Independent Bank Group, Inc.
Independent Bank Group, Inc. (Form: 10-Q, Received: 07/27/2016 12:48:03)


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, 2016 .
or
¨
Transition Report Pursuant to Section   13 or 15(d) of the Securities Exchange Act of 1934.
For the transition period from                 to                     .
Commission file number 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 – 18,475,978 shares as of July 26, 2016.





INDEPENDENT BANK GROUP, INC. AND SUBSIDIARIES
Form 10-Q
June 30, 2016
   
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, 2016 (unaudited) and December 31, 2015
(Dollars in thousands, except share information)
   
 
June 30,
 
December 31,
Assets
 
2016
 
2015
   
 
   
 
   
Cash and due from banks
 
$
153,975

 
$
129,096

Interest-bearing deposits in other banks
 
282,630

 
164,183

Cash and cash equivalents
 
436,605

 
293,279

Certificates of deposit held in other banks
 
12,886

 
61,746

Securities available for sale (amortized cost of $282,616 and $270,711, respectively)
 
287,976

 
273,463

Loans held for sale
 
13,942

 
12,299

Loans, net of allowance for loan losses of $30,916 and $27,043, respectively
 
4,218,549

 
3,960,809

Premises and equipment, net
 
93,151

 
93,015

Other real estate owned
 
1,567

 
2,168

Federal Home Loan Bank (FHLB) of Dallas stock and other restricted stock
 
26,379

 
14,256

Bank-owned life insurance (BOLI)
 
56,396

 
40,861

Deferred tax asset
 
5,192

 
5,892

Goodwill
 
258,319

 
258,643

Core deposit intangible, net
 
15,161

 
16,357

Other assets
 
20,674

 
22,212

Total assets
 
$
5,446,797

 
$
5,055,000

 
 
 
 
 
Liabilities, Temporary Equity and Stockholders’ Equity
 
   
 
   
Deposits:
 
   
 
   
Noninterest-bearing
 
$
1,107,620

 
$
1,071,656

Interest-bearing
 
3,100,785

 
2,956,623

Total deposits
 
4,208,405

 
4,028,279

 
 
 
 
 
FHLB advances
 
470,784

 
288,325

Repurchase agreements
 

 
12,160

Other borrowings
 
107,335

 
68,295

Other borrowings, related parties
 
50

 
2,503

Junior subordinated debentures
 
18,147

 
18,147

Other liabilities
 
12,448

 
9,982

Total liabilities
 
4,817,169

 
4,427,691

Commitments and contingencies
 


 


 
 
 
 
 
Temporary equity:   Series A preferred stock (0 and 23,938.35 shares issued and outstanding, respectively)
 

 
23,938

Stockholders’ equity:
 
   
 
   
Common stock (18,475,978 and 18,399,194 shares outstanding, respectively)
 
185

 
184

Additional paid-in capital
 
533,369

 
530,107

Retained earnings
 
91,997

 
70,698

Accumulated other comprehensive income
 
4,077

 
2,382

Total stockholders’ equity
 
629,628

 
603,371

Total liabilities, temporary equity and stockholders’ equity
 
$
5,446,797

 
$
5,055,000

See Notes to Consolidated Financial Statements

1





Independent Bank Group, Inc. and Subsidiaries

Consolidated Statements of Income
Three and Six Months Ended June 30, 2016 and 2015 (unaudited)
(Dollars in thousands, except per share information)
   
 
Three Months Ended June 30,
 
Six Months Ended June 30,
   
 
2016
 
2015
 
2016
 
2015
Interest income:
 
 
 
 
 
   
 
   
Interest and fees on loans
 
$
50,418

 
$
41,625

 
$
100,328

 
$
81,205

Interest on taxable securities
 
764

 
551

 
1,494

 
1,160

Interest on nontaxable securities
 
444

 
449

 
895

 
863

Interest on interest-bearing deposits and other
 
315

 
122

 
688

 
255

Total interest income
 
51,941

 
42,747

 
103,405

 
83,483

Interest expense:
 
 
 
 
 
   
 
 
Interest on deposits
 
3,923

 
3,018

 
7,574

 
5,727

Interest on FHLB advances
 
998

 
718

 
1,999

 
1,470

Interest on repurchase agreements and other borrowings
 
987

 
1,096

 
1,990

 
2,165

Interest on junior subordinated debentures
 
150

 
135

 
299

 
263

Total interest expense
 
6,058

 
4,967

 
11,862

 
9,625

Net interest income
 
45,883

 
37,780

 
91,543

 
73,858

Provision for loan losses
 
2,123

 
1,659

 
5,120

 
3,329

Net interest income after provision for loan losses
 
43,760

 
36,121

 
86,423

 
70,529

Noninterest income:
 
 
 
 
 
   
 
 
Service charges on deposit accounts
 
1,752

 
1,679

 
3,447

 
3,264

Mortgage fee income
 
2,021

 
1,429

 
3,397

 
2,729

Gain on sale of other real estate
 
10

 
49

 
53

 
179

Gain on sale of securities available for sale
 
4

 
90

 
4

 
90

Gain on sale of premises and equipment
 
3

 

 
41

 

Increase in cash surrender value of BOLI
 
270

 
268

 
535

 
538

Other
 
869

 
594

 
1,922

 
1,275

Total noninterest income
 
4,929

 
4,109

 
9,399

 
8,075

Noninterest expense:
 
 
 
 
 
   
 
 
Salaries and employee benefits
 
19,567

 
14,650

 
36,341

 
29,074

Occupancy
 
4,041

 
4,027

 
8,081

 
7,937

Data processing
 
1,203

 
666

 
2,385

 
1,354

FDIC assessment
 
869

 
493

 
1,595

 
1,012

Advertising and public relations
 
251

 
253

 
546

 
599

Communications
 
550

 
554

 
1,085

 
1,093

Net other real estate owned expenses (including taxes)
 
2

 
37

 
35

 
96

Other real estate impairment
 

 
25

 
55

 
25

Core deposit intangible amortization
 
492

 
367

 
980

 
739

Professional fees
 
977

 
677

 
1,637

 
1,167

Acquisition expense, including legal
 
90

 
28

 
729

 
500

Other
 
2,981

 
2,678

 
6,073

 
5,245

Total noninterest expense
 
31,023

 
24,455

 
59,542

 
48,841

 
 
 
 
 
 
 
 
 
Income before taxes
 
17,666

 
15,775

 
36,280

 
29,763

Income tax expense
 
5,857

 
5,204

 
12,019

 
9,740

Net income
 
$
11,809

 
$
10,571

 
$
24,261

 
$
20,023

Basic earnings per share
 
$
0.64

 
$
0.61

 
$
1.31

 
$
1.16

Diluted earnings per share
 
$
0.64

 
$
0.61

 
$
1.31

 
$
1.16


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, 2016 and 2015 (unaudited)
(Dollars in thousands)
   
 
Three Months Ended June 30,
 
Six Months Ended June 30,
   
 
2016
 
2015
 
2016
 
2015
Net income
 
$
11,809

 
$
10,571

 
$
24,261

 
$
20,023

Other comprehensive income (loss) before tax:
 
   
 
 
 
   
 
 
Change in net unrealized gains (losses) on available for sale securities during the year
 
1,407

 
(2,087
)
 
2,612

 
(706
)
Reclassification adjustment for gain on sale of securities available for sale included in net income
 
(4
)
 
(90
)
 
(4
)
 
(90
)
Other comprehensive income (loss) before tax
 
1,403

 
(2,177
)
 
2,608

 
(796
)
Income tax expense (benefit)
 
491

 
(821
)
 
913

 
(338
)
Other comprehensive income (loss), net of tax
 
912

 
(1,356
)
 
1,695

 
(458
)
Comprehensive income
 
$
12,721

 
$
9,215

 
$
25,956

 
$
19,565


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, 2016 and 2015 (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
 
Total
   
 
Shares
 
Amount
 
Balance, December 31, 2015
$

 
18,399,194

 
$
184

 
$
530,107

 
$
70,698

 
$
2,382

 
$
603,371

Net income

 

 

 

 
24,261

 

 
24,261

Other comprehensive income, net of tax

 

 

 

 

 
1,695

 
1,695

Restricted stock forfeited

 
(6,036
)
 

 

 

 

 

Restricted stock granted

 
82,820

 
1

 
(1
)
 

 

 

Stock based compensation expense

 

 

 
3,641

 

 

 
3,641

Income tax deficiency on restricted stock vested

 

 

 
(378
)
 

 

 
(378
)
Preferred stock dividends

 

 

 

 
(8
)
 

 
(8
)
Cash dividends ($0.16 per share)

 

 

 

 
(2,954
)
 

 
(2,954
)
Balance, June 30, 2016
$

 
18,475,978

 
$
185

 
$
533,369

 
$
91,997

 
$
4,077

 
$
629,628

 
 
 
 
 
 
 
 
 
 
 
 
 
 
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 forfeited

 
(11,399
)
 

 

 

 

 

Restricted stock granted

 
87,124

 
1

 
(1
)
 

 

 

Income tax deficiency on restricted stock vested

 

 

 
(66
)
 

 

 
(66
)
Stock based compensation expense

 

 

 
2,099

 

 

 
2,099

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

   
See Notes to Consolidated Financial Statements 

4





Independent Bank Group, Inc. and Subsidiaries

Consolidated Statements of Cash Flows
Six Months Ended June 30, 2016 and 2015 (unaudited)
(Dollars in thousands)  
   
 
Six Months Ended June 30,
   
 
2016
 
2015
Cash flows from operating activities:
 
   
 
   
Net income
 
$
24,261

 
$
20,023

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
Depreciation expense
 
3,306

 
3,074

Accretion of income recognized on acquired loans
 
(3,362
)
 
(1,211
)
Amortization of core deposit intangibles
 
980

 
739

Amortization of premium on securities, net
 
812

 
772

Amortization of discount and origination costs on other borrowings
 
64

 
75

Stock based compensation expense
 
3,641

 
2,099

FHLB stock dividends
 
(103
)
 
(22
)
Gain on sale of securities available for sale
 
(4
)
 
(90
)
Gain on sale of premises and equipment
 
(41
)
 

Gain recognized on other real estate transactions
 
(53
)
 
(179
)
Impairment of other real estate
 
55

 
25

Deferred tax (benefit) expense
 
(388
)
 
194

Provision for loan losses
 
5,120

 
3,329

Increase in cash surrender value of life insurance
 
(535
)
 
(538
)
Loans originated for sale
 
(133,684
)
 
(113,721
)
Proceeds from sale of loans
 
132,041

 
110,937

Net change in other assets
 
446

 
6,243

Net change in other liabilities
 
2,068

 
36,111

Net cash provided by operating activities
 
34,624

 
67,860

Cash flows from investing activities:
 
   
 
   
Proceeds from maturities, calls and pay downs of securities available for sale
 
399,799

 
171,680

Proceeds from sale of securities available for sale
 
5,399

 
12,128

Purchases of securities available for sale
 
(417,911
)
 
(156,599
)
Proceeds from maturities of certificates held in other banks
 
48,860

 

Purchase of bank owned life insurance contracts
 
(15,000
)
 

Net (purchases) redemptions of FHLB stock
 
(12,020
)
 
402

Net loans originated
 
(259,286
)
 
(172,760
)
Additions to premises and equipment
 
(3,564
)
 
(4,290
)
Proceeds from sale of premises and equipment
 
163

 

Proceeds from sale of other real estate owned
 
1,122

 
1,437

Capitalized additions to other real estate owned
 

 
(10
)
Net cash used in investing activities
 
(252,438
)
 
(148,012
)
Cash flows from financing activities:
 
   
 
   
Net increase in demand deposits, NOW and savings accounts
 
213,324

 
175,533

Net (decrease) increase in time deposits
 
(53,886
)
 
42,353

Proceeds from FHLB advances
 
525,000

 
105,000

Repayments of FHLB advances
 
(342,541
)
 
(140,039
)
Net change in repurchase agreements
 
8,528

 
1,362

Repayments of other borrowings
 
(5,798
)
 
(966
)
Proceeds from other borrowings
 
43,413

 

Redemption of preferred stock
 
(23,938
)
 

Offering costs paid in connection with acquired banks
 

 
(144
)
Dividends paid
 
(2,962
)
 
(2,798
)
Net cash provided by financing activities
 
361,140

 
180,301

Net change in cash and cash equivalents
 
143,326

 
100,149

Cash and cash equivalents at beginning of year
 
293,279

 
324,047

Cash and cash equivalents at end of period
 
$
436,605

 
$
424,196


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., IBG Aircraft Company III, Preston Grand, Inc, and McKinney Avenue Holdings, Inc. and its wholly owned subsidiary, McKinney Avenue SPE 1, Inc. McKinney Avenue Holdings, Inc. and its subsidiary were formed during the first quarter 2016 for the purpose of possible future asset holdings. Adriatica became inactive in 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, 2015. The consolidated statement of condition at December 31, 2015 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.
Reclassifications: Certain prior period financial statement amounts have been reclassified to conform to current period presentation. The reclassifications have no effect on net income or stockholders' equity as previously reported.

Redemption of Small Business Lending Fund Series A Preferred Stock: On January 14, 2016, the Company redeemed all outstanding shares of its Senior Non-Cumulative Perpetual Small Business Lending Fund Series A Preferred Stock held by the Treasury and related accrued dividends.

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 Securities and Exchange Commission (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 participating nonvested common stock was not included in dilutive shares 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 June 30,
 
Six Months Ended June 30,
   
2016
 
2015
 
2016
 
2015
Basic earnings per share:
   
 
   
 
 
 
 
Net income
$
11,809

 
$
10,571

 
$
24,261

 
$
20,023

Less: Preferred stock dividends

 
(60
)
 
(8
)
 
(120
)
Net income after preferred stock dividends
11,809

 
10,511

 
24,253

 
19,903

Less:
 
 
 
 
 
 
 
Undistributed earnings allocated to participating securities
174

 
183

 
385

 
362

Dividends paid on participating securities
25

 
27

 
53

 
58

Net income available to common shareholders
$
11,610

 
$
10,301

 
$
23,815

 
$
19,483

Weighted-average basic shares outstanding
18,157,372

 
16,769,194

 
18,123,585

 
16,740,881

Basic earnings per share
$
0.64

 
$
0.61

 
$
1.31

 
$
1.16

Diluted earnings per share:
   
 
   
 
 
 
 
Net income available to common shareholders
$
11,610

 
$
10,301

 
$
23,815

 
$
19,483

Total weighted-average basic shares outstanding
18,157,372

 
16,769,194

 
18,123,585

 
16,740,881

Add dilutive stock warrants
77,892

 
87,023

 
70,721

 
82,852

Total weighted-average diluted shares outstanding
18,235,264

 
16,856,217

 
18,194,306

 
16,823,733

Diluted earnings per share
$
0.64

 
$
0.61

 
$
1.31

 
$
1.16

Anti-dilutive participating securities
35,504

 
24,379

 
38,533

 
43,661

 

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,
 
 
2016
 
2015
Cash transactions:
 
 
 
 
Interest expense paid
 
$
10,855

 
$
9,805

Income taxes paid
 
$
12,010

 
$
12,900

Noncash transactions:
 
 
 
 
Accrued preferred stock dividends
 
$

 
$
60

Transfers of loans to other real estate owned
 
$
523

 
$

Loans to facilitate the sale of other real estate owned
 
$

 
$
159

Securities purchased, not yet settled
 
$

 
$
3,000

Excess tax deficiency on restricted stock vested
 
$
(378
)
 
$
(66
)
Transfer of repurchase agreements to deposits
 
$
20,688

 
$

  

The supplemental schedule of noncash investing activities from Company acquisition activity includes the following measurement-period adjustments made during the period:
 
 
Six Months Ended June 30,
 
 
2016
 
2015
Assets acquired:
 
 
 
 
Loans
 
$
735

 
$

Goodwill
 
(324
)
 
361

Other real estate owned
 

 
(373
)
Core deposit intangibles
 
(216
)
 

Deferred tax asset
 
(175
)
 
193

Total assets
 
$
20

 
$
181

Liabilities assumed:
 
 
 
 
Other liabilities
 
20

 
181

Total liabilities
 
$
20

 
$
181




8





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, 2016 and December 31, 2015, are as follows:    
   
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
Securities Available for Sale
 
   
 
   
 
   
 
   
June 30, 2016
 
   
 
   
 
   
 
   
U.S. treasuries
 
$
1,000

 
$
1

 
$

 
$
1,001

Government agency securities
 
137,766

 
653

 
(5
)
 
138,414

Obligations of state and municipal subdivisions
 
80,781

 
3,014

 
(87
)
 
83,708

Residential pass-through securities guaranteed by FNMA, GNMA and FHLMC
 
63,069

 
1,799

 
(15
)
 
64,853

   
 
$
282,616

 
$
5,467

 
$
(107
)
 
$
287,976

December 31, 2015
 
   
 
   
 
   
 
   
U.S. treasuries
 
$
999

 
$
3

 
$

 
$
1,002

Government agency securities
 
135,630

 
237

 
(567
)
 
135,300

Obligations of state and municipal subdivisions
 
83,442

 
2,222

 
(248
)
 
85,416

Residential pass-through securities guaranteed by FNMA, GNMA and FHLMC
 
50,640

 
1,202

 
(97
)
 
51,745

   
 
$
270,711

 
$
3,664

 
$
(912
)
 
$
273,463

Securities with a carrying amount of approximately $ 197,429 and $ 195,479 at June 30, 2016 and December 31, 2015, respectively, were pledged to secure public fund deposits and repurchase agreements.
Proceeds from sale of securities available for sale and gross gains and gross losses for the three months and six months ended June 30, 2016 and 2015 were as follows:
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2016
 
2015
 
2016
 
2015
Proceeds from sale
 
5,399

 
$
12,128

 
$
5,399

 
$
12,128

Gross gains
 
4

 
90

 
4

 
90

Gross losses
 

 

 

 

The amortized cost and estimated fair value of securities available for sale at June 30, 2016 , 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, 2016
 
 
Securities Available for Sale
 
 
Amortized
Cost
 
Fair
Value
Due in one year or less
 
$
28,438

 
$
28,449

Due from one year to five years
 
129,613

 
130,355

Due from five to ten years
 
22,947

 
23,676

Thereafter
 
38,549

 
40,643

 
 
219,547

 
223,123

Residential pass-through securities guaranteed by FNMA, GNMA and FHLMC
 
63,069

 
64,853

 
 
$
282,616

 
$
287,976


9





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, 2016 and December 31, 2015, 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, 2016
 
 
 
   
 
   
 
 
 
   
 
   
 
   
 
   
Government agency securities
 
1
 
$
1,176

 
$
(5
)
 
1
 
$
1,000

 
$

 
$
2,176

 
$
(5
)
Obligations of state and municipal subdivisions
 
12
 
5,509

 
(16
)
 
8
 
4,295

 
(71
)
 
9,804

 
(87
)
Residential pass-through securities guaranteed by FNMA, GNMA and FHLMC
 
3
 
7,701

 
(15
)
 
 

 

 
7,701

 
(15
)
   
 
16
 
$
14,386

 
$
(36
)
 
9
 
$
5,295

 
$
(71
)
 
$
19,681

 
$
(107
)
December 31, 2015
 
 
 
   
 
   
 
 
 
   
 
   
 
   
 
   
Government agency securities
 
25
 
$
84,798

 
$
(531
)
 
4
 
$
4,964

 
$
(36
)
 
$
89,762

 
$
(567
)
Obligations of state and municipal subdivisions
 
32
 
16,202

 
(88
)
 
19
 
8,662

 
(160
)
 
24,864

 
(248
)
Residential pass-through securities guaranteed by FNMA, GNMA and FHLMC
 
6
 
10,765

 
(97
)
 
 

 

 
10,765

 
(97
)
   
 
63
 
$
111,765

 
$
(716
)
 
23
 
$
13,626

 
$
(196
)
 
$
125,391

 
$
(912
)
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, 2016 and December 31, 2015, consisted of the following:
   
 
 
June 30,
 
December 31,
   
 
2016
 
2015
Commercial
 
$
636,557

 
$
731,818

Real estate:
 
   
 
   
Commercial
 
2,229,913

 
1,949,734

Commercial construction, land and land development
 
444,738

 
419,611

Residential
 
626,245

 
607,990

Single family interim construction
 
232,658

 
187,984

Agricultural
 
48,976

 
50,178

Consumer
 
32,233

 
41,966

Other
 
137

 
124

   
 
4,251,457

 
3,989,405

Deferred loan fees
 
(1,992
)
 
(1,553
)
Allowance for loan losses
 
(30,916
)
 
(27,043
)
   
 
$
4,218,549

 
$
3,960,809


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, 2016 and December 31, 2015, there were approximately $ 108.9 million and $ 182.5 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 1% 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, 2016 and December 31, 2015 , 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; change in value of underlying collateral; 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 $2.9 million annually. 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 ongoing volatility in oil prices has the potential to have a negative impact on the Texas economy, specifically in Houston. The risk of loss associated with all segments of the portfolio could increase due to this impact. The Company increased its allowance for loan losses during the first quarter 2016 in consideration of this risk to the energy portfolio. Due to the stabilization of commodity prices and reductions to the energy portfolio during the second quarter 2016, no additional allocations were warranted.
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, 2016 and 2015 :
 
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, 2016
 
 

 

 

 
Balance at the beginning of period
$
12,173

$
14,001

$
2,473

$
989

$
187

$
162

$
16

$
(17
)
$
29,984

Provision for loan losses
374

1,491

52

132

(12
)
7

23

56

2,123

Charge-offs
(1,191
)




(1
)
(22
)

(1,214
)
Recoveries
1


8



3

11


23

Balance at end of period
$
11,357

$
15,492

$
2,533

$
1,121

$
175

$
171

$
28

$
39

$
30,916

 
 
 
 
 
 
 
 
 
 
Six months ended June 30, 2016
 
 
 
 
 
 
 
 
Balance at the beginning of period
$
10,573

$
13,007

$
2,339

$
769

$
215

$
164

$

$
(24
)
$
27,043

Provision for loan losses
1,966

2,537

185

352

(40
)
4

53

63

5,120

Charge-offs
(1,191
)
(54
)



(2
)
(45
)

(1,292
)
Recoveries
9

2

9



5

20


45

Balance at end of period
$
11,357

$
15,492

$
2,533

$
1,121

$
175

$
171

$
28

$
39

$
30,916

 
 
 
 
 
 
 
 
 
 
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


13





The following table details the amount of the allowance for loan losses and recorded investment in loans by class as of June 30, 2016 and December 31, 2015:
 
Commercial
Commercial
Real Estate,
Land and Land
Development
Residential
Real Estate
Single-Family
Interim
Construction
Agricultural
Consumer
Other
Unallocated
Total
June 30, 2016
 
 
 
 
 
 
 
 
 
Allowance for losses:
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
3,587

$
4

$

$

$

$

$

$

$
3,591

Collectively evaluated for impairment
7,770

15,488

2,533

1,121

175

171

28

39

27,325

Loans acquired with deteriorated credit quality









Ending balance
$
11,357

$
15,492

$
2,533

$
1,121

$
175

$
171

$
28

$
39

$
30,916

 
 
 
 
 
 
 
 
 
 
Loans:
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
11,959

$
1,392

$
3,703

$

$

$
64

$

$

$
17,118

Collectively evaluated for impairment
621,716

2,641,515

620,529

232,658

48,976

32,152

137


4,197,683

Acquired with deteriorated credit quality
2,882

31,744

2,013



17



36,656

Ending balance
$
636,557

$
2,674,651

$
626,245

$
232,658

$
48,976

$
32,233

$
137

$

$
4,251,457

 
 
 
 
 
 
 
 
 
 
December 31, 2015
 
 
 
 
 
 
 
 
 
Allowance for losses:
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
3,085

$
116

$

$

$

$
2

$

$

$
3,203

Collectively evaluated for impairment
7,488

12,891