
|
$
|
44,072
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2015
|
|
Commercial
|
|
|
Agricultural
|
|
|
Real Estate
|
|
|
Consumer
|
|
|
Total
|
|
Loans individually evaluated for impairment
|
|
$
|
1,079
|
|
|
$
|
55
|
|
|
$
|
2,617
|
|
|
$
|
109
|
|
|
$
|
3,860
|
|
Loans collectively evaluated for impairment
|
|
|
9,296
|
|
|
|
418
|
|
|
|
22,622
|
|
|
|
1,632
|
|
|
|
33,968
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
10,375
|
|
|
$
|
473
|
|
|
$
|
25,239
|
|
|
$
|
1,741
|
|
|
$
|
37,828
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 months ended March 31, 2016 and 2015, are summarized as follows by
portfolio segment (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
March 31, 2016
|
|
Commercial
|
|
|
Agricultural
|
|
|
Real Estate
|
|
|
Consumer
|
|
|
Total
|
|
Beginning balance
|
|
$
|
12,644
|
|
|
$
|
1,191
|
|
|
$
|
24,375
|
|
|
$
|
3,667
|
|
|
$
|
41,877
|
|
Provision for loan losses
|
|
|
847
|
|
|
|
196
|
|
|
|
832
|
|
|
|
453
|
|
|
|
2,328
|
|
Recoveries
|
|
|
286
|
|
|
|
11
|
|
|
|
1,227
|
|
|
|
125
|
|
|
|
1,649
|
|
Charge-offs
|
|
|
(872
|
)
|
|
|
(143
|
)
|
|
|
(335
|
)
|
|
|
(432
|
)
|
|
|
(1,782
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
12,905
|
|
|
$
|
1,255
|
|
|
$
|
26,099
|
|
|
$
|
3,813
|
|
|
$
|
44,072
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
March 31, 2015
|
|
Commercial
|
|
|
Agricultural
|
|
|
Real Estate
|
|
|
Consumer
|
|
|
Total
|
|
Beginning balance
|
|
$
|
7,990
|
|
|
$
|
527
|
|
|
$
|
26,657
|
|
|
$
|
1,650
|
|
|
$
|
36,824
|
|
Provision for loan losses
|
|
|
2,465
|
|
|
|
(32
|
)
|
|
|
(1,467
|
)
|
|
|
324
|
|
|
|
1,290
|
|
Recoveries
|
|
|
80
|
|
|
|
2
|
|
|
|
71
|
|
|
|
71
|
|
|
|
224
|
|
Charge-offs
|
|
|
(160
|
)
|
|
|
(24
|
)
|
|
|
(22
|
)
|
|
|
(304
|
)
|
|
|
(510
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
10,375
|
|
|
$
|
473
|
|
|
$
|
25,239
|
|
|
$
|
1,741
|
|
|
$
|
37,828
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21
The Companys recorded investment in loans as of March 31, 2016 and 2015, and December 31, 2015 related to
the balance in the allowance for loan losses on the basis of the Companys impairment methodology was as follows (in thousands). Purchased credit impaired loans of $1,970,000, $2,037,000 and $2,178,000 at March 31, 2016 and 2015, and December
31, 2015, respectively, are included in loans individually evaluated for impairment.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2016
|
|
Commercial
|
|
|
Agricultural
|
|
|
Real Estate
|
|
|
Consumer
|
|
|
Total
|
|
Loans individually evaluated for impairment
|
|
$
|
7,392
|
|
|
$
|
19
|
|
|
$
|
18,473
|
|
|
$
|
1,291
|
|
|
$
|
27,175
|
|
Loans collectively evaluated for impairment
|
|
|
662,133
|
|
|
|
87,471
|
|
|
|
2,131,659
|
|
|
|
373,761
|
|
|
|
3,255,024
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
669,525
|
|
|
$
|
87,490
|
|
|
$
|
2,150,132
|
|
|
$
|
375,052
|
|
|
$
|
3,282,199
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2015
|
|
Commercial
|
|
|
Agricultural
|
|
|
Real Estate
|
|
|
Consumer
|
|
|
Total
|
|
Loans individually evaluated for impairment
|
|
$
|
3,098
|
|
|
$
|
197
|
|
|
$
|
14,983
|
|
|
$
|
657
|
|
|
$
|
18,935
|
|
Loans collectively evaluated for impairment
|
|
|
648,625
|
|
|
|
90,413
|
|
|
|
1,811,596
|
|
|
|
358,907
|
|
|
|
2,909,541
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
651,723
|
|
|
$
|
90,610
|
|
|
$
|
1,826,579
|
|
|
$
|
359,564
|
|
|
$
|
2,928,476
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22
The Companys loans that were modified in the three months ended March 31, 2016 and 2015 and considered
troubled debt restructurings are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2016
|
|
|
Three Months Ended March 31, 2015
|
|
|
|
Number
|
|
|
Pre-
Modification
Recorded
Investment
|
|
|
Post-
Modification
Recorded
Investment
|
|
|
Number
|
|
|
Pre-
Modification
Recorded
Investment
|
|
|
Post-
Modification
Recorded
Investment
|
|
Commercial
|
|
|
7
|
|
|
$
|
2,640
|
|
|
$
|
2,640
|
|
|
|
3
|
|
|
$
|
128
|
|
|
$
|
128
|
|
Agricultural
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real Estate
|
|
|
2
|
|
|
|
463
|
|
|
|
463
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer
|
|
|
2
|
|
|
|
20
|
|
|
|
20
|
|
|
|
1
|
|
|
|
24
|
|
|
|
24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
11
|
|
|
$
|
3,123
|
|
|
$
|
3,123
|
|
|
|
4
|
|
|
$
|
152
|
|
|
$
|
152
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The balances below provide information as to how the loans were modified as troubled debt restructured loans during the three
months ended March 31, 2016 and 2015 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2016
|
|
|
Three Months Ended March 31, 2015
|
|
|
|
Adjusted
Interest
Rate
|
|
|
Extended
Maturity
|
|
|
Combined
Rate and
Maturity
|
|
|
Adjusted
Interest
Rate
|
|
|
Extended
Maturity
|
|
|
Combined
Rate and
Maturity
|
|
Commercial
|
|
$
|
|
|
|
$
|
2,237
|
|
|
$
|
403
|
|
|
$
|
|
|
|
$
|
128
|
|
|
$
|
|
|
Agricultural
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real Estate
|
|
|
|
|
|
|
113
|
|
|
|
350
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer
|
|
|
|
|
|
|
4
|
|
|
|
16
|
|
|
|
|
|
|
|
|
|
|
|
24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
|
|
|
$
|
2,354
|
|
|
$
|
769
|
|
|
$
|
|
|
|
$
|
128
|
|
|
$
|
24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the three months ended March 31, 2015, one loan was 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 March 31, 2016. 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 March 31, 2015
|
|
|
|
Number
|
|
|
Balance
|
|
Commercial
|
|
|
1
|
|
|
$
|
111
|
|
Agriculture
|
|
|
|
|
|
|
|
|
Real Estate
|
|
|
|
|
|
|
|
|
Consumer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
1
|
|
|
$
|
111
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 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 March 31, 2016, $2,032,327,000 in loans held by our bank subsidiary were subject to blanket liens as
security for this line of credit. At March 31, 2016, $175,000,000 were outstanding under this line of credit.
23
Note 6 Borrowings
Borrowings at March 31, 2016 and 2015, and December 31, 2015 consisted of the following (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2015
|
|
Securities sold under agreements with customers to repurchase
|
|
$
|
342,540
|
|
|
$
|
366,140
|
|
|
$
|
310,330
|
|
Federal funds purchased
|
|
|
7,800
|
|
|
|
19,775
|
|
|
|
6,325
|
|
Advances from Federal Home Loan Bank of Dallas
|
|
|
175,000
|
|
|
|
15,983
|
|
|
|
299,020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
525,340
|
|
|
$
|
401,898
|
|
|
$
|
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
$7,739,000 for the first quarter of 2016 as compared to $7,766,000 for the same period in 2015. The Companys effective tax rates on pretax income were 23.15% and 24.45% for the first quarters of 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 March 31, 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 $180,000 for the three-month periods ended March 31, 2016
and 2015, respectively.
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 is being expensed over the period from grant date to April 26, 2016, the next scheduled annual
shareholders meeting at which the directors current term will expire. 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 additional disclosure requirements under authoritative accounting guidance have been omitted due to immateriality.
Note 9 - Pension
Plan
The Companys 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 Companys employees at the time. The benefits for each employee were based on
years of service and a percentage of the employees qualifying compensation during the final years of employment. The Companys funding policy was and is to contribute annually the amount necessary to satisfy the Internal
24
Revenue Services 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 Services funding standards to develop a plan for funding in future years. The Company made a contribution totaling $500,000 in 2015 and has to date made no contributions in 2016.
Net periodic benefit costs totaling $82,000 and $75,000 were recorded for the three months ended March 31, 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 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 entitys 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 entitys own assumptions that market participants would use in pricing the assets or liabilities.
|
25
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 Companys 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 securitys terms and conditions,
among other items.
There were no transfers between Level 2 and Level 3 during the three months ended March 31, 2016 and 2015, and the year ended December
31, 2015.
The following table summarizes financial assets and financial liabilities measured at fair value on a recurring basis as of March 31, 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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1
Inputs
|
|
|
Level 2
Inputs
|
|
|
Level 3
Inputs
|
|
|
Total Fair
Value
|
|
Available-for-sale investment securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury securities
|
|
$
|
10,829
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
10,829
|
|
Obligations of U. S. government sponsored-enterprises and agencies
|
|
|
|
|
|
|
132,545
|
|
|
|
|
|
|
|
132,545
|
|
Obligations of states and political subdivisions
|
|
|
|
|
|
|
1,471,034
|
|
|
|
|
|
|
|
1,471,034
|
|
Corporate bonds
|
|
|
|
|
|
|
66,136
|
|
|
|
|
|
|
|
66,136
|
|
Residential mortgage-backed securities
|
|
|
|
|
|
|
809,726
|
|
|
|
|
|
|
|
809,726
|
|
Commercial mortgage-backed securities
|
|
|
|
|
|
|
268,173
|
|
|
|
|
|
|
|
268,173
|
|
Other securities
|
|
|
4,596
|
|
|
|
|
|
|
|
|
|
|
|
4,596
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
15,425
|
|
|
$
|
2,747,614
|
|
|
$
|
|
|
|
$
|
2,763,039
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1
Inputs
|
|
|
Level 2
Inputs
|
|
|
Level 3
Inputs
|
|
|
Total Fair
Value
|
|
Available-for-sale investment securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury securities
|
|
$
|
10,983
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
10,983
|
|
Obligations of U. S. government sponsored-enterprises and agencies
|
|
|
|
|
|
|
175,117
|
|
|
|
|
|
|
|
175,117
|
|
Obligations of states and political subdivisions
|
|
|
|
|
|
|
1,303,492
|
|
|
|
|
|
|
|
1,303,492
|
|
Corporate bonds
|
|
|
|
|
|
|
93,158
|
|
|
|
|
|
|
|
93,158
|
|
Residential mortgage-backed securities
|
|
|
|
|
|
|
920,366
|
|
|
|
|
|
|
|
920,366
|
|
Commercial mortgage-backed securities
|
|
|
|
|
|
|
181,239
|
|
|
|
|
|
|
|
181,239
|
|
Other securities
|
|
|
4,975
|
|
|
|
|
|
|
|
|
|
|
|
4,975
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
15,958
|
|
|
$
|
2,673,372
|
|
|
$
|
|
|
|
$
|
2,689,330
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 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 March 31, 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 March 31, 2016, impaired loans with a carrying value of $27,175,000 were
reduced by specific valuation reserves totaling $5,262,000 resulting in a net fair value of $21,913,000.
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 March 31, 2016, the Companys 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
27
ended March 31, 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
March 31,
|
|
|
|
2016
|
|
|
2015
|
|
Carrying value of other real estate owned prior to re-measurement
|
|
$
|
|
|
|
$
|
10
|
|
Write-downs included in gain (loss) on sale of other real estate owned
|
|
|
|
|
|
|
(10
|
)
|
|
|
|
|
|
|
|
|
|
Fair value
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
At March 31, 2016 and 2015, and December 31, 2015, other real estate owned totaled $743,000, $863,000, and $153,000,
respectively.
The Company is required under current authoritative accounting guidance to disclose the estimated fair value of their financial instrument
assets and liabilities including those subject to the requirements discussed above. For the Company, as for most financial institutions, substantially all of its assets and liabilities are considered financial instruments. Many of the Companys
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 Companys 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.
28
The estimated fair values and carrying values of all financial instruments under current authoritative guidance
at March 31, 2016 and 2015, and December 31, 2015, were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
March 31,
|
|
|
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
|
|
$
|
139,995
|
|
|
$
|
139,995
|
|
|
$
|
142,233
|
|
|
$
|
142,233
|
|
|
$
|
179,140
|
|
|
$
|
179,140
|
|
|
Level 1
|
|
|
|
|
|
|
|
|
Federal funds sold
|
|
|
2,660
|
|
|
|
2,660
|
|
|
|
5,460
|
|
|
|
5,460
|
|
|
|
3,810
|
|
|
|
3,810
|
|
|
Level 1
|
|
|
|
|
|
|
|
|
Interest-bearing deposits in banks
|
|
|
22,993
|
|
|
|
22,993
|
|
|
|
18,275
|
|
|
|
18,275
|
|
|
|
89,936
|
|
|
|
89,936
|
|
|
Level 1
|
|
|
|
|
|
|
|
|
Interest-bearing time deposits in banks
|
|
|
2,427
|
|
|
|
2,430
|
|
|
|
9,170
|
|
|
|
9,185
|
|
|
|
3,495
|
|
|
|
3,500
|
|
|
Level 2
|
|
|
|
|
|
|
|
|
Available-for-sale Securities
|
|
|
2,763,039
|
|
|
|
2,763,039
|
|
|
|
2,689,330
|
|
|
|
2,689,330
|
|
|
|
2,733,899
|
|
|
|
2,733,899
|
|
|
Levels 1 and 2
|
|
|
|
|
|
|
|
|
Held-to-maturity securities
|
|
|
146
|
|
|
|
150
|
|
|
|
310
|
|
|
|
317
|
|
|
|
278
|
|
|
|
283
|
|
|
Level 2
|
|
|
|
|
|
|
|
|
Loans
|
|
|
3,255,135
|
|
|
|
3,260,544
|
|
|
|
2,900,879
|
|
|
|
2,907,114
|
|
|
|
3,308,716
|
|
|
|
3,316,243
|
|
|
Level 3
|
|
|
|
|
|
|
|
|
Accrued interest receivable
|
|
|
26,166
|
|
|
|
26,166
|
|
|
|
25,238
|
|
|
|
25,238
|
|
|
|
34,697
|
|
|
|
34,697
|
|
|
Level 2
|
|
|
|
|
|
|
|
|
Deposits with stated maturities
|
|
|
589,898
|
|
|
|
591,675
|
|
|
|
623,108
|
|
|
|
624,926
|
|
|
|
620,852
|
|
|
|
622,572
|
|
|
Level 2
|
|
|
|
|
|
|
|
|
Deposits with no stated maturities
|
|
|
4,473,909
|
|
|
|
4,473,909
|
|
|
|
4,213,899
|
|
|
|
4,213,899
|
|
|
|
4,569,317
|
|
|
|
4,569,317
|
|
|
Level 1
|
|
|
|
|
|
|
|
|
Short-term borrowings
|
|
|
525,340
|
|
|
|
525,340
|
|
|
|
401,898
|
|
|
|
401,898
|
|
|
|
615,675
|
|
|
|
615,675
|
|
|
Level 2
|
|
|
|
|
|
|
|
|
Accrued interest payable
|
|
|
254
|
|
|
|
254
|
|
|
|
235
|
|
|
|
235
|
|
|
|
240
|
|
|
|
240
|
|
|
Level 2
|
29
Note 11 - Recently Issued Authoritative Accounting Guidance
Accounting Standards Update (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 Companys financial statements.
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 standards core principle is that a company will recognize revenue when it transfers
promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. In doing so, companies will need to use more judgment and make more estimates
than under existing guidance. These may include identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate
performance obligation. The new standard will be effective in the first quarter of 2018. The Company is continuing to evaluate the potential impact to the Companys 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 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 Companys 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 Companys 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 periods 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 Companys financial statements.
30
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 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 Companys financial statements.
ASU
2015-05, Intangibles Goodwill and Other Internal-Use Software Customers 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
Companys 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 2016-02, Leases.
ASU 2016-02 will amend current lease accounting to require lessees to recognize (i) a lease liability, which is a
lessees 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 lessees 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 Companys 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. On July 31, 2015, the transaction was completed. Pursuant to the agreement, we issued 1,755,374 shares of the Companys common stock in exchange for all of the outstanding shares of FBC Bancshares, Inc. At closing,
FBC Bancshares, Inc. was merged into the Company and First Bank, N.A., Conroe, Texas, was merged into First Financial Bank, National Association, Abilene, Texas, a wholly owned subsidiary of the Company. The primary purpose of the acquisition was to
expand the Companys market share along Interstate Highway 45 in southern Texas, north of Houston. Factors that contributed to a purchase price resulting in goodwill include First Bank, N.A.s historic record of earnings, strong local
economic environment and opportunity for growth. The results of operations from this acquisition are included in the consolidated earnings of the Company commencing August 1, 2015.
31
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):
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Fair value of consideration paid:
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Common stock issued (1,755,374 shares)
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$
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59,648
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Fair value of identifiable assets acquired:
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Cash and cash equivalents
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65,197
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Securities available-for-sale
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42,903
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Loans
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248,380
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Identifiable intangible assets
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2,343
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Other assets
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15,262
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Total identifiable assets acquired
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374,085
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Fair value of liabilities assumed:
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Deposits
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343,583
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Subordinated debt
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13,125
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Other liabilities
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1,651
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Total liabilities assumed
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358,359
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Fair value of net identifiable assets acquired
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15,726
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Goodwill resulting from acquisition
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$
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43,922
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Goodwill recorded in the acquisition was accounted for in accordance with the authoritative business combination
guidance. Accordingly, goodwill will not be amortized, but will be tested for impairment annually. The goodwill recorded is not deductible for federal income tax purposes.
The subordinated debt of $13,125,000 was paid off August 3, 2015, subsequent to closing.
The fair value of total loans acquired was $248,380,000 at acquisition compared to contractual amounts of $252,458,000. The fair value of purchased
credit impaired loans at acquisition was $1,398,000 compared to contractual amounts of $1,704,000. Additional purchased credit impaired loan disclosures were omitted due to immateriality. All other acquired loans were considered performing
loans.
First Bank, N.A. had branches in Conroe, Magnolia, Tomball, The Woodlands, Cut and Shoot and Huntsville, all located north of Houston, Texas. On
February 26, 2016, the Company closed First Banks Huntsville location and merged the branch with the Companys 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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