Attached files
file | filename |
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8-K/A - 8-K/A - SOUTHSIDE BANCSHARES INC | a8-kadibollfinancialsstate.htm |
EX-99.4 - EXHIBIT 99.4 - SOUTHSIDE BANCSHARES INC | ex994proformasdiboll.htm |
EX-99.2 - EXHIBIT 99.2 - SOUTHSIDE BANCSHARES INC | ex992diboll-20162015.htm |
EX-23.1 - EXHIBIT 23.1 - SOUTHSIDE BANCSHARES INC | ex231consent.htm |
Exhibit 99.3
INDEX TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS OF
DIBOLL STATE BANCSHARES, INC.
Page Number | |
DIBOLL STATE BANCSHARES, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
September 30, 2017 | December 31, 2016 | ||||||
ASSETS | |||||||
Cash and cash equivalents: | |||||||
Non-interest bearing | $ | 22,349,743 | $ | 23,666,373 | |||
Interest bearing | 70,718,336 | 28,699,876 | |||||
Total cash and cash equivalents | 93,068,079 | 52,366,249 | |||||
Investment Securities: | |||||||
Available-for-sale | 247,458,527 | 265,828,008 | |||||
Federal Home Loan Bank (FHLB) stock, at cost | 395,800 | 393,500 | |||||
Loans, less allowance for loan losses | 635,172,174 | 634,662,062 | |||||
Accrued interest receivable | 2,892,544 | 3,440,659 | |||||
Bank premises and equipment, net | 14,185,845 | 14,752,132 | |||||
Other real estate owned | 2,022,800 | 263,400 | |||||
Goodwill | 7,334,165 | 7,334,165 | |||||
Other assets | 3,466,227 | 4,899,398 | |||||
Total assets | $ | 1,005,996,161 | $ | 983,939,573 | |||
LIABILITIES AND STOCKHOLDERS’ EQUITY | |||||||
Deposits: | |||||||
Noninterest-bearing demand | $ | 321,207,153 | $ | 302,996,959 | |||
Interest-bearing demand | 353,002,799 | 346,000,253 | |||||
Savings | 94,526,223 | 91,341,079 | |||||
Time | 121,291,915 | 138,721,437 | |||||
Total deposits | 890,028,090 | 879,059,728 | |||||
Accrued interest payable | 117,052 | 107,558 | |||||
Other liabilities | 8,836,232 | 4,473,711 | |||||
Total liabilities | 898,981,374 | 883,640,997 | |||||
Commitments and contingencies (Note 5) | |||||||
Stockholders’ equity: | |||||||
Common stock, par value $1; 1,000,000 shares authorized; 906,828 and 900,980 shares issued, respectively | 906,828 | 900,980 | |||||
Surplus | 13,308,963 | 12,504,604 | |||||
Retained earnings | 97,129,841 | 92,510,085 | |||||
Treasury stock, 58,052 and 57,313 shares at cost, respectively | (5,368,635 | ) | (5,254,090 | ) | |||
Accumulated other comprehensive income (loss), net of tax | 1,037,790 | (363,003 | ) | ||||
Total stockholders’ equity | 107,014,787 | 100,298,576 | |||||
Total liabilities and stockholders’ equity | $ | 1,005,996,161 | $ | 983,939,573 |
The accompanying notes are an integral part of these consolidated financial statements.
F-1
DIBOLL STATE BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
Nine Months Ended | ||||||||
September 30, | ||||||||
2017 | 2016 | |||||||
Interest income: | ||||||||
Interest and fees on loans | $ | 24,965,669 | $ | 24,103,769 | ||||
Interest on investment securities | 3,535,669 | 3,654,447 | ||||||
Interest on federal funds sold and deposits in banks | 187,676 | 144,381 | ||||||
Total interest income | 28,689,014 | 27,902,597 | ||||||
Interest expense: | ||||||||
Interest on interest-bearing demand and savings accounts | 247,871 | 244,156 | ||||||
Interest on time deposits | 547,722 | 539,332 | ||||||
Other interest | 156 | 1 | ||||||
Total interest expense | 795,749 | 783,489 | ||||||
Net interest income | 27,893,265 | 27,119,108 | ||||||
Provision for loan losses | 2,207,500 | 1,019,350 | ||||||
Net interest income after provision for loan losses | 25,685,765 | 26,099,758 | ||||||
Other income: | ||||||||
Income from fiduciary activities | 1,785,082 | 1,915,000 | ||||||
Service fees on deposits | 3,244,027 | 3,265,806 | ||||||
Net realized gain on sale of available-for-sale securities | 2,472 | 166,631 | ||||||
Loss on sale of property, plant and equipment | (18,269 | ) | — | |||||
Other income | 3,137,033 | 3,336,010 | ||||||
Total other income | 8,150,345 | 8,683,447 | ||||||
Other expenses: | ||||||||
Salaries and employee benefits | 12,389,948 | 12,502,184 | ||||||
Occupancy and equipment | 1,573,440 | 1,639,963 | ||||||
Other operating expenses | 7,549,668 | 7,162,681 | ||||||
Total other expenses | 21,513,056 | 21,304,828 | ||||||
Income before federal income taxes | 12,323,054 | 13,478,377 | ||||||
Federal income taxes | 3,901,600 | 4,318,700 | ||||||
Net income | 8,421,454 | 9,159,677 | ||||||
Net income per common share - basic | $ | 9.96 | $ | 10.88 | ||||
Net income per common share - diluted | $ | 9.72 | $ | 10.62 | ||||
Weighted average shares outstanding - basic | 845,214 | 841,899 | ||||||
Weighted average shares outstanding - diluted | 866,067 | 862,197 |
The accompanying notes are an integral part of these consolidated financial statements.
F-2
DIBOLL STATE BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF COMPRHENSIVE INCOME (LOSS)
(UNAUDITED)
Nine Months Ended | ||||||||
September 30, | ||||||||
2017 | 2016 | |||||||
Net income | 8,421,454 | 9,159,677 | ||||||
Other comprehensive income, net of tax: | ||||||||
Unrealized gains (losses) on securities: | ||||||||
Change in net unrealized gains (losses) on securities available for sale, net of income taxes of $611,280 in 2017 and $1,434,139 in 2016 | 1,402,425 | 2,293,418 | ||||||
Reclassification adjustment for gains realized net of income taxes of ($840) in 2017 and ($56,655) in 2016 | (1,632 | ) | (109,976 | ) | ||||
Other comprehensive income | 1,400,793 | 2,183,442 | ||||||
Comprehensive income | $ | 9,822,247 | $ | 11,343,119 |
The accompanying notes are an integral part of these consolidated financial statements.
F-3
DIBOLL STATE BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE TWELVE MONTHS ENDED DECEMBER 31, 2016 AND THE NINE MONTHS ENDED SEPTEMBER 30, 2017
(UNAUDITED)
Common Stock | Surplus | Retained Earnings | Treasury Stock | Accumulated Other Comprehensive Income (Loss) | Total | |||||||||||||||||||||
Shares | Par Value | |||||||||||||||||||||||||
Balance at December 31, 2015 | 897,722 | $ | 897,722 | $ | 12,015,576 | $ | 85,906,535 | $ | (5,209,090 | ) | $ | 1,210,903 | $ | 94,821,646 | ||||||||||||
Net income | — | — | — | 12,080,204 | — | — | 12,080,204 | |||||||||||||||||||
Other comprehensive income (loss) | — | — | — | — | — | (1,573,906 | ) | (1,573,906 | ) | |||||||||||||||||
Stock options exercised | 3,258 | 3,258 | 360,350 | — | — | — | 363,608 | |||||||||||||||||||
Purchase of treasury stock | — | — | — | — | (45,000 | ) | — | (45,000 | ) | |||||||||||||||||
Stock-based compensation | — | — | 128,678 | — | — | — | 128,678 | |||||||||||||||||||
Cash dividends declared | — | — | — | (5,476,654 | ) | — | — | (5,476,654 | ) | |||||||||||||||||
Balance at December 31, 2016 | 900,980 | $ | 900,980 | $ | 12,504,604 | $ | 92,510,085 | $ | (5,254,090 | ) | $ | (363,003 | ) | $ | 100,298,576 | |||||||||||
Net income | — | — | — | 8,421,454 | — | — | 8,421,454 | |||||||||||||||||||
Other comprehensive income (loss) | — | — | — | — | — | 1,400,793 | 1,400,793 | |||||||||||||||||||
Stock options exercised | 5,848 | 5,848 | 937,058 | — | — | — | 942,906 | |||||||||||||||||||
Purchase of treasury stock | — | — | — | — | (114,545 | ) | — | (114,545 | ) | |||||||||||||||||
Stock-based compensation | — | — | (132,699 | ) | — | — | — | (132,699 | ) | |||||||||||||||||
Cash dividends declared | — | — | — | (3,801,698 | ) | — | — | (3,801,698 | ) | |||||||||||||||||
Balance at September 30, 2017 | 906,828 | $ | 906,828 | $ | 13,308,963 | $ | 97,129,841 | $ | (5,368,635 | ) | $ | 1,037,790 | $ | 107,014,787 |
F-4
DIBOLL STATE BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
The accompanying notes are an integral part of these consolidated financial statements.
Nine Months Ended | |||||||
September 30, | |||||||
2017 | 2016 | ||||||
OPERATING ACTIVITIES: | |||||||
Net income | $ | 8,421,454 | $ | 9,159,677 | |||
Adjustments to reconcile net income to net cash provided by operations: | |||||||
Amortization on investment securities, net | 644,061 | 689,196 | |||||
Provision for loan losses | 2,207,500 | 1,019,350 | |||||
FHLB stock dividends | (2,300 | ) | (900 | ) | |||
Depreciation of bank premises and equipment | 997,007 | 983,217 | |||||
Amortization of software | 139,884 | 200,643 | |||||
Loss (gain) from sale of other real estate | (29,133 | ) | (87,089 | ) | |||
Increase in deferred taxes excluding effect of accumulated comprehensive income | 43,696 | 210,289 | |||||
Net gain from sales of investment securities | (2,472 | ) | (166,631 | ) | |||
Stock-based compensation | 118,682 | 96,509 | |||||
Net loss from disposal of premises and equipment | 18,268 | — | |||||
Change in Assets/Liabilities: | |||||||
Decrease in accrued interest receivable | 548,115 | 489,179 | |||||
Decrease (increase) in prepaid federal income tax | 2,108,262 | (12,618 | ) | ||||
Decrease in other operating assets | 463,818 | 457,414 | |||||
Increase (decrease) in accrued interest payable | 9,494 | (86 | ) | ||||
Increase in other liabilities | 3,631,705 | 3,355,767 | |||||
Net cash provided by operating activities | 19,318,041 | 16,393,917 | |||||
INVESTING ACTIVITIES: | |||||||
Decrease in Federal funds | — | (1,500,000 | ) | ||||
Proceeds from sales, maturities, and calls of investment securities available-for-sale | 177,710,360 | 231,016,567 | |||||
Purchases of investments available-for-sale | (157,858,155 | ) | (225,900,213 | ) | |||
Purchases of FHLB stock | — | (23,000 | ) | ||||
Proceeds from sales of mortgage loans | 16,951,493 | 20,567,971 | |||||
Increase in loans, net of noncash transactions | (21,798,682 | ) | (44,583,968 | ) | |||
Capital expenditures, net | (498,680 | ) | (503,725 | ) | |||
Proceeds from sale of other real estate | 399,310 | 195,878 | |||||
Net cash provided by (used in) investing activities | 14,905,646 | (20,730,490 | ) | ||||
FINANCING ACTIVITIES: | |||||||
Increase in noninterest-bearing demand accounts | 18,210,194 | 43,294,328 | |||||
Increase (decrease) in interest-bearing demand accounts | 7,002,546 | (19,367,377 | ) | ||||
Increase in savings accounts | 3,185,144 | 5,828,954 | |||||
Decrease in time deposits | (17,429,522 | ) | (2,109,904 | ) | |||
Proceeds from stock options exercised | 691,525 | 272,938 | |||||
Purchase of treasury stock | (114,545 | ) | (45,000 | ) | |||
Payment of dividends | (5,067,199 | ) | (5,889,935 | ) | |||
Net cash provided by financing activities | 6,478,143 | 21,984,004 | |||||
Net decrease in cash and cash equivalents | 40,701,830 | 17,647,431 | |||||
Cash and cash equivalents at beginning of period | 52,366,249 | 74,490,424 | |||||
Cash and cash equivalents at end of period | $ | 93,068,079 | $ | 92,137,855 | |||
SUPPLEMENTAL DISCLOSURES FOR CASH FLOW INFORMATION: | |||||||
Interest paid | $ | 786,255 | $ | 783,575 | |||
Income tax paid | 4,050,696 | 4,533,289 | |||||
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES: | |||||||
Increase in unrealized holding gains and losses on securities available-for-sale | 2,122,414 | 3,308,245 | |||||
Increase in deferred income tax on unrealized holding gains and losses on securities available for sale | 721,621 | 1,129,325 | |||||
Net decrease in loans from other real estate foreclosures and financing | (2,129,577 | ) | (582,989 | ) | |||
Loan charge-offs | 2,544,752 | 747,075 | |||||
Decrease in dividends payable | (1,265,501 | ) | (2,732,304 | ) |
F-5
DIBOLL STATE BANCSHARES, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Diboll State Bancshares, Inc. ("Diboll" or "the Company"), is a bank holding company headquartered in Diboll, Texas and owns all the outstanding capital stock of First Bank & Trust East Texas ("FB&T" or "the Bank"). The accounting and reporting policies of Diboll and the Bank conform to practices within the banking industry. The following is a description of the more significant of those policies.
Nature of Operations:
Diboll, as a bank holding company, exists for the purpose of investing in banks. It is subject to regulation by the Federal Reserve System.
The Bank operates under a state bank charter, provides full banking services, and is subject to regulation by the Texas State Department of Banking and the Federal Deposit Insurance Corporation. The Bank generates commercial (including agricultural), mortgage and consumer loans and receives deposits from customers located primarily in the eastern region of Texas with seventeen branch locations: Lufkin (5), Diboll (1), Nacogdoches (1), Cleveland (1), Splendora (1), Jasper (2), San Augustine (1), Pineland (1), Hemphill (1), Tyler (1), Palestine (1) and Longview (1).
Additionally, the Bank maintains correspondent banking relationships and transacts daily federal fund sales on an unsecured basis with regional correspondent banks. Note 2 discusses the types of securities in which the Bank invests. Note 3 discusses the types of lending in which the Bank engages. The Bank does not have any significant concentrations to any one industry or customer.
Basis of Presentation:
The accompanying unaudited consolidated financial statements of the Company have been prepared on the accrual method of accounting in conformity with accounting principles generally accepted in the United States of America (GAAP).
Certain information and footnote disclosures normally included in the financial statements have been condensed or omitted. These interim consolidated financial statements and notes should be read in conjunction with the consolidated financial statements, and notes thereto, for the year ended December 31, 2016, included in the Company’s Annual Report.
In the opinion of management, the accompanying consolidated financial statements include all adjustments, consisting of only normal recurring adjustments, necessary for a fair presentation of the financial condition and results of operations at the dates and for the interim periods presented. The results of operations for the nine months ended September 30, 2017 are not necessarily indicative of the results of operations for the full fiscal year or for any other period.
Principles of Consolidation:
The consolidated financial statements and related notes include the accounts of Diboll and FB&T. In consolidation, all material intercompany transactions and balances have been eliminated.
Use of Estimates:
The preparation of consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Material estimates that are particularly susceptible to significant change relate to the determination of the allowance for losses on loans and the valuation of real estate acquired in connection with foreclosures or in satisfaction of loans. In connection with the determination of the allowances for losses on loans and foreclosed real estate, management may obtain independent appraisals for significant problem loans or properties.
F-6
DIBOLL STATE BANCSHARES, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) —(Continued)
The Bank's loans are generally secured by specific items of collateral including real property, consumer assets, and business assets. Although the loan portfolio is diversified, its debtors’ ability to honor their contracts is heavily dependent upon economic conditions in the service area. Accordingly, the ultimate collectability of a substantial portion of the Bank’s loan portfolio and the recovery of a substantial portion of the carrying amount of foreclosed real estate are susceptible to changes in local market conditions.
While management uses available information to recognize losses on loans, further reductions in the carrying amounts of loans may be necessary based on changes in the economic conditions in the service area. In addition, the regulatory agencies, as an integral part of their examination process, periodically review the estimated losses on loans. Such agencies may require the Bank to recognize additional losses based on their judgments about information available to them at the time of their examination. Because of these factors, it is reasonably possible that the estimated losses on loans may change materially in the near term. However, the amount of the change that is reasonably possible cannot be estimated.
Cash and Cash Equivalents:
Cash and cash equivalents include cash sold and due from banks. Generally, the Bank considers all highly liquid instruments with original maturities of three months or less to be cash and cash equivalents. In monitoring credit risk associated with these uninsured deposits, the Bank periodically evaluates the stability of the correspondent financial institutions.
Investment Securities:
Professional standards require the Bank to recognize all financial derivatives on the balance sheet at fair value. At September 30, 2017 and December 31, 2016, the Bank had no derivative instruments.
Securities classified as held-to-maturity are those debt securities the Bank has both the intent and ability to hold to maturity regardless of changes in market conditions, liquidity needs or changes in general economic conditions. These securities are carried at cost, adjusted for amortization of premium and accretion of discount, computed using the interest method, over their contractual lives. At September 30, 2017 and December 31, 2016, the Bank had no investment securities categorized as held-to-maturity.
Securities classified as available-for-sale are equity securities with readily determinable fair values and those debt securities that the Bank intends to hold for an indefinite period of time but not necessarily to maturity. Any decision to sell a security classified as available-for-sale would be based on various factors, including significant movement in interest rates, changes in the maturity mix of the Bank’s assets and liabilities, liquidity needs, regulatory capital considerations, and other similar factors. These securities are carried at estimated fair value based on information provided by a third party pricing service with any unrealized gains or losses excluded from net income and reported in accumulated other comprehensive income (loss), which is reported as a separate component of stockholders’ equity, net of the related deferred tax effect.
Securities held as trading assets are carried at fair value. At September 30, 2017 and December 31, 2016, the Bank had no investment securities categorized as trading.
Dividend and interest income, including amortization of premium and accretion of discount arising at acquisition, from all categories of investment securities are included in interest income in the consolidated statements of income.
Gains and losses realized on sales of investment securities, determined using the adjusted cost basis of the specific securities sold, are included in noninterest income in the consolidated statements of income. Additionally, declines in the estimated fair value of individual investment securities below their cost that are other-than-temporary are reflected as realized losses in the statements of income. Factors affecting the determination of whether an other-than-temporary impairment has occurred include a downgrading of the security by a rating agency, a significant deterioration in the financial condition of the issuer, or that management would not have the intent and ability to hold a security for a period of time sufficient to allow for any anticipated recovery in fair value.
Restricted Equity Securities:
Restricted stock is stock from the Federal Home Loan Bank of Dallas, which is restricted as to its marketability. Because no ready market exists for this stock and it has no quoted market value, it is carried at cost in the financial statements.
F-7
DIBOLL STATE BANCSHARES, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) —(Continued)
Loans:
The Bank grants mortgage, commercial and consumer loans to customers. A substantial portion of the loan portfolio is represented by real estate loans throughout the eastern region of Texas. The ability of the Bank’s debtors to honor their contracts is dependent upon the real estate and general economic conditions in the area.
Loans, with the exception of mortgage loans held for sale, are stated at the amount of unpaid principal and reduced by an allowance for loan losses.
Mortgage loans held for sale are recorded at the lower of cost or market. Gains and losses on sales are computed on the basis of specific identification.
Interest on loans is accrued by using the simple interest method on daily balances of the principal amount outstanding.
Loan origination and commitment fees are recognized as income when received. Direct loan origination costs are expensed when paid.
Included in the loans category are loans, which have been categorized by management as nonaccrual because collection of interest is doubtful. After a loan is placed on nonaccrual status, all interest previously accrued but not collected is reversed against current period interest income. Subsequent collections of interest payments on nonaccrual loans are recognized as interest income unless ultimate collectability of the loan is in doubt. Cash collections on loans where ultimate collectability remains in doubt are applied as reductions of the loan principal balance and no interest income is recognized until the principal balance has been collected.
Allowance for Loan Losses:
The allowance for loan losses reflects management’s judgment of probable loan losses inherent in the portfolio at the balance sheet date. The Bank uses a disciplined process and methodology to establish the allowance for loan losses each quarter. To determine the total allowance for loan losses, management estimates the reserves needed for each segment of the portfolio, including loans analyzed individually and loans analyzed on a pooled basis. The allowance for loan losses consists of amounts applicable to: (i) the real estate portfolio; (ii) the consumer and credit card portfolio, and (iii) the commercial portfolio. The classes within the commercial portfolio segments are commercial loans that are unsecured and secured by personal property. The classes within the real estate portfolio segment are residential mortgage, home equity, home improvement, and commercial real estate. The classes within the consumer and credit card portfolio segment include credit card, direct/indirect consumer and other consumer loans. Under this accounting guidance, the allowance is presented by portfolio segment.
The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to earnings. Loan losses are charged against the allowance when management believes the uncollectability of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. The allowance is based on two basic principles of accounting: (i) FASB ASC 450, Contingencies, which requires that losses be accrued when they are probable of occurring and estimable and (ii) FASB ASC 310, Receivables, which requires that losses on impaired loans be accrued based on the differences between the loan balance and either the value of collateral, if such loans are considered to be collateral dependent and in the process of collection, or the present value of future cash flows, or the loan’s value as observable in the secondary market. A loan is considered impaired when, based on current information and events, the Bank has concerns about the ability to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed.
The Bank’s allowance for loan losses has three basic components: the specific allowance, the formula allowance and the pooled allowance. Each of these components is determined based upon estimates that can and do change when the actual events occur. As a result of the uncertainties inherent in the estimation process, management’s estimate of loan losses and the related
F-8
DIBOLL STATE BANCSHARES, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) —(Continued)
allowance could change in the near term.
The specific allowance component is used to individually establish an allowance for loans identified for impairment testing. When impairment is identified, a specific reserve may be established based on the Bank’s calculation of the estimated loss embedded in the individual loan. Impairment testing includes consideration of the borrower’s overall financial condition, resources and payment record, support available from financial guarantors and the fair market value of collateral. These factors are combined to estimate the probability and severity of inherent losses. Large groups of smaller balance, homogeneous loans are collectively evaluated for impairment. Accordingly, the Bank does not separately evaluate individual consumer and residential loans for impairment.
The formula allowance component is used for estimating the loss on internally risk rated loans exclusive of those identified as impaired. The loans meeting the Bank’s internal criteria for classification, such as special mention, substandard, doubtful and loss, as well as specifically identified impaired loans, are segregated from performing loans within the portfolio. These internally classified loans are then grouped by loan type (commercial, commercial real estate, commercial construction, residential real estate, residential construction or installment). Each loan type is assigned an allowance factor based on management’s estimate of the associated risk, complexity and size of the individual loans within the particular loan category. Classified loans are assigned a higher allowance factor than non-classified loans due to management’s concerns regarding collectability or management’s knowledge of particular elements surrounding the borrower. Allowance factors increase with the worsening of the internal risk rating.
The pooled formula component is used to estimate the losses inherent in the pools of non-classified loans. These loans are then also segregated by loan type and allowance factors are assigned by management based on delinquencies, loss history, trends in volume and terms of loans, effects of changes in lending policy, the experience and depth of management, national and local economic trends, concentrations of credit, results of the loan review system and the effect of external factors (i.e. competition and regulatory requirements).
Allowance factors and overall size of the allowance may change from period to period based on management’s assessment of the above-described factors and the relative weights given to each factor. In addition, various regulatory agencies periodically review the allowance for loan losses. These agencies may require the Bank to make additions to the allowance for loan losses based on their judgments of collectability based on information available to them at the time of their examination.
Loans are placed into a nonaccruing status and classified as nonperforming when the principal or interest has been in default for a period of 90 days or more unless the obligation is well secured and in the process of collection. A debt is “well secured” if it is secured by (i) pledges of real or personal property, including securities, that have a realizable value sufficient to discharge the debt, (including accrued interest), in full, or (ii) the guarantee of a financially responsible party. A debt is “in the process of collection” if collection on the debt is proceeding in due course either through legal action, including judgment enforcement procedure, or, in appropriate circumstances, through collection efforts not involving legal action which are reasonably expected to result in repayment of the debt or in its restoration to a current status.
Loans classified as substandard or worse are considered for impairment testing. A substandard loan shows signs of continuing negative financial trends and unprofitability and therefore, is inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any. The borrower on such loans typically exhibits one or more of the following characteristics: financial ratios and profitability margins are well below industry average; a negative cash flow position exists; debt service capacity is insufficient to the service debt and an improvement in the cash flow position is unlikely within the next twelve months; secondary and tertiary means of debt repayment are weak. Loans classified as substandard are characterized by the probability that the Bank will not collect amounts due according to the contractual terms or sustain some loss if the deficiencies are not corrected.
Loss potential, while existing with respect to the aggregate amount of substandard (or worse) loans, does not have to exist in any individual assets classified as substandard. Such credits are also evaluated for nonaccrual status.
Impaired loans include loans that have been classified as substandard or worse. However, certain loans have been paying as agreed and have remained current, with some financial issues related to cash flow that have caused some concern as to the ability of the borrower to perform in accordance with the current loan terms but not to such an extent as to require the loan be put into a nonaccrual status. Cash receipts on impaired loans are recorded as interest income as received, unless the loan is in a nonaccrual
F-9
DIBOLL STATE BANCSHARES, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) —(Continued)
status.
Loan Charge-Offs:
The Bank’s charge-off policy states after all collection efforts have been exhausted and the loan is deemed to be a loss, it will be charged to the Bank’s established allowance for loan losses.
For consumer loans, the Bank generally fully or partially charges down to the fair value of collateral securing the asset when:
•management judges the asset to be uncollectible;
•repayment is deemed to be protracted beyond reasonable time frames;
•the asset has been classified as a loss by either the Bank’s internal loan review process or external examiners;
•the customer has filed bankruptcy and the loss becomes evident owing to a lack of assets; or
•the loan is 180 days past due unless both well secured and in the process of collection.
The Bank’s charge-off policies by segment of the loan portfolio are as follows:
•Real Estate - The Bank generally writes down to the net realizable value at foreclosure. Foreclosure proceedings commonly begin when the loan is 120 - 180 days past due.
•Auto Loans - The Bank generally charges down to the net realizable value when the collateral is repossessed. Collateral repossession attempts typically begin when the loan is 120 days past due. The Bank fully charges the loan off when recovery of the collateral appears doubtful.
•Unsecured Loans - The Bank generally charges off when the loan is 90 days past due.
•Other Secured Loans - The Bank generally charges down to the net realizable value when the collateral is repossessed. Collateral repossession attempts typically begin when the loan is 120 days past due. The Bank fully charges the loan off when recovery of the collateral appears doubtful.
Troubled Debt Restructurings:
In situations where, for economic or legal reasons related to a customer’s financial difficulties, the Bank grants a concession for other than an insignificant period of time to the customer that the Bank would not otherwise consider, the related loan is classified as a troubled debt restructuring (TDR). The Bank strives to identify customers in financial difficulty early and work with them to modify to more affordable terms before their loan reaches nonaccrual status. These modified terms may include rate reductions, principal forgiveness, payment forbearance and other actions intended to minimize the economic loss and to avoid foreclosure or repossession of the collateral. In cases where the Bank grants the customer new terms that provide for a reduction of either interest or principal, the Bank measures any impairment on the restructuring as previously noted for impaired loans.
Bank Premises and Equipment:
Land is stated at cost. Other premises and equipment are stated at cost less accumulated depreciation. Depreciation expense is computed on the straight-line method over the estimated useful lives of the assets. Maintenance and repairs that do not extend the life of bank premises and equipment are charged to expense.
Off-Balance Sheet Financial Instruments:
In the ordinary course of business the Bank has entered into off-balance sheet financial instruments consisting of commitments to extend credit and standby letters of credit. Such financial instruments are recorded in the financial statements when they are funded.
F-10
DIBOLL STATE BANCSHARES, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) —(Continued)
Goodwill and Other Intangibles:
The Bank conducts annual impairment test for goodwill if there is an event that would cause, or could cause impairment. If the reporting unit’s fair value is greater than its carrying amount, goodwill is not impaired and no loss is recognized. If the implied fair value of the reporting unit’s goodwill is less than the recorded amount, goodwill is considered impaired and the Bank must recognize a loss. Management concluded that there was no impairment for the nine months ended September 30, 2017 or the year ended December 31, 2016.
Other Real Estate:
Real estate properties acquired through or in lieu of loan foreclosure are initially recorded at the fair value less estimated selling cost at the date of foreclosure. Any write-downs based on the asset’s fair value at the date of acquisition are charged to the allowance for loan losses. After foreclosure, valuations are periodically performed by management and property held for sale is carried at the lower of the new cost basis or fair value less cost to sell. Impairment losses on property to be held and used are measured as the amount by which the carrying amount of a property exceeds its fair value. Costs of significant property improvements are capitalized, whereas costs relating to holding property are expensed. Valuations are periodically performed by management, and any subsequent write-downs are recorded as an increase to an allowance account and a charge to operations, if necessary, to reduce the carrying value of a property to the lower of its cost or fair value less cost to sell.
Income Taxes:
Provisions for income taxes are based on taxes payable or refundable for the current year (after exclusion of non-taxable income such as interest on state and municipal securities) and deferred taxes on temporary differences between the amount of taxable income and pretax financial income and between the tax bases of assets and liabilities and their reported amounts in the financial statements. Deferred tax assets and liabilities are included in the financial statements at currently enacted income tax rates applicable to the period in which the deferred tax assets and liabilities are expected to be realized or settled. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes.
Uncertain Tax Positions:
FASB Codification Section 740 requires recognition, measurement and disclosure of uncertain tax positions. The Company does not have any uncertain tax positions that are deemed material, and did not recognize any adjustments for unrecognized tax benefits. The Company’s policy is to recognize interest and penalties on income taxes in other noninterest expense.
Transfers of Financial Assets:
The Bank accounts for transfers of financial assets in accordance with FASB ASC 860, Transfers and Servicing. Transfers of financial assets are accounted for as sales only when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Bank, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and (3) the Bank does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity.
Income from Fiduciary Activities:
Trust fees are recorded on the accrual basis.
Stock-Based Compensation:
Diboll has stock-based employee compensation plans which provide for grants of incentive stock options. Professional standards generally require that equity-based compensation, including grants of stock options, to employees be expensed based on the grant date fair value of the award. For awards with graded vesting schedules, Diboll uses the straight-line method of attributing the value of stock-based compensation expense based on the applicable vesting schedule.
F-11
DIBOLL STATE BANCSHARES, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) —(Continued)
Comprehensive Income:
Accounting principles generally require that recognized revenue, expenses, gains and losses be included in net income. Although certain changes in assets and liabilities, such as unrealized gains and losses on available-for-sale securities, are reported as a separate component of the stockholders’ equity section of the balance sheet, such items, along with net income, are components of comprehensive income.
Segment Reporting:
FASB ASC 280, Segment Reporting, encourages nonpublic entities to report selected information about operating segments in its financial statements issued to its shareholders. Based on the analysis performed by the Company, management has determined that the Company only has one operating segment, which is commercial banking. The chief operating decision-makers use consolidated results to make operating and strategic decisions, and therefore, are not required to disclose any additional segment information.
NOTE 2 - INVESTMENT SECURITIES
The amortized cost and fair values of investment securities available-for-sale at September 30, 2017 were:
GROSS | GROSS | |||||||||||||||
AMORTIZED | UNREALIZED | UNREALIZED | FAIR | |||||||||||||
COST | GAIN | LOSSES | VALUE | |||||||||||||
Obligations of U. S. government agencies | $ | 157,536,001 | $ | 299,066 | $ | (780,889 | ) | $ | 157,054,178 | |||||||
Obligations of states and political subdivisions | 77,925,440 | 2,073,590 | (210,912 | ) | 79,788,118 | |||||||||||
Mortgage-backed and other securities | 10,254,532 | 202,948 | (11,395 | ) | 10,446,085 | |||||||||||
Limited partnership | 170,146 | — | — | 170,146 | ||||||||||||
$ | 245,886,119 | $ | 2,575,604 | $ | (1,003,196 | ) | $ | 247,458,527 |
The net of the above gross unrealized gains of $2,575,604 and gross unrealized losses of $(1,003,196) for available-for-sale securities, net of federal income taxes, is included in accumulated other comprehensive income at September 30, 2017.
The amortized cost and fair values of investment securities available for sale at December 31, 2016 were:
GROSS | GROSS | |||||||||||||||
AMORTIZED | UNREALIZED | UNREALIZED | FAIR | |||||||||||||
COST | GAIN | LOSSES | VALUE | |||||||||||||
Obligations of U. S. government agencies | $ | 167,460,234 | $ | 347,539 | $ | (1,561,002 | ) | $ | 166,246,771 | |||||||
Obligations of states and political subdivisions | 86,745,151 | 1,501,019 | (1,015,061 | ) | 87,231,109 | |||||||||||
Mortgage-backed and other securities | 12,006,855 | 246,088 | (68,589 | ) | 12,184,354 | |||||||||||
Limited partnership | 165,774 | — | — | 165,774 | ||||||||||||
$ | 266,378,014 | $ | 2,094,646 | $ | (2,644,652 | ) | $ | 265,828,008 |
The net of the above gross unrealized gains of $2,094,646 and gross unrealized losses of $(2,644,652) for available-for- sale securities, net of federal income taxes, is included in accumulated other comprehensive income at December 31, 2016.
F-12
DIBOLL STATE BANCSHARES, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) —(Continued)
The amortized cost and fair values of investment securities available-for-sale at September 30, 2017, by expected maturity are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
SECURITIES AVAILABLE | ||||||||
FOR SALE | ||||||||
AMORTIZED | FAIR | |||||||
COST | VALUE | |||||||
Due in one year or less | $ | 39,580,729 | $ | 39,632,423 | ||||
Due after one year but less than five years | 143,092,343 | 143,177,535 | ||||||
Due after five years but less than ten years | 45,563,919 | 46,650,783 | ||||||
Due after ten years | 7,224,450 | 7,381,555 | ||||||
235,461,441 | 236,842,296 | |||||||
Mortgage-backed and other securities | 10,424,678 | 10,616,231 | ||||||
$ | 245,886,119 | $ | 247,458,527 |
Proceeds from sales of investment securities available-for-sale were $393,621 and $4,148,482 during the nine months ended September 30, 2017 and 2016, respectively. Gross realized gains amounted to $4,162 and $169,014 and gross realized (losses) amounted to $(1,690) and $(2,383) on available-for-sale securities for the nine months ended September 30, 2017 and 2016, respectively.
Investment securities with an amortized cost of approximately $137,582,000 and $142,780,000 and a fair value of approximately $138,285,000 and $142,830,000 at September 30, 2017 and December 31, 2016, respectively, were pledged to secure public deposits and for other purposes required or permitted by law.
Professional standards require the assessment of “Other-than-temporary Impairment” regarding debt and equity securities classified as available-for-sale or held to maturity and equity investments accounted for using the cost method. Information pertaining to securities with gross unrealized losses at September 30, 2017 and December 31, 2016 aggregated by investment category and length of time that individual securities have been in a continuous loss position, follows:
F-13
DIBOLL STATE BANCSHARES, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) —(Continued)
LESS THAN 12 MONTHS | 12 MONTHS OR GREATER | TOTAL | |||||||||||||||||||||
FAIR VALUE | UNREALIZED LOSSES | FAIR VALUE | UNREALIZED LOSSES | FAIR VALUE | UNREALIZED LOSSES | ||||||||||||||||||
Description of Securities September 30, 2017: | |||||||||||||||||||||||
Obligations of U.S. government agencies | $ | 69,219,840 | $ | 440,901 | $ | 16,090,700 | $ | 339,988 | $ | 85,310,540 | $ | 780,889 | |||||||||||
Obligations of states and political subdivisions | 7,306,651 | 105,536 | 10,354,171 | 105,376 | 17,660,822 | 210,912 | |||||||||||||||||
Mortgage-backed and other securities | 2,688,374 | 11,395 | — | — | 2,688,374 | 11,395 | |||||||||||||||||
Total temporarily impaired securities | $ | 79,214,865 | $ | 557,832 | $ | 26,444,871 | $ | 445,364 | $ | 105,659,736 | $ | 1,003,196 | |||||||||||
LESS THAN 12 MONTHS | 12 MONTHS OR GREATER | TOTAL | |||||||||||||||||||||
FAIR VALUE | UNREALIZED LOSSES | FAIR VALUE | UNREALIZED LOSSES | FAIR VALUE | UNREALIZED LOSSES | ||||||||||||||||||
Description of Securities December 31, 2016: | |||||||||||||||||||||||
Obligations of U.S. government agencies | $ | 101,459,625 | $ | 1,561,002 | $ | — | $ | — | $ | 101,459,625 | $ | 1,561,002 | |||||||||||
Obligations of states and political subdivisions | 38,445,976 | 802,330 | 8,984,550 | 212,731 | 47,430,526 | 1,015,061 | |||||||||||||||||
Mortgage-backed and other securities | 6,074,995 | 67,471 | 197,830 | 1,118 | 6,272,825 | 68,589 | |||||||||||||||||
Total temporarily impaired securities | $ | 145,980,596 | $ | 2,430,803 | $ | 9,182,380 | $ | 213,849 | $ | 155,162,976 | $ | 2,644,652 |
Management evaluates securities for other-than-temporary impairment on a periodic basis. Consideration is given to (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) the intent and ability of the Bank to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value.
Debt securities with unrealized losses have depreciated 0.95% and 1.70% from the Bank’s amortized cost basis at September 30, 2017 and December 31, 2016, respectively. These securities are guaranteed by either the U.S. Government agencies thereof or municipalities. These unrealized losses relate principally to current interest rates for similar types of securities. In analyzing an issuer’s financial condition, management considers whether the securities are issued by the federal government or its agencies, whether downgrades by bond rating agencies have occurred, and the results of reviews of the issuer’s financial condition. As management has the ability to hold debt securities until maturity, or for the foreseeable future if classified as available-for-sale, no declines are deemed to be other-than-temporary.
F-14
DIBOLL STATE BANCSHARES, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) —(Continued)
NOTE 3 - LOANS AND ALLOWANCE FOR LOAN LOSSES
Outstanding Loans:
The tables below present total outstanding loans and an aging analysis at September 30, 2017 and December 31, 2016:
SEPTEMBER 30, | ||||||||||||||||||||
2017 | ||||||||||||||||||||
TOTAL | ||||||||||||||||||||
90 DAYS | PAST DUE | TOTAL | ||||||||||||||||||
30-89 DAYS | OR MORE | 30 DAYS | OUT- | |||||||||||||||||
PAST DUE | PAST DUE | OR MORE | CURRENT | STANDING | ||||||||||||||||
Real Estate: | ||||||||||||||||||||
Residential construction | $ | — | $ | — | $ | — | $ | 9,302,994 | 9,302,994 | |||||||||||
Commercial construction | — | — | — | 8,692,903 | 8,692,903 | |||||||||||||||
Farm real estate | 19,274 | — | 19,274 | 7,073,103 | 7,092,377 | |||||||||||||||
1-4 family residential | 4,305,069 | 912,907 | 5,217,976 | 165,134,272 | 170,352,248 | |||||||||||||||
Unimproved property | 636,876 | — | 636,876 | 36,906,975 | 37,543,851 | |||||||||||||||
5 plus family residential | — | — | — | 1,391,989 | 1,391,989 | |||||||||||||||
Commercial real estate | 296,139 | 70,121 | 366,260 | 218,850,045 | 219,216,305 | |||||||||||||||
Nonprofit real estate | — | — | — | 3,493,697 | 3,493,697 | |||||||||||||||
Home improvement | 31,930 | — | 31,930 | 5,495,584 | 5,527,514 | |||||||||||||||
TOTAL REAL ESTATE | 5,289,288 | 983,028 | 6,272,316 | 456,341,562 | 462,613,878 | |||||||||||||||
Consumer | ||||||||||||||||||||
Automobile | 511,633 | 73,622 | 585,255 | 12,812,137 | 13,397,392 | |||||||||||||||
Consumer goods | — | — | — | 9,719 | 9,719 | |||||||||||||||
Dealer | 31,678 | — | 31,678 | 625,208 | 656,886 | |||||||||||||||
Farm - Personal | 959 | — | 959 | 245,663 | 246,622 | |||||||||||||||
Home equity | 910,634 | 170,827 | 1,081,461 | 33,366,627 | 34,448,088 | |||||||||||||||
Home improvement | — | — | — | 168,066 | 168,066 | |||||||||||||||
Home equity line of credit | — | — | — | — | — | |||||||||||||||
Line of credit | 48,924 | — | 48,924 | 918,835 | 967,759 | |||||||||||||||
Mobile home | 19,168 | 22,572 | 41,740 | 664,492 | 706,232 | |||||||||||||||
Recreational vehicle | 309,597 | 38,478 | 348,075 | 7,317,518 | 7,665,593 | |||||||||||||||
Secured | 604,100 | 310,350 | 914,450 | 15,716,209 | 16,630,659 | |||||||||||||||
Stocks/bonds | — | — | — | 50,068 | 50,068 | |||||||||||||||
Savings/CD | 42,827 | — | 42,827 | 7,916,260 | 7,959,087 | |||||||||||||||
Unsecured | 180,035 | 57,870 | 237,905 | 5,316,305 | 5,554,210 | |||||||||||||||
TOTAL CONSUMER | 2,659,555 | 673,719 | 3,333,274 | 85,127,107 | 88,460,381 | |||||||||||||||
Commercial: | ||||||||||||||||||||
Automobile | 111,494 | 29,705 | 141,199 | 3,156,779 | 3,297,978 | |||||||||||||||
Farm - Livestock | 1,383 | — | 1,383 | 4,362,653 | 4,364,036 | |||||||||||||||
Line of credit | 317,628 | — | 317,628 | 28,602,795 | 28,920,423 | |||||||||||||||
Nonprofit loans - Non R/E | — | — | — | 428,734 | 428,734 | |||||||||||||||
Nontaxable | — | — | — | 344,421 | 344,421 | |||||||||||||||
Unsecured | 47,265 | 17,179 | 64,444 | 1,540,984 | 1,605,428 | |||||||||||||||
Secured | 639,081 | 136,113 | 775,194 | 47,994,310 | 48,769,504 | |||||||||||||||
Stocks/bonds | — | — | — | 901,673 | 901,673 | |||||||||||||||
Dealer | — | — | — | 7,615 | 7,615 | |||||||||||||||
TOTAL COMMERCIAL | 1,116,851 | 182,997 | 1,299,848 | 87,339,964 | 88,639,812 | |||||||||||||||
Late charges, overdrafts, | ||||||||||||||||||||
and clearing account | — | — | — | 2,796,754 | 2,796,754 | |||||||||||||||
TOTAL LOANS | $ | 9,065,694 | $ | 1,839,744 | $ | 10,905,438 | $ | 631,605,387 | 642,510,825 | |||||||||||
Allowance for credit losses | (7,338,651 | ) | ||||||||||||||||||
NET LOANS | $ | 635,172,174 |
F-15
DIBOLL STATE BANCSHARES, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) —(Continued)
DECEMBER 31, | ||||||||||||||||||||
2016 | ||||||||||||||||||||
TOTAL | ||||||||||||||||||||
TOTAL | CURRENT OR | |||||||||||||||||||
90 DAYS | PAST DUE | LESS THAN | TOTAL | |||||||||||||||||
30-89 DAYS | OR MORE | 30 DAYS | 30 DAYS | OUT- | ||||||||||||||||
PAST DUE | PAST DUE | OR MORE | PAST DUE | STANDING | ||||||||||||||||
Real Estate: | ||||||||||||||||||||
Residential construction | $ | 306,900 | $ | — | $ | 306,900 | $ | 12,744,122 | $ | 13,051,022 | ||||||||||
Commercial construction | — | — | — | 18,378,569 | 18,378,569 | |||||||||||||||
Farm real estate | 272,572 | — | 272,572 | 8,501,557 | 8,774,129 | |||||||||||||||
1-4 family residential | 3,317,981 | 1,481,138 | 4,799,119 | 153,111,371 | 157,910,490 | |||||||||||||||
Unimproved property | 63,188 | 245,558 | 308,746 | 40,348,338 | 40,657,084 | |||||||||||||||
5 plus family residential | — | — | — | 651,324 | 651,324 | |||||||||||||||
Commercial real estate | 623,030 | 2,117,511 | 2,740,541 | 198,992,471 | 201,733,012 | |||||||||||||||
Nonprofit real estate | — | 86,171 | 86,171 | 5,236,887 | 5,323,058 | |||||||||||||||
Home improvement | 51,636 | 34,838 | 86,474 | 3,964,201 | 4,050,675 | |||||||||||||||
TOTAL REAL ESTATE | 4,635,307 | 3,965,216 | 8,600,523 | 441,928,840 | 450,529,363 | |||||||||||||||
Consumer | ||||||||||||||||||||
Automobile | 434,095 | 114,012 | 548,107 | 14,022,338 | 14,570,445 | |||||||||||||||
Consumer goods | — | — | — | 18,782 | 18,782 | |||||||||||||||
Dealer | 12,228 | — | 12,228 | 452,008 | 464,236 | |||||||||||||||
Farm - Personal | — | — | — | 320,792 | 320,792 | |||||||||||||||
Home equity | 634,085 | 255,366 | 889,451 | 33,663,237 | 34,552,688 | |||||||||||||||
Home improvement | 5,173 | — | 5,173 | 190,545 | 195,718 | |||||||||||||||
Home equity line of credit | — | — | — | 105,885 | 105,885 | |||||||||||||||
Line of credit | — | — | — | 939,032 | 939,032 | |||||||||||||||
Mobile home | 43,436 | 24,159 | 67,595 | 784,003 | 851,598 | |||||||||||||||
Recreational vehicle | 150,857 | 95,265 | 246,122 | 7,344,767 | 7,590,889 | |||||||||||||||
Secured | 757,887 | 284,773 | 1,042,660 | 16,957,077 | 17,999,737 | |||||||||||||||
Stocks/bonds | 27,048 | — | 27,048 | 121,334 | 148,382 | |||||||||||||||
Savings/CD | 7,745 | — | 7,745 | 7,946,139 | 7,953,884 | |||||||||||||||
Unsecured | 114,438 | 23,403 | 137,841 | 6,156,489 | 6,294,330 | |||||||||||||||
Other consumer (overdrafts) | — | — | — | 323,660 | 323,660 | |||||||||||||||
TOTAL CONSUMER | 2,186,992 | 796,978 | 2,983,970 | 89,346,088 | 92,330,058 | |||||||||||||||
Commercial: | ||||||||||||||||||||
Automobile | 19,654 | 3,006 | 22,660 | 2,934,458 | 2,957,118 | |||||||||||||||
Farm - Livestock | 14,796 | — | 14,796 | 4,209,800 | 4,224,596 | |||||||||||||||
Line of credit | 7,264 | — | 7,264 | 35,816,348 | 35,823,612 | |||||||||||||||
Nonprofit loans - Non R/E | — | — | — | 529,164 | 529,164 | |||||||||||||||
Nontaxable | — | — | — | 473,852 | 473,852 | |||||||||||||||
Unsecured | — | 55,918 | 55,918 | 1,414,915 | 1,470,833 | |||||||||||||||
Secured | 276,033 | 142,790 | 418,823 | 51,332,484 | 51,751,307 | |||||||||||||||
Stocks/bonds | — | — | — | 1,024,747 | 1,024,747 | |||||||||||||||
Dealer | — | — | — | 53,512 | 53,512 | |||||||||||||||
TOTAL COMMERCIAL | 317,747 | 201,714 | 519,461 | 97,789,280 | 98,308,741 | |||||||||||||||
Late charges and clearing account | 1,124,640 | 1,124,640 | ||||||||||||||||||
TOTAL LOANS | $ | 7,140,046 | $ | 4,963,908 | $ | 12,103,954 | $ | 630,188,848 | 642,292,802 | |||||||||||
Allowance for credit losses | (7,630,740 | ) | ||||||||||||||||||
NET LOANS | $ | 634,662,062 |
The Bank’s goal is to mitigate risks from an unforeseen threat to the loan portfolio as a result of an economic downturn or other negative influences. Plans that aid in mitigating these potential risks in managing the loan portfolio include: enforcing loan policies and procedures, evaluating the borrower’s business plan through the life of the loan, identifying and monitoring primary and alternative sources of repayment, and obtaining adequate collateral to mitigate loss in the event of liquidation. Specific reserves are established based upon credit and/or collateral risks on an individual loan basis. A risk rating system is used to estimate potential loss exposure and to provide a measuring system for setting general and specific reserve allocations.
F-16
DIBOLL STATE BANCSHARES, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) —(Continued)
As of September 30, 2017, the real estate loan portfolio constituted 72% of the total loan portfolio. This can be broken down further into the following categories: 3% construction and land development, 34% commercial real estate and 27% residential real estate loans, as a percent of total loans.
The Bank’s construction and land development loans are secured by real property where the loan funds will be used to acquire land and to construct or improve appropriately zoned real property for the creation of income producing or owner occupied commercial properties. Borrowers are generally required to put equity into the project at levels determined by the loan committee and usually are underwritten with a maximum term of 24 months.
Commercial real estate loans are secured by improved real property which is generating income in the normal course of business. Debt service coverage, assuming stabilized occupancy, must be satisfied to support a permanent loan. The debt service coverage ratio is ordinarily at 1.20 to 1.00. These loans are generally underwritten with a maturity not greater than 10 years or the remaining useful life of the property, whichever is lower. The preferred repricing is between 5 to 7 years, with amortization to a maximum of 25 years.
Residential real estate loans are secured by the improved real property of the borrower and are usually underwritten with a term of 1 to 5 years fixed, then variable with amortization to a maximum of 30 years.
The Company also makes commercial and industrial loans for a variety of purposes, which include working capital, equipment and accounts receivable financing. This category represents about 14% of the loan portfolio at September 30, 2017. Loans in this category generally carry a variable interest rate. Commercial loans meet reasonable underwriting standards, including appropriate collateral and cash flow necessary to support debt service. Personal guarantees are generally required, but may be limited.
F-17
DIBOLL STATE BANCSHARES, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) —(Continued)
Nonaccrual Loans:
The table below includes the Company’s nonaccrual loans, including nonperforming troubled debt restructures, and loans past due 90 days or more at September 30, 2017 and December 31, 2016:
NONACCRUAL LOANS | ACCRUING PAST DUE | |||||||||||||||
AND LEASES | 90 DAYS OR MORE | |||||||||||||||
September 30, | December 31, | September 30, | December 31, | |||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Real Estate: | ||||||||||||||||
Farm real estate | $ | — | $ | — | $ | — | $ | — | ||||||||
1-4 family residential | 1,005,375 | 1,076,474 | — | 445,535 | ||||||||||||
Unimproved property | — | 196,330 | — | 49,228 | ||||||||||||
Commercial real estate | 774,259 | 2,583,997 | — | 245,606 | ||||||||||||
Nonprofit real estate | — | 86,171 | — | — | ||||||||||||
Home improvement | — | 34,837 | — | — | ||||||||||||
TOTAL REAL ESTATE | 1,779,634 | 3,977,809 | — | 740,369 | ||||||||||||
Consumer: | ||||||||||||||||
Automobile | 73,622 | 48,423 | — | 68,076 | ||||||||||||
Dealer | — | 6,781 | — | — | ||||||||||||
Home equity | 170,827 | 110,655 | — | 236,908 | ||||||||||||
Mobile home | 22,572 | 24,159 | — | — | ||||||||||||
Recreational vehicle | 43,630 | 5,958 | — | 89,307 | ||||||||||||
Secured | 310,350 | 227,237 | — | 78,122 | ||||||||||||
Unsecured | 57,870 | 53,287 | — | 21,149 | ||||||||||||
TOTAL CONSUMER | 678,871 | 476,500 | — | 493,562 | ||||||||||||
Commercial: | ||||||||||||||||
Automobile | 19,051 | 3,006 | — | — | ||||||||||||
Farm - Livestock | — | — | — | — | ||||||||||||
Line of credit | 90,318 | — | — | — | ||||||||||||
Unsecured | 336,226 | 349,441 | — | 55,918 | ||||||||||||
Secured | 136,112 | 173,390 | — | 19,684 | ||||||||||||
TOTAL COMMERCIAL | 581,707 | 525,837 | — | 75,602 | ||||||||||||
TOTAL | $ | 3,040,212 | $ | 4,980,146 | $ | — | $ | 1,309,533 |
Credit Quality Indicators:
The Company monitors credit quality within its three segments based on primary credit quality indicators. The Company’s loans are evaluated using the pass rated or reservable criticized as the primary credit quality indicator. The term reservable criticized refers to those loans that are internally classified or listed by the Company as substandard, doubtful, or loss. These assets pose an elevated risk and may have a high probability of default or total loss. Pass rated refers to all loans not considered reservable criticized.
Internally assigned grade:
Listed in the following table as Pass:
Pass - loans in this category have strong asset quality and liquidity along with a multi-year track record of profitability.
Special mention - loans in this category are currently protected but are potentially weak. The credit risk may be relatively minor, yet constitute an increased risk in light of the circumstances surrounding a specific loan.
F-18
DIBOLL STATE BANCSHARES, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) —(Continued)
Listed in the following table as Reservable Criticized:
Substandard - loans in this category show signs of continuing negative financial trends and unprofitability at various times, and therefore, are inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any.
Doubtful - loans in this category are illiquid and highly leveraged, have negative net worth, cash flow, and continuing trend serious losses. The possibility of loss is extremely high, but because of certain important and reasonably specific pending factors which may work to the advantage and strengthening of the asset, its classification as loss is deferred until its more exact status may be determined.
Loss - loans in this category are considered uncollectible and of such little value that their continuance as bankable loans is not warranted. This classification does not mean that the loan has no recovery value, but that it is not practical to defer writing it off, even though partial recovery may be affected in the future. Such credits should be recommended for charge-off.
The information for each of the credit quality indicators is updated on a quarterly basis in conjunction with the determination of the adequacy of the allowance for loan losses.
F-19
DIBOLL STATE BANCSHARES, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) —(Continued)
The following table indicates the risk rating of loans by category:
RISK RATING | ||||||||||||||||
September 30, 2017 | December 31, 2016 | |||||||||||||||
RESERVABLE | RESERVABLE | |||||||||||||||
PASS | CRITICIZED | PASS | CRITICIZED | |||||||||||||
Real Estate: | ||||||||||||||||
Residential construction | $ | 9,302,994 | $ | — | $ | 13,051,022 | $ | — | ||||||||
Commercial construction | 8,692,903 | — | 18,378,569 | — | ||||||||||||
Farm real estate | 7,082,570 | 9,807 | 8,762,933 | 11,196 | ||||||||||||
1-4 family residential | 169,818,377 | 533,871 | 153,252,675 | 4,657,815 | ||||||||||||
Unimproved property | 37,511,360 | 32,491 | 40,297,295 | 359,789 | ||||||||||||
5 plus family residential | 1,391,989 | — | 651,324 | — | ||||||||||||
Commercial real estate | 218,512,168 | 704,137 | 192,994,912 | 8,738,100 | ||||||||||||
Nonprofit real estate | 3,493,697 | — | 5,236,887 | 86,171 | ||||||||||||
Home improvement | 5,527,514 | — | 4,015,837 | 34,838 | ||||||||||||
TOTAL REAL ESTATE | 461,333,572 | 1,280,306 | 436,641,454 | 13,887,909 | ||||||||||||
Consumer: | ||||||||||||||||
Automobile | 13,326,437 | 70,955 | 14,104,137 | 466,308 | ||||||||||||
Consumer goods | 9,719 | — | 18,782 | — | ||||||||||||
Dealer | 656,886 | — | 444,170 | 20,066 | ||||||||||||
Farm - Personal | 246,622 | — | 320,792 | — | ||||||||||||
Home equity | 34,178,686 | 269,402 | 33,811,737 | 740,951 | ||||||||||||
Home improvement | 168,066 | — | 195,718 | — | ||||||||||||
Home equity line of credit | — | — | 105,885 | — | ||||||||||||
Line of credit | 967,759 | — | 939,032 | — | ||||||||||||
Mobile home | 683,660 | 22,572 | 767,874 | 83,724 | ||||||||||||
Recreational vehicle | 7,618,596 | 46,997 | 7,305,779 | 285,110 | ||||||||||||
Secured | 16,486,299 | 144,360 | 17,221,229 | 778,508 | ||||||||||||
Stocks/bonds | 50,068 | — | 148,382 | — | ||||||||||||
Savings/CD | 7,959,087 | — | 7,953,884 | — | ||||||||||||
Unsecured | 5,489,908 | 64,302 | 6,159,318 | 135,012 | ||||||||||||
Other consumer (overdrafts) | — | — | 323,660 | — | ||||||||||||
TOTAL CONSUMER | 87,841,793 | 618,588 | 89,820,379 | 2,509,679 | ||||||||||||
Commercial: | ||||||||||||||||
Automobile | 3,297,978 | — | 2,954,112 | 3,006 | ||||||||||||
Farm - Livestock | 4,364,036 | — | 4,222,646 | 1,950 | ||||||||||||
Line of credit | 28,830,105 | 90,318 | 34,892,510 | 931,102 | ||||||||||||
Nonprofit loans - Non R/E | 428,734 | — | 529,164 | — | ||||||||||||
Nontaxable | 344,421 | — | 473,852 | — | ||||||||||||
Unsecured | 1,271,962 | 333,466 | 1,038,892 | 431,941 | ||||||||||||
Secured | 48,651,574 | 117,930 | 50,861,559 | 889,748 | ||||||||||||
Stocks/bonds | 901,673 | — | 1,024,747 | — | ||||||||||||
Dealer | 7,615 | — | 53,512 | — | ||||||||||||
TOTAL COMMERCIAL | 88,098,098 | 541,714 | 96,050,994 | 2,257,747 | ||||||||||||
Late charges, overdrafts, and clearing accounts | 2,796,754 | — | 1,124,640 | — | ||||||||||||
TOTAL | $ | 640,070,217 | $ | 2,440,608 | $ | 623,637,467 | $ | 18,655,335 |
F-20
DIBOLL STATE BANCSHARES, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) —(Continued)
Impaired Loans and Troubled Debt Restructurings:
A loan is considered impaired when, based on current information and events, it is probable that the Bank will be unable to collect all amounts due from the borrower in accordance with the contractual terms of the loan.
Impaired loans were as follows:
September 30, 2017 | ||||||||||||
UNPAID | ||||||||||||
PRINCIPAL | CARRYING | RELATED | ||||||||||
BALANCE | VALUE | ALLOWANCE | ||||||||||
With an Allowance Recorded: | ||||||||||||
Real estate | $ | 860,000 | $ | 792,000 | $ | 68,000 | ||||||
Commercial | 583,000 | 143,000 | 440,000 | |||||||||
Consumer | 346,000 | 150,000 | 196,000 | |||||||||
Total | $ | 1,789,000 | $ | 1,085,000 | $ | 704,000 |
December 31, 2016 | ||||||||||||
UNPAID | ||||||||||||
PRINCIPAL | CARRYING | RELATED | ||||||||||
BALANCE | VALUE | ALLOWANCE | ||||||||||
With an Allowance Recorded: | ||||||||||||
Real estate | $ | 3,615,000 | $ | 3,270,000 | $ | 345,000 | ||||||
Commercial | 502,000 | 33,000 | 469,000 | |||||||||
Consumer | 182,000 | 55,000 | 127,000 | |||||||||
Total | $ | 4,299,000 | $ | 3,358,000 | $ | 941,000 |
Information on troubled debt restructurings for the nine months ended September 30, 2017 is as follows:
September 30, 2017 | ||||||||||
PRE-MODIFICATION | POST-MODIFICATION | |||||||||
OUTSTANDING | OUTSTANDING | |||||||||
NUMBER OF | RECORDED | RECORDED | ||||||||
CONTRACTS | INVESTMENT | INVESTMENT | ||||||||
Trouble Debt Restructuring: | ||||||||||
Commercial | 1 | $ | 1,799,281 | $ | 1,629,276 | |||||
$ | 1,799,281 | $ | 1,629,276 |
The troubled debt restructured loan shown above was modified during 2016 with the following terms:
The loan originally had an adjustable interest rate that has been modified to a fixed rate due to the borrower filing
bankruptcy.
There were no loans as of September 30, 2017 that had been modified as troubled debt restructuring during the year and subsequently re-defaulted.
At September 30, 2017, there is no commitment to lend additional funds to a borrower whose loan terms have been modified in a trouble debt restructuring.
F-21
DIBOLL STATE BANCSHARES, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) —(Continued)
Allowance for Credit Losses:
The tables below summarize the changes in the allowance for credit losses for the nine months ended September 30, 2017 and 2016:
September 30, 2017 | ||||||||||||||||
REAL | TOTAL | |||||||||||||||
COMMERCIAL | ESTATE | CONSUMER | ALLOWANCE | |||||||||||||
Allowance for loan and lease losses January 1 | $ | 1,498,857 | $ | 4,782,582 | $ | 1,349,301 | $ | 7,630,740 | ||||||||
Loans and leases charged off | (787,875 | ) | (888,778 | ) | (962,497 | ) | (2,639,150 | ) | ||||||||
Recoveries of loans and leases previously charged off | 5,551 | 350 | 133,660 | 139,561 | ||||||||||||
NET CHARGE OFFS | (782,324 | ) | (888,428 | ) | (828,837 | ) | (2,499,589 | ) | ||||||||
Provision for loan and lease losses | 652,528 | 628,513 | 926,459 | 2,207,500 | ||||||||||||
ALLOWANCE FOR LOAN AND LEASE LOSSES SEPTEMBER 30 | $ | 1,369,061 | $ | 4,522,667 | $ | 1,446,923 | $ | 7,338,651 |
September 30, 2016 | ||||||||||||||||
REAL | CONSUMER AND | TOTAL | ||||||||||||||
COMMERCIAL | ESTATE | CREDIT CARDS | ALLOWANCE | |||||||||||||
Allowance for loan and lease losses January 1 | $ | 1,483,465 | $ | 4,434,601 | $ | 1,454,528 | $ | 7,372,594 | ||||||||
Loans and leases charged off | (76,783 | ) | (87,397 | ) | (713,511 | ) | (877,691 | ) | ||||||||
Recoveries of loans and leases previously charged off | 4,577 | — | 53,249 | 57,826 | ||||||||||||
NET CHARGE OFFS | (72,206 | ) | (87,397 | ) | (660,262 | ) | (819,865 | ) | ||||||||
Provision for loan and lease losses | (182,731 | ) | 588,949 | 613,132 | 1,019,350 | |||||||||||
ALLOWANCE FOR LOAN AND LEASE LOSSES SEPTEMBER 30 | $ | 1,228,528 | $ | 4,936,153 | $ | 1,407,398 | $ | 7,572,079 |
F-22
DIBOLL STATE BANCSHARES, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) —(Continued)
The tables below represent the allowance and the carrying value of outstanding loans and leases by portfolio segment at September 30, 2017 and December 31, 2016.
September 30, 2017 | ||||||||||||||||
REAL | ||||||||||||||||
COMMERCIAL | ESTATE | CONSUMER | TOTAL | |||||||||||||
Impaired Loans and Troubled Debt Restructurings: | ||||||||||||||||
Allowance for loans and lease losses | $ | 439,482 | $ | 68,000 | $ | 196,126 | $ | 703,608 | ||||||||
Unpaid principal | $ | 583,351 | $ | 859,552 | $ | 345,893 | $ | 1,788,796 | ||||||||
Allowance as a percentage of unpaid principal | 75.34 | % | 7.91 | % | 56.70 | % | 39.33 | % | ||||||||
Collectively Evaluated for Impairment: | ||||||||||||||||
Allowance for loans and lease losses | $ | 929,579 | $ | 4,454,667 | $ | 1,250,797 | $ | 6,635,043 | ||||||||
Unpaid principal | $ | 88,056,461 | $ | 461,754,326 | $ | 88,114,488 | $ | 637,925,275 | ||||||||
Allowance as a percentage of unpaid principal | 1.06 | % | 0.96 | % | 1.42 | % | 1.04 | % | ||||||||
Total: | ||||||||||||||||
Allowance for loans and lease losses | $ | 1,369,061 | $ | 4,522,667 | $ | 1,446,923 | $ | 7,338,651 | ||||||||
Unpaid principal | $ | 88,639,812 | $ | 462,613,878 | $ | 88,460,381 | $ | 639,714,071 | ||||||||
Allowance as a percentage of unpaid principal | 1.54 | % | 0.98 | % | 1.64 | % | 1.15 | % |
December 31, 2016 | ||||||||||||||||||
REAL | ||||||||||||||||||
COMMERCIAL | ESTATE | CONSUMER | TOTAL | |||||||||||||||
Impaired Loans and Troubled Debt Restructurings: | ||||||||||||||||||
Allowance for loans and lease losses | $ | 469,000 | $ | 345,000 | $ | 127,000 | $ | 941,000 | ||||||||||
Unpaid principal | $ | 502,000 | $ | 3,615,000 | $ | 182,000 | $ | 4,299,000 | ||||||||||
Allowance as a percentage of unpaid principal | 93.43 | % | 9.54 | % | 69.78 | % | 21.89 | % | ||||||||||
Collectively Evaluated for Impairment: | ||||||||||||||||||
Allowance for loans and lease losses | $ | 1,029,857 | $ | 4,437,582 | $ | 1,222,301 | $ | 6,689,740 | ||||||||||
Unpaid principal | $ | 97,806,740 | $ | 446,914,364 | $ | 92,148,057 | $ | 636,869,161 | ||||||||||
Allowance as a percentage of unpaid principal | 1.05 | % | 0.99 | % | 1.33 | % | 1.05 | % | ||||||||||
Total: | ||||||||||||||||||
Allowance for loans and lease losses | $ | 1,498,857 | $ | 4,782,582 | $ | 1,349,301 | $ | 7,630,740 | ||||||||||
Unpaid principal | $ | 98,308,740 | $ | 450,529,364 | $ | 92,330,057 | $ | 641,168,161 | ||||||||||
Allowance as a percentage of unpaid principal | 1.52 | % | 1.06 | % | 1.46 | % | 1.19 | % |
Approximate loan maturities and repricing of the loan portfolio are as follows:
F-23
DIBOLL STATE BANCSHARES, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) —(Continued)
September 30, 2017 | December 31, 2016 | |||||||
Within one year | $ | 179,370,000 | $ | 183,120,000 | ||||
After one through five years | 430,305,000 | 418,252,000 | ||||||
After five years | 32,836,000 | 40,921,000 | ||||||
TOTAL | $ | 642,511,000 | $ | 642,293,000 |
NOTE 4 - TIME DEPOSITS
The aggregate amount of time deposits issued in denominations that meet or exceed the FDIC insurance limit of $250,000 totaled approximately $26,441,000 and $34,544,000 at September 30, 2017 and December 31, 2016, respectively.
Total time deposits and their approximate remaining maturities are as follows:
September 30, | December 31, | |||||||
2017 | 2016 | |||||||
Three months or less | $ | 23,364,000 | $ | 37,149,000 | ||||
Over three months through twelve months | 64,604,000 | 67,214,000 | ||||||
Over one year through three years | 22,439,000 | 21,833,000 | ||||||
Over three years | 10,886,000 | 12,525,000 | ||||||
$ | 121,293,000 | $ | 138,721,000 |
NOTE 5 - COMMITMENTS AND CONTINGENT LIABILITIES
The Bank is party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of customers. These financial instruments include commitments to extend credit, and standby letters of credit. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the statement of financial position. The contract amounts of those instruments reflect the extent of involvement the Bank has in particular classes of financial instruments.
The Bank’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments. The Bank uses the same credit policies in making commitments and conditional obligations as they do for on-balance-sheet instruments.
At September 30, 2017 and December 31, 2016, the Bank had the following financial instruments whose approximate contract amounts represent credit risk:
September 30, 2017 | December 31, 2016 | |||||||
Commitments to extend credit | $ | 77,952,000 | $ | 77,266,000 | ||||
Standby letters of credit | 6,462,000 | 9,300,000 | ||||||
$ | 84,414,000 | $ | 86,566,000 |
F-24
DIBOLL STATE BANCSHARES, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) —(Continued)
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. The Bank evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Bank upon extension of credit, is based on management’s credit evaluation of the customer. Collateral held varies but largely consists of real estate, deposits and inventory. Credit card loan commitments are unsecured.
Standby letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. Collateral held for the standby letters of credit primarily consists of deposits; however, some letters of credit are unsecured.
NOTE 6 - SURPLUS RESTRICTIONS AND REGULATORY MATTERS
Diboll is subject to the dividend restrictions set forth by the Federal Reserve System. Under such restrictions, Diboll may not, without prior approval of the Federal Reserve System, declare dividends in excess of the sum of current year’s retained earnings (as defined) plus the retained earnings (as defined) from the prior two years. This amount is also limited based on the regulatory capital requirement. The dividends, as of September 30, 2017, that Diboll could declare, without the approval of the Federal Reserve System, amounted to approximately $16,288,000.
Diboll (on a consolidated basis) and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory - and possibly additional discretionary - actions by regulators that, if undertaken, could have a direct material effect on Diboll’s and the Bank’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, Diboll and the Bank must meet specific capital guidelines that involve quantitative measures of their assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy requires the Bank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier I capital (as defined) to average assets (as defined). Management believes, as of September 30, 2017, the Bank meets all capital adequacy requirements to which it is subject.
As of September 30, 2017 and December 31, 2016, the most recent notification from the Federal Deposit Insurance Corporation categorized the Bank as well-capitalized under the regulatory framework for prompt corrective action. To be categorized as well-capitalized minimum total risk-based, Tier I risk based and Tier I leverage ratios as set forth in the table must be maintained. There are no conditions or events since that notification that management believes have changed the Bank’s categories.
Actual capital amounts and ratios are presented in the table for the Bank (in thousands). Bank only amounts and percentages are presented as they do not differ materially from bank holding company amounts and percentages.
F-25
DIBOLL STATE BANCSHARES, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) —(Continued)
TO BE WELL | |||||||||||||||||||
CAPITALIZED UNDER | |||||||||||||||||||
FOR CAPITAL | PROMPT CORRECTIVE | ||||||||||||||||||
ACTUAL | ADEQUACY PURPOSES | ACTION PROVISIONS | |||||||||||||||||
AMOUNT | RATIO | AMOUNT | RATIO | AMOUNT | RATIO | ||||||||||||||
As of September 30, 2017: | |||||||||||||||||||
Total Risk-Based Capital (to Risk Weighted Assets) | $ | 103,956,000 | 15.25 | % | $ | 54,552,000 | ≥8.0% | $ | 68,190,000 | ≥10.0% | |||||||||
Tier I Capital (to Risk Total Risk-Based Capital Weighted Assets) | $ | 96,394,000 | 14.14 | % | $ | 40,914,000 | ≥6.0% | $ | 54,552,000 | ≥8.0% | |||||||||
Common Equity Tier 1 Capital (to Risk Weighted Assets) | $ | 96,394,000 | 14.14 | % | $ | 30,685,000 | ≥4.5% | $ | 44,323,000 | ≥6.5% | |||||||||
Tier I Capital (to Average Assets) | $ | 96,394,000 | 9.84 | % | $ | 39,175,000 | ≥4.0% | $ | 48,969,000 | ≥5.0% | |||||||||
As of December 31, 2016: | |||||||||||||||||||
Total Risk-Based Capital (to Risk Weighted Assets) | $ | 99,348,000 | 14.13% | $ | 56,255,000 | ≥8.0% | $ | 70,319,000 | ≥10.0% | ||||||||||
Tier I Capital (to Risk Total Risk-Based Capital Weighted Assets) | $ | 91,494,000 | 13.01% | $ | 42,191,000 | ≥6.0% | $ | 56,255,000 | ≥8.0% | ||||||||||
Common Equity Tier 1 Capital (to Risk Weighted Assets) | $ | 91,494,000 | 13.01% | $ | 31,643,000 | ≥4.5% | $ | 45,707,000 | ≥6.5% | ||||||||||
Tier I Capital (to Average Assets) | $ | 91,494,000 | 9.17% | $ | 39,915,000 | ≥4.0% | $ | 49,894,000 | ≥5.0% |
NOTE 7 - TRUST ASSETS
Trust assets and other property (except cash deposits), held by the Bank in agency or other fiduciary capacities for its customers are not included in the financial statements since they are not assets of the Bank. Market value of the trust assets at September 30, 2017 and December 31, 2016, respectively, was approximately $923,650,000 and $883,850,000.
NOTE 8 - FINANCIAL INSTRUMENTS
Professional accounting standards require disclosure of fair value information about financial instruments, whether or not recognized in the statement of financial condition.
FASB ASC 820, Fair Value Measurements and Disclosures, clarifies that fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. Under this guidance, fair value measurements are not adjusted for transaction costs. This guidance establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy under this guidance are described below:
Level 1 Valuations for assets and liabilities traded in active exchange markets. Valuations are obtained from readily available pricing sources for market transactions involving identical assets or liabilities.
Level 2 Valuations for assets and liabilities traded in less active dealer or broker markets. Valuations are obtained from third party pricing services for identical or comparable assets or liabilities which use observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in active markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3 Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
A financial instrument’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement.
F-26
DIBOLL STATE BANCSHARES, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) —(Continued)
Professional accounting standards exclude all nonfinancial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented do not represent the underlying consolidated value of Diboll and the Bank.
The following methods and assumptions were used in estimating fair value disclosures for those financial instruments for which it was practical to estimate that value:
Cash and Due From Banks, and Federal Funds Sold
For these financial instruments, the carrying amount is a reasonable estimate of fair value (Level 1).
Investment Securities
For securities held as investments, fair value is based on quoted market prices, where available (Level 1). If a quoted market price is not available, fair value is estimated based on discounted cash flow analysis using observable inputs (Level 2).
Federal Home Loan Bank Stock
No ready market exists for Federal Home Loan Bank (“FHLB”) stock. Investment is required to be a member of the Federal Home Loan Bank system. This stock can be redeemed at cost should the requirements be reduced; therefore, cost is used as fair value for this purpose.
Loans
For variable-rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying amounts. The fair values for other loans are estimated using discounted cash flow analysis, based on interest rates currently being offered for loans with similar terms to borrowers of similar credit quality (Level 2). Loan fair value estimates include judgment regarding future expected loss experience and risk characteristics.
Deposits
The fair values disclosed for noninterest-bearing demand deposits, savings, and interest-bearing demand deposits are, by definition, equal to the amount payable on demand at the reporting date (that is, their carrying amounts). The fair values for time deposits are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregated contractual maturities on such time deposits (Level 2).
Accrued Interest Receivable and Accrued Interest Payable
For these financial instruments, the carrying amount is a reasonable estimate of fair value.
Off-Balance-Sheet Financial Instruments
Fair values for commitments to extend credit and letters of credit are estimated based upon rates currently in effect at the balance sheet date.
F-27
DIBOLL STATE BANCSHARES, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) —(Continued)
The estimated fair values of the consolidated financial instruments at September 30, 2017 are as follows:
APPROXIMATE | ||||||||
CARRYING | APPROXIMATE | |||||||
AMOUNT | FAIR VALUE | |||||||
Financial Assets: | ||||||||
Cash, due from banks, and federal funds sold | $ | 93,068,000 | $ | 93,068,000 | ||||
Investment securities | 247,459,000 | 247,459,000 | ||||||
FHLB stock | 369,000 | 369,000 | ||||||
Loans, less allowance for loan losses | 635,172,000 | 633,334,000 | ||||||
Accrued interest receivable | 2,893,000 | 2,893,000 | ||||||
$ | 978,961,000 | $ | 977,123,000 | |||||
Financial Liabilities: | ||||||||
Deposits | $ | 890,028,000 | $ | 890,423,000 | ||||
Accrued interest payable | 117,000 | 117,000 | ||||||
$ | 890,145,000 | $ | 890,540,000 | |||||
Off-Balance-Sheet: | ||||||||
Commitments to extend credit | $ | 84,414,000 | $ | 84,414,000 |
The estimated fair values of the consolidated financial instruments at December 31, 2016 are as follows:
APPROXIMATE | ||||||||
CARRYING | APPROXIMATE | |||||||
AMOUNT | FAIR VALUE | |||||||
Financial Assets: | ||||||||
Cash, due from banks, and federal funds sold | $ | 52,366,000 | $ | 52,366,000 | ||||
Investment securities | 265,828,000 | 265,828,000 | ||||||
FHLB stock | 394,000 | 394,000 | ||||||
Loans, less allowance for loan losses | 634,662,000 | 636,280,000 | ||||||
Accrued interest receivable | 3,441,000 | 3,441,000 | ||||||
$ | 956,691,000 | $ | 958,309,000 | |||||
Financial Liabilities: | ||||||||
Deposits | $ | 879,060,000 | $ | 879,502,000 | ||||
Accrued interest payable | 108,000 | 108,000 | ||||||
$ | 879,168,000 | $ | 879,610,000 | |||||
Off-Balance-Sheet: | ||||||||
Commitments to extend credit | $ | 86,566,000 | $ | 86,566,000 |
F-28
DIBOLL STATE BANCSHARES, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) —(Continued)
Fair values of assets and liabilities presented on the consolidated balance sheets measured on a recurring basis at September 30, 2017 and December 31, 2016 are as follows:
FAIR VALUE MEASUREMENTS AT REPORTING DATE USING | |||||||||||||||||
QUOTED PRICES | |||||||||||||||||
IN ACTIVE | |||||||||||||||||
MARKETS FOR | SIGNIFICANT | ||||||||||||||||
IDENTICAL | OTHER | SIGNIFICANT | |||||||||||||||
ASSETS/ | OBSERVABLE | UNOBSERVABLE | |||||||||||||||
FAIR | LIABILITIES | INPUTS | INPUTS | ||||||||||||||
VALUE | (LEVEL 1) | (LEVEL 2) | (LEVEL 3) | ||||||||||||||
September 30, 2017: | |||||||||||||||||
Obligations of U.S. government agencies | $ | 157,054,179 | $ | — | $ | 157,054,179 | $ | — | |||||||||
Obligations of states and political subdivisions | 79,788,117 | — | 79,788,117 | — | |||||||||||||
Mortgage-backed and other securities | 10,616,231 | — | 10,616,231 | — | |||||||||||||
Available-for-sale securities | $ | 247,458,527 | $ | — | $ | 247,458,527 | $ | — | |||||||||
December 31, 2016: | |||||||||||||||||
Obligations of U.S. government agencies | $ | 166,246,771 | $ | — | $ | 166,246,771 | $ | — | |||||||||
Obligations of states and political subdivisions | 87,231,109 | — | 87,231,109 | — | |||||||||||||
Mortgage-backed and other securities | 12,350,128 | — | 12,350,128 | — | |||||||||||||
Available-for-sale securities | $ | 265,828,008 | $ | — | $ | 265,828,008 | $ | — |
For each major category of assets and liabilities presented on the consolidated balance sheets measured at fair value on a nonrecurring basis during the period are presented as follows:
FAIR VALUE MEASUREMENTS USING | |||||||||||||||||||||
QUOTED | SIGNIFICANT | ||||||||||||||||||||
PRICES IN ACTIVE | OTHER | SIGNIFICANT | |||||||||||||||||||
PERIOD | MARKETS FOR | OBSERVABLE | UNOBSERVABLE | TOTAL | |||||||||||||||||
END | IDENTICAL ASSETS | INPUTS | INPUTS | GAINS | |||||||||||||||||
DESCRIPTION | VALUE | (LEVEL 1) | (LEVEL 2) | (LEVEL 3) | (LOSSES) | ||||||||||||||||
September 30, 2017: | |||||||||||||||||||||
Other real estate owned | $ | 2,022,800 | $ | — | $ | 2,022,800 | $ | — | $ | — | |||||||||||
Goodwill | $ | 7,334,165 | $ | — | $ | 7,334,165 | $ | — | $ | — | |||||||||||
Impaired Loans | $ | 1,788,796 | $ | — | $ | 1,788,796 | $ | — | $ | — | |||||||||||
December 31, 2016: | |||||||||||||||||||||
Other real estate owned | $ | 263,400 | $ | — | $ | 263,400 | $ | — | $ | — | |||||||||||
Goodwill | $ | 7,334,165 | $ | — | $ | 7,334,165 | $ | — | $ | — | |||||||||||
Impaired Loans | $ | 4,299,000 | $ | — | $ | 4,299,000 | $ | — | $ | — |
Fair market values of goodwill and other real estate owned are determined on a nonrecurring basis in order to determine if any impairment exists at September 30, 2017 and December 31, 2016. In order to estimate the fair values of these assets the bank uses observable inputs such as values of similar entities (goodwill) and tax appraisal values and estimated selling prices for other real estate owned.
F-29
DIBOLL STATE BANCSHARES, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) —(Continued)
NOTE 9 - RESTRICTION ON CASH AND DUE FROM BANKS
The Bank is required to maintain reserve funds in cash or on deposit with the Federal Reserve Bank. The required reserve at September 30, 2017 was approximately $2,616,000.
NOTE 10 - EARNINGS PER SHARE
Basic earnings per common share is computed by dividing net income by the weighted-average number of common shares outstanding for the period. Diluted earnings per common share reflects the potential dilution that could occur if securities or other contracts to issue common stock (such as stock awards and options) were exercised or converted to common stock, or resulted in the issuance of common stock that then shared in the Company’s earnings. Diluted earnings per common share is computed by dividing net income by the weighted-average number of common shares outstanding for the period increased for the dilutive effect of unexercised stock options and unvested restricted stock awards. The table below presents the information used to compute basic and diluted earnings per share at September 30, 2017 and September 30, 2016:
Nine Months Ended September 30, | ||||||||
2017 | 2016 | |||||||
Earnings: | ||||||||
Income available to common shareholders | $ | 8,421,454 | $ | 9,159,677 | ||||
Basic shares: | ||||||||
Weighted-average common shares outstanding | 845,214 | 841,899 | ||||||
Net income per common share, basic | $ | 9.96 | $ | 10.88 | ||||
Diluted shares: | ||||||||
Weighted-average common shares outstanding for basic earnings per common share | 845,214 | 841,899 | ||||||
Add: Dilutive effects of share-based compensation plan | 20,853 | 20,298 | ||||||
Average shares for diluted earnings per share | 866,067 | 862,197 | ||||||
Net Income | $ | 9.72 | $ | 10.62 |
NOTE 11 - SUBSEQUENT EVENT
On November 30, 2017, the previously announced acquisition of the Company by Southside Bancshares, Inc., a Texas corporation and the holding company for Southside Bank, a Texas bank, was completed pursuant to the Agreement and Plan of Merger (the “Merger Agreement”), dated as of June 12, 2017.
F-30