0001564618-15-000076.txt : 20150731 0001564618-15-000076.hdr.sgml : 20150731 20150731145849 ACCESSION NUMBER: 0001564618-15-000076 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 12 CONFORMED PERIOD OF REPORT: 20150630 FILED AS OF DATE: 20150731 DATE AS OF CHANGE: 20150731 FILER: COMPANY DATA: COMPANY CONFORMED NAME: Independent Bank Group, Inc. CENTRAL INDEX KEY: 0001564618 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 134219346 STATE OF INCORPORATION: TX FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-35854 FILM NUMBER: 151019113 BUSINESS ADDRESS: STREET 1: 1600 REDBUD BOULEVARD STREET 2: SUITE 400 CITY: MCKINNEY STATE: TX ZIP: 75069 BUSINESS PHONE: (972) 562-9004 MAIL ADDRESS: STREET 1: 1600 REDBUD BOULEVARD STREET 2: SUITE 400 CITY: MCKINNEY STATE: TX ZIP: 75069 FORMER COMPANY: FORMER CONFORMED NAME: Independent Bank Group Inc DATE OF NAME CHANGE: 20121213 10-Q 1 a2015q2.htm 10-Q 2015 Q2


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549   

FORM 10-Q
(Mark One)
ý
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
For the quarterly period ended June 30, 2015.
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 001-35854

Independent Bank Group, Inc.
(Exact name of registrant as specified in its charter)   
Texas
   
13-4219346
(State or other jurisdiction of incorporation or organization)
   
(I.R.S. Employer Identification No.)
   
   
   
1600 Redbud Boulevard, Suite 400
McKinney, Texas
   
75069-3257
(Address of principal executive offices)
   
(Zip Code)
(972) 562-9004
(Registrant’s telephone number, including area code)
Not applicable
(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 such shorter periods that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of 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 ý No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. Check One:
   
Large accelerated filer
   
¨
      
Accelerated filer
   
ý
   
   
   
   
Non-accelerated filer
   
¨
      
Smaller reporting company
   
¨
Indicate by a check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No ý
Applicable Only to Corporate Issuers
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practical date.
Common Stock, Par Value $0.01 Per Share – 17,108,394 shares as of July 30, 2015.





INDEPENDENT BANK GROUP, INC. AND SUBSIDIARIES
Form 10-Q
June 30, 2015
   
PART I.
 
 
   
   
   
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
   
   
 
 
Item 2.
 
   
   
   
 
Item 3.
 
   
   
   
 
Item 4.
 
   
   
   
 
PART II.
 
   
   
   
 
Item 1.
   
   
   
   
 
Item 1a.
   
   
   
   
 
Item 2
   
   
   
   
 
Item 3.
   
   
   
   
 
Item 4.
   
   
   
 
 
Item 5.
   
   
   
   
 
Item 6.
   
   
   
   
 
   
 
 
   


***






Independent Bank Group, Inc. and Subsidiaries

Consolidated Balance Sheets
June 30, 2015 and December 31, 2014 (unaudited)
(Dollars in thousands, except share information)
   
 
June 30,
 
December 31,
Assets
 
2015
 
2014
   
 
   
 
   
Cash and due from banks
 
$
117,398

 
$
153,158

Interest-bearing deposits in other banks
 
306,798

 
170,889

Cash and cash equivalents
 
424,196

 
324,047

Securities available for sale (amortized cost of $178,386 and $203,277, respectively)
 
180,465

 
206,062

Loans held for sale
 
7,237

 
4,453

Loans, net of allowance for loan losses of $21,764 and $18,552, respectively
 
3,352,846

 
3,182,045

Premises and equipment, net
 
88,118

 
88,902

Other real estate owned
 
2,958

 
4,763

Federal Home Loan Bank (FHLB) of Dallas stock and other restricted stock
 
11,941

 
12,321

Bank-owned life insurance (BOLI)
 
40,322

 
39,784

Deferred tax asset
 
2,482

 
2,235

Goodwill
 
229,818

 
229,457

Core deposit intangible, net
 
11,716

 
12,455

Other assets
 
23,628

 
26,115

Total assets
 
$
4,375,727

 
$
4,132,639

 
 
 
 
 
Liabilities and Stockholders’ Equity
 
   
 
   
Deposits:
 
   
 
   
Noninterest-bearing
 
$
886,087

 
$
818,022

Interest-bearing
 
2,581,397

 
2,431,576

Total deposits
 
3,467,484

 
3,249,598

 
 
 
 
 
FHLB advances
 
194,366

 
229,405

Repurchase agreements
 
5,374

 
4,012

Other borrowings
 
68,853

 
69,410

Other borrowings, related parties
 
2,911

 
3,320

Junior subordinated debentures
 
18,147

 
18,147

Other liabilities
 
59,145

 
17,896

Total liabilities
 
3,816,280

 
3,591,788

Commitments and contingencies
 


 


Stockholders’ equity:
 
   
 
   
Series A preferred stock (23,938.35 shares issued and outsanding)
 
23,938

 
23,938

Common stock (17,108,394 and 17,032,669 shares outstanding, respectively)
 
171

 
170

Additional paid-in capital
 
478,497

 
476,609

Retained earnings
 
54,896

 
37,731

Accumulated other comprehensive income
 
1,945

 
2,403

Total stockholders’ equity
 
559,447

 
540,851

Total liabilities and stockholders’ equity
 
$
4,375,727

 
$
4,132,639

See Notes to Consolidated Financial Statements

1





Independent Bank Group, Inc. and Subsidiaries

Consolidated Statements of Income
Three and Six Months Ended June 30, 2015 and 2014 (unaudited)
(Dollars in thousands, except per share information)
   
 
Three months ended June 30,
 
Six months ended June 30,
   
 
2015
 
2014
 
2015
 
2014
Interest income:
 
 
 
 
 
   
 
   
Interest and fees on loans
 
$
41,625

 
$
33,881

 
$
81,205

 
$
58,004

Interest on taxable securities
 
551

 
777

 
1,160

 
1,476

Interest on nontaxable securities
 
449

 
367

 
863

 
624

Interest on federal funds sold and other
 
122

 
53

 
255

 
136

Total interest income
 
42,747

 
35,078

 
83,483

 
60,240

Interest expense:
 
 
 
 
 
   
 
 
Interest on deposits
 
3,018

 
2,437

 
5,727

 
4,344

Interest on FHLB advances
 
718

 
965

 
1,470

 
1,817

Interest on repurchase agreements and other borrowings
 
1,096

 
136

 
2,165

 
271

Interest on junior subordinated debentures
 
135

 
136

 
263

 
269

Total interest expense
 
4,967

 
3,674

 
9,625

 
6,701

Net interest income
 
37,780

 
31,404

 
73,858

 
53,539

Provision for loan losses
 
1,659

 
1,379

 
3,329

 
2,632

Net interest income after provision for loan losses
 
36,121

 
30,025

 
70,529

 
50,907

Noninterest income:
 
 
 
 
 
   
 
 
Service charges on deposit accounts
 
1,908

 
1,453

 
3,713

 
2,664

Mortgage fee income
 
1,429

 
967

 
2,729

 
1,697

Gain on sale of other real estate
 
49

 

 
179

 
39

Gain on sale of securities available for sale
 
90

 

 
90

 

Increase in cash surrender value of BOLI
 
268

 
260

 
538

 
409

Other
 
365

 
439

 
826

 
644

Total noninterest income
 
4,109

 
3,119

 
8,075

 
5,453

Noninterest expense:
 
 
 
 
 
   
 
 
Salaries and employee benefits
 
14,650

 
16,112

 
29,074

 
25,246

Occupancy
 
4,027

 
3,227

 
7,937

 
5,765

Data processing
 
666

 
452

 
1,354

 
948

FDIC assessment
 
493

 
516

 
1,012

 
820

Advertising and public relations
 
253

 
180

 
599

 
414

Communications
 
554

 
402

 
1,093

 
722

Net other real estate owned expenses (including taxes)
 
37

 
57

 
96

 
136

Operations of IBG Adriatica, net
 

 

 

 
23

Other real estate impairment
 
25

 

 
25

 

Core deposit intangible amortization
 
367

 
299

 
739

 
498

Professional fees
 
677

 
596

 
1,167

 
964

Acquisition expense, including legal
 
28

 
1,523

 
500

 
1,999

Other
 
2,678

 
1,979

 
5,245

 
3,884

Total noninterest expense
 
24,455

 
25,343

 
48,841

 
41,419

 
 
 
 
 
 
 
 
 
Income before taxes
 
15,775

 
7,801

 
29,763

 
14,941

Income tax expense
 
5,204

 
2,682

 
9,740

 
5,021

Net income
 
$
10,571

 
$
5,119

 
$
20,023

 
$
9,920

Basic earnings per share
 
$
0.61

 
$
0.32

 
$
1.16

 
$
0.70

Diluted earnings per share
 
$
0.61

 
$
0.32

 
$
1.16

 
$
0.69


See Notes to Consolidated Financial Statements

2





Independent Bank Group, Inc. and Subsidiaries

Consolidated Statements of Comprehensive Income
Three and Six Months Ended June 30, 2015 and 2014 (unaudited)
(Dollars in thousands)
   
 
Three Months Ended June 30,
 
Six Months Ended June 30,
   
 
2015
 
2014
 
2015
 
2014
Net income
 
$
10,571

 
$
5,119

 
$
20,023

 
$
9,920

Other comprehensive income (loss) before tax:
 
   
 
 
 
   
 
 
Change in net unrealized gains (losses) on available for sale securities during the year
 
(2,087
)
 
2,157

 
(706
)
 
4,586

Reclassification adjustment for gain on sale of securities available for sale included in net income
 
(90
)
 

 
(90
)
 

Other comprehensive income (loss) before tax
 
(2,177
)
 
2,157

 
(796
)
 
4,586

Income tax expense (benefit)
 
(821
)
 
755

 
(338
)
 
1,605

Other comprehensive income (loss), net of tax
 
(1,356
)
 
1,402

 
(458
)
 
2,981

Comprehensive income
 
$
9,215

 
$
6,521

 
$
19,565

 
$
12,901


See Notes to Consolidated Financial Statements
   

3





Independent Bank Group, Inc. and Subsidiaries

Consolidated Statements of Changes in Stockholders’ Equity
Six Months Ended June 30, 2015 and 2014 (unaudited)
(Dollars in thousands, except for par value, share and per share information)
   
   
Series A Preferred Stock
$.01 Par Value
10 million shares authorized
 
Common Stock
$.01 Par Value
100 million shares authorized
 
Additional
Paid in Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Total
   
 
Shares
 
Amount
 
Balance, December 31, 2014
$
23,938

 
17,032,669

 
$
170

 
$
476,609

 
$
37,731

 
$
2,403

 
$
540,851

Net income

 

 

 

 
20,023

 

 
20,023

Other comprehensive (loss), net of tax

 

 

 

 

 
(458
)
 
(458
)
Offering costs related to acquired bank

 

 

 
(144
)
 

 

 
(144
)
Restricted stock granted

 
87,124

 
1

 
(1
)
 

 

 

Stock based compensation expense

 

 

 
2,099

 

 

 
2,099

Income tax deficiency on restricted stock vested

 

 

 
(66
)
 

 

 
(66
)
Preferred stock dividends

 

 

 

 
(120
)
 

 
(120
)
Cash dividends ($0.16 per share)

 

 

 

 
(2,738
)
 

 
(2,738
)
Balance, June 30, 2015
$
23,938

 
17,108,394

 
$
171

 
$
478,497

 
$
54,896

 
$
1,945

 
$
559,447

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, December 31, 2013
$

 
12,330,158

 
$
123

 
$
222,116

 
$
12,663

 
$
(1,130
)
 
$
233,772

Net income

 

 

 

 
9,920

 

 
9,920

Other comprehensive income, net of tax

 

 

 

 

 
2,981

 
2,981

Series A preferred stock issued
23,938

 

 

 

 

 

 
23,938

Common stock issued for acquisition of bank

 
3,851,480

 
39

 
220,036

 

 

 
220,075

Restricted stock granted

 
189,069

 
2

 
(2
)
 

 

 

Excess tax benefit on restricted stock vested

 

 

 
1,022

 

 

 
1,022

Stock based compensation expense

 

 

 
1,170

 

 

 
1,170

Preferred stock dividends

 

 

 

 
(49
)
 

 
(49
)
Cash dividends ($0.12 per share)

 

 

 

 
(1,738
)
 

 
(1,738
)
Balance, June 30, 2014
$
23,938

 
16,370,707

 
$
164

 
$
444,342

 
$
20,796

 
$
1,851

 
$
491,091

   
See Notes to Consolidated Financial Statements 

4





Independent Bank Group, Inc. and Subsidiaries

Consolidated Statements of Cash Flows
Six Months Ended June 30, 2015 and 2014 (unaudited)
(Dollars in thousands) 
   
 
Six Months Ended June 30,
   
 
2015
 
2014
Cash flows from operating activities:
 
   
 
   
Net income
 
$
20,023

 
$
9,920

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
Depreciation expense
 
3,074

 
2,435

Amortization of core deposit intangibles
 
739

 
498

Amortization of premium on securities, net
 
772

 
942

Stock based compensation expense
 
2,099

 
1,170

FHLB stock dividends
 
(22
)
 
(17
)
Gain on sale of securities available for sale
 
(90
)
 

Gain recognized on other real estate transactions
 
(179
)
 
(39
)
Impairment of other real estate
 
25

 

Deferred tax (benefit) expense
 
194

 
(7
)
Provision for loan losses
 
3,329

 
2,632

Increase in cash surrender value of life insurance
 
(538
)
 
(409
)
Loans originated for sale
 
(113,721
)
 
(63,946
)
Proceeds from sale of loans
 
110,937

 
61,829

Net change in other assets
 
4,681

 
(1,018
)
Net change in other liabilities
 
(12,252
)
 
(5,679
)
Net cash provided by operating activities
 
19,071

 
8,311

Cash flows from investing activities:
 
   
 
   
Proceeds from maturities, calls and pay downs of securities available for sale
 
171,680

 
48,967

Proceeds from sale of securities available for sale
 
12,128

 

Purchases of securities available for sale
 
(156,599
)
 
(21,514
)
Net purchases of FHLB stock
 
402

 
2,519

Net loans originated
 
(173,971
)
 
(264,091
)
Additions to premises and equipment
 
(4,290
)
 
(1,577
)
Proceeds from sale of premises and equipment
 

 
11

Proceeds from sale of other real estate owned
 
1,437

 
1,255

Capitalized additions to other real estate
 
(10
)
 
(28
)
Cash received from acquired banks
 

 
167,771

Cash paid in connection with acquisitions
 

 
(44,010
)
Net cash used in investing activities
 
(149,223
)
 
(110,697
)
Cash flows from financing activities:
 
   
 
   
Net increase in demand deposits, NOW and savings accounts
 
175,533

 
59,416

Net increase in time deposits
 
42,353

 
157,466

Net change in FHLB advances
 
(35,039
)
 
(13,041
)
Net change in repurchase agreements
 
1,362

 
199

Proceeds from short-term borrowing
 
50,000

 

Repayments of other borrowings
 
(966
)
 

Offering costs paid in connection with acquired banks
 
(144
)
 
(442
)
Dividends paid
 
(2,798
)
 
(1,738
)
Net cash provided by financing activities
 
230,301

 
201,860

Net change in cash and cash equivalents
 
100,149

 
99,474

Cash and cash equivalents at beginning of year
 
324,047

 
93,054

Cash and cash equivalents at end of period
 
$
424,196

 
$
192,528


See Notes to Consolidated Financial Statements 

5





Independent Bank Group, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (unaudited)
(Dollars in thousands, except for share and per share information)

Note 1. Summary of Significant Accounting Policies
Nature of Operations: Independent Bank Group, Inc. (IBG) through its subsidiary, Independent Bank, a Texas state banking corporation (Bank) (collectively known as the Company), provides a full range of banking services to individual and corporate customers in the North Texas, Central Texas and Houston areas through its various branch locations in those areas. The Company is engaged in traditional community banking activities, which include commercial and retail lending, deposit gathering, investment and liquidity management activities. The Company’s primary deposit products are demand deposits, money market accounts and certificates of deposit, and its primary lending products are commercial business and real estate, real estate mortgage and consumer loans.
Basis of Presentation: The accompanying consolidated financial statements include the accounts of IBG, its wholly-owned subsidiaries, the Bank and IBG Adriatica Holdings, Inc. (Adriatica) and the Bank’s wholly-owned subsidiaries, IBG Real Estate Holdings, Inc. and IBG Aircraft Acquisition, Inc. Adriatica was formed in 2011 to acquire a mixed use residential and retail real estate development in McKinney, Texas. Adriatica became inactive during the first quarter of 2014. All material intercompany transactions and balances have been eliminated in consolidation. In addition, the Company wholly-owns IB Trust I (Trust I), IB Trust II (Trust II), IB Trust III (Trust III), IB Centex Trust I (Centex Trust I) and Community Group Statutory Trust I (CGI Trust I). The Trusts were formed to issue trust preferred securities and do not meet the criteria for consolidation.
The consolidated interim 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 Annual Report of Form10-K for the year ended December 31, 2014. The consolidated statement of condition at December 31, 2014 had been derived from the audited financial statements as of 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.
Segment Reporting: The Company has one reportable segment. The Company’s chief operating decision-maker uses consolidated results to make operating and strategic decisions.

Subsequent events: Companies are required to evaluate events and transactions that occur after the balance sheet date but before the date the financial statements are issued. They must recognize in the financial statements the effect of all events or transactions that provide additional evidence of conditions that existed at the balance sheet date, including the estimates inherent in the financial statement preparation process. Entities shall not recognize the impact of events or transactions that provide evidence about conditions that did not exist at the balance sheet date but arose after that date. The Company has evaluated subsequent events through the date of filing these financial statements with the SEC and noted no subsequent events requiring financial statement recognition or disclosure, except as disclosed in Note 12.
Earnings per share: Basic earnings per common share are net income available to common shareholders divided by the weighted average number of common shares outstanding during the period. The unvested share-based payment awards that contain rights to non forfeitable dividends are considered participating securities for this calculation. Diluted earnings per common share include the dilutive effect of additional potential common shares issuable under stock warrants. The dilutive effect of participating non vested common stock was not included as it was anti-dilutive. Proceeds from the assumed exercise of dilutive stock warrants are assumed to be used to repurchase common stock at the average market price.

6





 
Three Months Ended September 30,
 
Six Months Ended June 30,
   
2015
 
2014
 
2015
 
2014
Basic earnings per share:
   
 
   
 
 
 
 
Net income
$
10,571

 
$
5,119

 
$
20,023

 
$
9,920

Less: Preferred stock dividends
(60
)
 
(49
)
 
(120
)
 
(49
)
Net income after preferred stock dividends
10,511

 
5,070

 
19,903

 
9,871

Less:
 
 
 
 
 
 
 
Undistributed earnings allocated to participating securities
183

 
80

 
362

 
140

Dividends paid on participating securities
27

 
18

 
58

 
29

Net income available to common shareholders
$
10,301

 
$
4,972

 
$
19,483

 
$
9,702

Weighted-average basic shares outstanding
16,769,194

 
15,483,257

 
16,740,881

 
13,951,830

Basic earnings per share
$
0.61

 
$
0.32

 
$
1.16

 
$
0.70

Diluted earnings per share:
   
 
   
 
 
 
 
Net income available to common shareholders
$
10,301

 
$
4,972

 
$
19,483

 
$
9,702

Total weighted-average basic shares outstanding
16,769,194

 
15,483,257

 
16,740,881

 
13,951,830

Add dilutive stock warrants
87,023

 
101,383

 
82,852

 
101,513

Total weighted-average diluted shares outstanding
16,856,217

 
15,584,640

 
16,823,733

 
14,053,343

Diluted earnings per share
$
0.61

 
$
0.32

 
$
1.16

 
$
0.69

Anti-dilutive participating securities
24,379

 
142,125

 
43,661

 
90,203

 

7





Note 2. Statement of Cash Flows
As allowed by the accounting standards, the Company has chosen to report on a net basis its cash receipts and cash payments for time deposits accepted and repayments of those deposits, and loans made to customers and principal collections on those loans. The Company uses the indirect method to present cash flows from operating activities. Other supplemental cash flow information is presented below:
   
 
 
Six Months Ended June 30,
 
 
2015
 
2014
Cash transactions:
 
 
 
 
Interest expense paid
 
$
9,805

 
$
6,483

Income taxes paid
 
$
12,900

 
$
5,625

Noncash transactions:
 
 
 
 
Accrued preferred stock dividends
 
$
60

 
$
49

Transfers of loans to other real estate owned
 
$

 
$
120

Loans to facilitate the sale of other real estate owned
 
$
159

 
$
48

Securities purchased, not yet settled
 
$
3,000

 
$
1,746

Excess tax benefit (tax deficiency) on restricted stock vested
 
$
(66
)
 
$
1,022

Transfer of bank premises to other real estate
 
$

 
$
391

  

The supplemental schedule of noncash investing activities from Company acquisition activity is as follows:
 
 
Six Months Ended June 30,
 
 
2015
 
2014
Assets acquired
 
 
 
 
Cash and cash equivalents
 
$

 
$
167,771

Securities available for sale
 

 
75,881

Loans
 

 
858,065

Premises and equipment
 

 
9,811

Other real estate owned
 

 
1,191

Goodwill
 

 
171,722

Core deposit intangibles
 

 
8,147

Other assets
 

 
27,624

Total assets
 
$

 
$
1,320,212

Liabilities assumed:
 
 
 
 
Deposits
 
$

 
$
925,712

Repurchase agreements
 

 
3,733

FHLB advances
 

 
95,000

Other liabilities
 

 
7,302

Total liabilities
 
$

 
$
1,031,747

Cash paid to shareholders of acquired banks
 
$

 
$
44,010

Series A preferred stock exchanged in connection with acquired bank
 
$

 
$
23,938

Fair value of common stock issued to shareholders of acquired banks
 
$

 
$
220,517



8





In addition, the following measurement-period adjustments were made during the period relating to Company acquisition activity:
 
 
Six Months Ended June 30,
 
 
2015
 
2014
Assets acquired:
 
 
 
 
Loans
 
$

 
$
(328
)
Goodwill
 
361

 
749

Other real estate owned
 
(373
)
 

Core deposit intangibles
 

 
(18
)
Deferred tax asset
 
193

 
109

Other assets
 

 
10

Total assets
 
$
181

 
$
522

Liabilities assumed:
 
 
 
 
Deposits
 
$

 
$
505

Other liabilities
 
181

 
17

Total liabilities
 
$
181

 
$
522



Note 3. Securities Available for Sale
Securities available for sale have been classified in the consolidated balance sheets according to management’s intent. The amortized cost of securities and their approximate fair values at June 30, 2015 and December 31, 2014, are as follows:   
   
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
Securities Available for Sale
 
   
 
   
 
   
 
   
June 30, 2015:
 
   
 
   
 
   
 
   
U.S. treasuries
 
$
999

 
$
7

 
$

 
$
1,006

Government agency securities
 
55,374

 
304

 
(136
)
 
55,542

Obligations of state and municipal subdivisions
 
72,810

 
1,324

 
(764
)
 
73,370

Residential pass-through securities guaranteed by FNMA, GNMA, FHLMC and FHR
 
49,203

 
1,344

 

 
50,547

   
 
$
178,386

 
$
2,979

 
$
(900
)
 
$
180,465

December 31, 2014:
 
   
 
   
 
   
 
   
U.S. treasuries
 
$
999

 
$
7

 
$

 
$
1,006

Government agency securities
 
58,174

 
199

 
(350
)
 
58,023

Obligations of state and municipal subdivisions
 
75,599

 
1,837

 
(537
)
 
76,899

Corporate bonds
 
1,068

 
13

 

 
1,081

Residential pass-through securities guaranteed by FNMA, GNMA, FHLMC and FHR
 
67,437

 
1,616

 

 
69,053

   
 
$
203,277

 
$
3,672

 
$
(887
)
 
$
206,062

At June 30, 2015, three securities totaling $3,000 were purchased but did not settle until after month-end. In addition, the Company purchased a $50,000 treasury bill, which is recorded in cash and cash equivalents on the accompanying balance sheet due to the short term maturity. The payable for these purchases is reflected in other liabilities in the accompanying balance sheet.
Securities with a carrying amount of approximately $154,054 and $174,741 at June 30, 2015 and December 31, 2014, respectively, were pledged to secure public fund deposits and repurchase agreements.


9





Proceeds from sale of securities available for sale and gross gains and gross losses for the three and six months ended June 30, 2015 and 2014 were as follows:

 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2015
 
2014
 
2015
 
2014
Proceeds from sale
 
12,128

 

 
12,128

 

Gross gains
 
90

 

 
90

 

Gross losses
 

 

 

 

The amortized cost and estimated fair value of securities available for sale at June 30, 2015, by contractual maturity, are shown below. Maturities of pass-through certificates will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.   
 
 
June 30, 2015
 
 
Securities Available for Sale
 
 
Amortized
Cost
 
Fair
Value
Due in one year or less
 
$
2,475

 
$
2,476

Due from one year to five years
 
57,431

 
57,460

Due from five to ten years
 
32,263

 
32,505

Thereafter
 
37,014

 
37,477

 
 
129,183

 
129,918

Residential pass-through securities guaranteed by FNMA, GNMA, FHLMC and FHR
 
49,203

 
50,547

 
 
$
178,386

 
$
180,465


The number of securities, unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, as of June 30, 2015 and December 31, 2014, are summarized as follows:   
   
 
Less Than 12 Months
 
Greater Than 12 Months
 
Total
Description of Securities
 
Number of Securities
 
Estimated
Fair Value
 
Unrealized
Losses
 
Number of Securities
 
Estimated
Fair Value
 
Unrealized
Losses
 
Estimated
Fair Value
 
Unrealized
Losses
Securities Available for Sale
 
 
 
   
 
   
 
 
 
   
 
   
 
   
 
   
June 30, 2015
 
 
 
   
 
   
 
 
 
   
 
   
 
   
 
   
Government agency securities
 
4
 
$
6,286

 
$
(12
)
 
10
 
$
17,875

 
$
(124
)
 
$
24,161

 
$
(136
)
Obligations of state and municipal subdivisions
 
51
 
20,601

 
(227
)
 
23
 
10,455

 
(537
)
 
31,056

 
(764
)
   
 
55
 
$
26,887

 
$
(239
)
 
33
 
$
28,330

 
$
(661
)
 
$
55,217

 
$
(900
)
December 31, 2014
 
 
 
   
 
   
 
 
 
   
 
   
 
   
 
   
Government agency securities
 
6
 
$
6,396

 
$
(24
)
 
14
 
$
22,671

 
$
(326
)
 
$
29,067

 
$
(350
)
Obligations of state and municipal subdivisions
 
44
 
16,636

 
(197
)
 
13
 
8,541

 
(340
)
 
25,177

 
(537
)
   
 
50
 
$
23,032

 
$
(221
)
 
27
 
$
31,212

 
$
(666
)
 
$
54,244

 
$
(887
)
Unrealized losses are generally due to changes in interest rates. The Company has the intent to hold these securities until maturity or a forecasted recovery, and it is more likely than not that the Company will not have to sell the securities before the recovery of their cost basis. As such, the losses are deemed to be temporary.   

10





Note 4. Loans, Net and Allowance for Loan Losses
Loans, net at June 30, 2015 and December 31, 2014, consisted of the following:
   
 
 
June 30,
 
December 31,
   
 
2015
 
2014
Commercial
 
$
685,944

 
$
672,052

Real estate:
 
   
 
   
Commercial
 
1,654,277

 
1,450,434

Commercial construction, land and land development
 
286,656

 
334,964

Residential
 
527,760

 
514,025

Single family interim construction
 
136,395

 
138,278

Agricultural
 
37,313

 
38,822

Consumer
 
47,031

 
52,267

Other
 
177

 
242

   
 
3,375,553

 
3,201,084

Deferred loan fees
 
(943
)
 
(487
)
Allowance for loan losses
 
(21,764
)
 
(18,552
)
   
 
$
3,352,846

 
$
3,182,045


The Company has certain lending policies and procedures in place that are designed to maximize loan income within an acceptable level of risk. Management reviews and approves these policies and procedures on a regular basis. A reporting system supplements the review process by providing management with frequent reports related to loan production, loan quality, concentrations of credit, loan delinquencies and non-performing and potential problem loans.
Commercial loans are underwritten after evaluating and understanding the borrower’s ability to operate profitably and prudently expand its business. The Company’s management examines 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. These cash flows, however, may not be as expected and the value of collateral securing the loans may fluctuate. Most commercial loans are secured by the assets being financed or other business assets such as accounts receivable or inventory and may incorporate a personal guarantee; however, some short term loans may be made on an unsecured basis. Additionally, our commercial loan portfolio includes loans made to customers in the energy industry, which is a complex, technical and cyclical industry. Experienced bankers with specialized energy lending experience originate our energy loans. Companies in this industry produce, extract, develop, exploit and explore for oil and natural gas. Loans are primarily collateralized with proven producing oil and gas reserves based on a technical evaluation of these reserves. At June 30, 2015 and December 31, 2014, there were approximately $226.6 million and $231.7 million of exploration and production (E&P) energy loans outstanding, respectively.
Commercial real estate loans are subject to underwriting standards and processes similar to commercial loans. These loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate. Commercial real estate lending typically involves higher loan principal amounts, and the repayment of these loans is generally largely dependent on the successful operation of the property or the business conducted on the property securing the loan. Commercial real estate loans may be more adversely affected by conditions in the real estate markets or in the general economy. The properties securing the Company’s commercial real estate portfolio are diverse in terms of type and geographic location. Management monitors the diversification of the portfolio on a quarterly basis by type and geographic location. Management also tracks the level of owner occupied property versus non owner occupied property.
Land and commercial land development loans are underwritten using feasibility studies, independent appraisal reviews and financial analysis of the developers or property owners. Generally, borrowers must have a proven track record of success. Commercial construction loans are generally based upon estimates of cost and value of the completed project. These estimates may not be accurate. Commercial construction loans often involve the disbursement of substantial funds with the repayment dependent on the success of the ultimate project. Sources of repayment for these loans may be pre-committed permanent financing or sale of the developed property. The loans in this portfolio are geographically diverse and due to the increased risk are monitored closely by management and the board of directors on a quarterly basis.

11





Residential real estate and single family interim construction loans are underwritten primarily based on borrowers’ credit scores, documented income and minimum collateral values. Relatively small loan amounts are spread across many individual borrowers, which minimizes risk in the residential portfolio. In addition, management evaluates trends in past dues and current economic factors on a regular basis.
Agricultural loans are collateralized by real estate and/or agricultural-related assets. Agricultural real estate loans are primarily comprised of loans for the purchase of farmland. Loan-to-value ratios on loans secured by farmland generally do not exceed 80% and have amortization periods limited to twenty years. Agricultural non-real estate loans are generally comprised of term loans to fund the purchase of equipment, livestock and seasonal operating lines to grain farmers to plant and harvest corn and soybeans. Specific underwriting standards have been established for agricultural-related loans, including the establishment of projections for each operating year based on industry developed estimates of farm input costs and expected commodity yields and prices. Operating lines are typically written for one year and secured by the crop and other farm assets as considered necessary.
Agricultural loans carry significant credit risks as they involve larger balances concentrated with single borrowers or groups of related borrowers. In addition, repayment of such loans depends on the successful operation or management of the farm property securing the loan or for which an operating loan is utilized. Farming operations may be affected by adverse weather conditions such as drought, hail or floods that can severely limit crop yields.
Consumer loans represent less than 2% of the outstanding total loan portfolio. Collateral consists primarily of automobiles and other personal assets. Credit score analysis is used to supplement the underwriting process.
Most of the Company’s lending activity occurs within the State of Texas, primarily in the north, central and southeast Texas regions. A large percentage of the Company’s portfolio consists of commercial and residential real estate loans. As of June 30, 2015 and December 31, 2014, there were no concentrations of loans related to a single industry in excess of 10% of total loans.
The allowance for loan losses is an amount that management believes will be adequate to absorb estimated losses relating to specifically identified loans, as well as probable credit losses inherent in the balance of the loan portfolio.
The allowance is derived from the following two components: 1) allowances established on individual impaired loans, which are based on a review of the individual characteristics of each loan, including the customer’s ability to repay the loan, the underlying collateral values, and the industry in which the customer operates, and 2) allowances based on actual historical loss experience for the last three years for similar types of loans in the Company’s loan portfolio adjusted for primarily changes in the lending policies and procedures; collection, charge-off and recovery practices; nature and volume of the loan portfolio; volume and severity of nonperforming loans; existence and effect of any concentrations of credit and the level of such concentrations and current, national and local economic and business conditions. This second component also includes an unallocated allowance to cover uncertainties that could affect management’s estimate of probable losses. The unallocated allowance reflects the imprecision inherent in the underlying assumptions used in the methodologies for estimating this component.
The Company’s management continually evaluates the allowance for loan losses determined from the allowances established on individual loans and the amounts determined from historical loss percentages adjusted for the qualitative factors above. Should any of the factors considered by management change, the Company’s estimate of loan losses could also change and would affect the level of future provision expense. While the calculation of the allowance for loan losses utilizes management’s best judgment and all the information available, the adequacy of the allowance for loan losses is dependent on a variety of factors beyond the Company’s control, including, among other things, the performance of the entire loan portfolio, the economy, changes in interest rates and the view of regulatory authorities towards loan classifications.
In addition, regulatory agencies, as an integral part of their examination process, periodically review the Bank’s allowance for loan losses, and may require the Bank to make additions to the allowance based on their judgment about information available to them at the time of their examinations.

12





Loans requiring an allocated loan loss provision are generally identified at the servicing officer level based on review of weekly past due reports and/or the loan officer’s communication with borrowers. In addition, past due loans are discussed at weekly officer loan committee meetings to determine if classification is warranted. The Company’s credit department has implemented an internal risk based loan review process to identity potential internally classified loans that supplements the annual independent external loan review. The external review generally covers all loans greater than $2.4 million. These reviews include analysis of borrower’s financial condition, payment histories and collateral values to determine if a loan should be internally classified. Generally, once classified, an impaired loan analysis is completed by the credit department to determine if the loan is impaired and the amount of allocated allowance required.
The Texas economy, specifically the Company’s lending area of north, central and southeast Texas, has generally performed better than certain other parts of the country. However, the recent drop in oil prices has the potential to have negative impact on the Texas economy. The risk of loss associated with all segments of the portfolio could increase due to this impact.
The economy and other risk factors are minimized by the Company’s underwriting standards, which include the following principles: 1) financial strength of the borrower including strong earnings, high net worth, significant liquidity and acceptable debt to worth ratio, 2) managerial business competence, 3) ability to repay, 4) loan to value, 5) projected cash flow and 6) guarantor financial statements as applicable. The following is a summary of the activity in the allowance for loan losses by loan class for the three and six months ended June 30, 2015 and 2014:
 
Commercial
Commercial
Real Estate,
Land and Land
Development
Residential
Real Estate
Single-Family
Interim
Construction
Agricultural
Consumer
Other
Unallocated
Total
Three months ended June 30, 2015
 
 

 

 

 
Balance at the beginning of period
$
6,078

$
10,654

$
2,194

$
734

$
238

$
156

$

$
173

$
20,227

Provision for loan losses
658

1,054

122

4

(4
)
57


(232
)
1,659

Charge-offs
(106
)




(41
)


(147
)
Recoveries
2

12

2



9



25

Balance at end of period
$
6,632

$
11,720

$
2,318

$
738

$
234

$
181

$

$
(59
)
$
21,764

 
 
 
 
 
 
 
 
 
 
Six months ended June 30, 2015
 
 
 
 
 
 
 
 
Balance at the beginning of period
$
5,051

$
10,110

$
2,205

$
669

$
246

$
146

$

$
125

$
18,552

Provision for loan losses
1,681

1,580

109

69

(12
)
86


(184
)
3,329

Charge-offs
(106
)




(77
)


(183
)
Recoveries
6

30

4



26



66

Balance at end of period
$
6,632

$
11,720

$
2,318

$
738

$
234

$
181

$

$
(59
)
$
21,764

 
 
 
 
 
 
 
 
 
 
Three months ended June 30, 2014
 
 
 
 
 
 
 
 
Balance at the beginning of period
$
2,620

$
8,117

$
2,278

$
536

$
244

$
353

$

$
693

$
14,841

Provision for loan losses
1,056

945

42

38

28

16


(746
)
1,379

Charge-offs
(5
)

(31
)


(28
)


(64
)
Recoveries
5

38

2

10


8



63

Balance at end of period
$
3,676

$
9,100

$
2,291

$
584

$
272

$
349

$

$
(53
)
$
16,219

 
 
 
 
 
 
 
 
 
 
Six months ended June 30, 2014
 
 
 
 
 
 
 
 
Balance at the beginning of period
$
2,401

$
7,872

$
2,440

$
577

$
238

$
363

$

$
69

$
13,960

Provision for loan losses
1,634

1,201

(121
)
(4
)
34

10


(122
)
2,632

Charge-offs
(368
)
(21
)
(32
)


(42
)


(463
)
Recoveries
9

48

4

11


18



90

Balance at end of period
$
3,676

$
9,100

$
2,291

$
584

$
272

$
349

$

$
(53
)
$
16,219


13





The following table details the amount of the allowance for loan losses and recorded investment in loans by class as of June 30, 2015 and December 31, 2014:
 
Commercial
Commercial
Real Estate,
Land and Land
Development
Residential
Real Estate
Single-Family
Interim
Construction
Agricultural
Consumer
Other
Unallocated
Total
June 30, 2015
 
 
 
 
 
 
 
 
 
Allowance for losses:
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
1,629

$
126

$
10

$

$

$

$

$

$
1,765

Collectively evaluated for impairment
5,003

11,594

2,308

738

234

181


(59
)
19,999

Loans acquired with deteriorated credit quality









Ending balance
$
6,632

$
11,720

$
2,318

$
738

$
234

$
181

$

$
(59
)
$
21,764

 
 
 
 
 
 
 
 
 
 
Loans:
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
5,677

$
6,291

$
3,280

$

$

$
82

$

$

$
15,330

Collectively evaluated for impairment
677,232

1,889,844

522,808

136,395

37,313

46,924

177


3,310,693

Acquired with deteriorated credit quality
3,035

44,798

1,672



25



49,530

Ending balance
$
685,944

$
1,940,933

$
527,760

$
136,395

$
37,313

$
47,031

$
177

$

$
3,375,553

 
 
 
 
 
 
 
 
 
 
December 31, 2014
 
 
 
 
 
 
 
 
 
Allowance for losses:
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
339

$
124

$
8

$

$

$
4

$

$

$
475

Collectively evaluated for impairment
4,712

9,986

2,197

669

246

142


125

18,077

Loans acquired with deteriorated credit quality









Ending balance
$
5,051

$
10,110

$
2,205

$
669

$
246

$
146

$

$
125

$
18,552

 
 
 
 
 
 
 
 
 
 
Loans:
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
1,479

$
6,768

$
3,387

$

$

$
75

$

$

$
11,709

Collectively evaluated for impairment
666,830

1,724,514

508,833

138,278

38,822

52,159

242


3,129,678

Acquired with deteriorated credit quality
3,743

54,116

1,805



33



59,697

Ending balance
$
672,052

$
1,785,398

$
514,025

$
138,278

$
38,822

$
52,267

$
242

$

$
3,201,084




14







Nonperforming loans by loan class at June 30, 2015 and December 31, 2014, are summarized as follows:
   
 
 
Commercial
 
Commercial
Real Estate,
Land and Land
Development
 
Residential Real Estate
 
Single-Family
Interim
Construction
 
Agricultural
 
Consumer
 
Other
 
Total
June 30, 2015
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Nonaccrual loans
 
$
5,654

 
$
150

 
$
683

 
$

 
$