FR Y€ oMB Number 7100{297 ApprovBl oxplr€s Soptember 30, ?01 I ffiuftffi$#ffiffi Pags 1 ot 2 Board of Governors of the Federal Reserve System
Annual Report of Holding Compan es-FR Y-G
Report at the close of business as ofthe end of flscal year This Report is required by law: Section 5(cX1)(A) of the Bank This report form is to be filed by all top-tier bank holding compe- Holding Company Act (12 U.S.C. $ 18an(cX1XA)); sections 8(a) nies, toptier savings and loan holding oompanies, and U.S, inter- and 13(a) of the lntemational Banking Act (12 U.S.C. SS 3106(a) mediate holding companies organized under U.S. law, and by and 3108(a)); sections 11(aX1), 25, and 25A of the Federal any foreign banking organization that does not meet the requir* Reserve Act (12 U.S.C. SS 2a8(aX1), 602, and 611a); and sec- ments of and is not treated as a qualifying foreign banklng orga- tions 113, 165,312,6'18, and 809 of the Dodd-Frank Ast (12 U,S.C. nization under Section 211.23 of Regulation K (12 C.F.R. S SS 5361, 5365, 5412, 1850a(c)(1), and 5468(b)('1)). Return to the 211 .23). (See page one of the general instruclions for more detail appropriate Federal Reserve Bank the original and the number of of who must file.) The Federal Reserve may not conduct or spon- copies specified. sor, and an organization (or a person) is not required to respond to, an information collection unless it displays a currently valid OMB control number. NOTE; The Annual Reporl of Holding hmpanies must be slgned by Date of Report (top-tier holding company's fiscal year-end): one director of the top-tier holding company. This individual should also be a senior official of the toplier holding cornpany. ln the event December 31 2016 that the top-tier holding @mpany does not have an individual who is Month/Oay/Year a senior official and is also a director, the chairman of the board must N/A sign the report. lf the holding company is an ESOP/ESOT formed as Reporteds Legal Entity ldentlier (LEl) (2(}Character LEI Code) a corporation or is an LLC, see the General lnstructions for the authorized individual who must sign the report. Reportefs Name, Street, and Mailing Address l, Timothy R. O'Brien Name oF lh6 Holdlng Company Dlrector and Oficial Tavaq lnr{anandcnl Rannch: lnc CFO, Advisory Director L6galTltle of Holdlng Comparry TiUe of he Holding Company DirBctor and Officlal 3232 Palmer Highway aftest that the Annual Repod of Holding Companias (including (Malling Address ol th€ Holding Company) Street / P.O. Box the supporting attachments) for this report date has been pre- Texas City TX 77590 pared in conformance with the instructlons issued by the Federal Clty State Zip Cod€ Reserve System and are true and correct to the best of my knowledge and belief. Physical Locauon (tf difiBrBnt from malllng address) Wth respect to information regading individuels contained in this reporl, the Repofter cedifies that it has the aulhoity to provida this Person to whom questions aboul this report should be directed: information lo the Fedoral Reserve. The Reporter a/so certrlTes Catherine Pofter Secretary that it has the authoity, on behaff of each individual, to consent or Name Trtle object to public of information individual. release rcgarding that 409-7664324 The Federal Reserye may assume, in the absence ol a raquest for conf,dential treatment submitted in accordance with the Board's Area Code I Phone Number / Exlension
"Rules Regarding Availability of lnformation,' 12 C.F.R. Pafl 261 , 409-9486219 that the Roporter and individual consent to public release of all Area Code / FAX Number in details the that individual. kittv. potter@texasfi rstban k. co m n Efiall Addr€ss Slgnature and Omdal 07t07 Address (URL) for$e Holding Company's web page Date of
For holding companies not rcgistercd with the SEC- ls confldentlal trcatment requested for any portion F1{o lndicate status of Annual Report to Shareholders: of thls roport submission?...... l=Yqr 0 El is included with the FR Y-6 report ln accordance with the General lnstructlons for this report (check fl will be sent under separste cover only one), justifylng provlded E is not prepared 1. a letter this rsquest is being along wlth the report ,...... tr For Federal Reserve Bank Use Only 2. a letter justifylng thk requst has been provlded separately..... RSSD ID NOTE: lnformadon forwhlch confidential treatment ls belng c.t. r€quostsd must be prwided separatoly and labeled as "confldential."
O,lllce of Managsment and Eudgel, PapeMort Reducuon Pmloct (710t1O294. t4resh{ngton, OC 20503 1A2016 Texas Independent Bancshares, Inc, Tltol2ot FR Y.6 Annual Repoft of Bank Holding Companies EUEE$88!E As of L2l3LlrG
Report ltem 1; Annual Report to Shareholders - Exhibit A JUL 10 2017 Note: Independent audit is Extribit B
Repoft Item 2(a): Organization Chart: Toos Independent Bancshares, Inc. (*Incorporated in Texas) Texas City, TX 77590 I{o LEI avallable
I Texas First Bank - 100o/o (*Texas) Rust,Ewing, Watt & Haney, Inc. - 10070 (*Texas) Texas City, T( n59O Texas City, 1X77591 No LEI's avallable
Report ltem 2(b): Branches - Submitted Electronically 3l2lt7
Repoft Item 3: Securities Holderr Shares- r}6 0wned Common Texas Independent Bancshares, Inc. Voting Trust 86.720/o 440,401 Texas City, Texas (United States) Mihhell Chuoke, Jr., Trustee Gaddis Wittjen, Trustee Charles T. Doyle, Trustee Christopher C. Doyle, Trustee Matthew T, Doyle, Trustee
T.I.B. Employees' 4.01-K Plan 14.79o/o 72,073 Teros City, Texas (United States) Dennis Bettison, Trustee
Doyle Family Children's Trust 11.84Vo 60,136 Texas City, Texas (United States) Matthew T. Doyle, Trustee Christopher C. Doyle, Trustee
Lawrence J. Del Papa, Jr. - USA 6.4Lo/o 32,530 Lawrence J. Del Papa, Jr. Texas City, Teras (U.S. Citizen) Current laura Del Papa Murray 17.78o/o 59,810 Wichita Falls, Texas (U.S. Citizen)
Lawrence J. De! Papa, Jr. Lawrence J, Del Papa, Jr., Trustee Bancshares Trust USA 3,940/o 20,000 Caitlyn Del Papa L,23EO 6,257 Lawrence J. Del Papa, III 0.81o/o 4tt23
Ollvia Ann Estrada Houston, Texas (U.S, CiUzen) Personal 5.29o/o 26,861 Estrada Family Trust (USA) Family Trust, Trustce 3.780/to 19,192 Olivia Ann Estrada Trust (USA) Personal Trust Trustee t.4Lo/o 7,1 55 TOTAL 10,480/o 53,208
(3-2) No other parties own more than five percent 5 E IE s E E s ;o I ts F h c e s 6 !
.12 z z z 2lz z z z z z z z z z z z (l< z z
TEXAS INOEPENDENT BANCSHARES, INC. JUL 1 0 Zrlfi Report ltem 4: lnsiders
(1) Name & Address (21 Principal Occupation - Qther than with holding company (3a) Title & Position with holding company (3b) ntle & Position with Subsidiaries (3c) Title & Position with Qther Businesses (4a) Percentage owned of TIB (4b) Percentage owned of Subsidiaries (4c) Companies - greater than 25% ownership
(1) Charles T. Doyle Texas City, Texas (2) N/A (3a) Chairman, Dlrector (3b) Chairman Emeritus, Director - Texas First Bank Director - Rust Ewing lnsurance Trustee - TIB Voting Trust (3c) Owner, Director - United States Management Director - Q2 Corporation (4a) \0,782 2.12Yo Personal 44O,4Ot 86.78% Voting Trust (4b) N/A (4c) United States Management - 100%
(1) MatthewT. Doyle Texas City, Texas (2) N/A (3a) Vice Chairman, Director (3b) Chairman, Director -Texas First Bank Chairman, Director - Rust Ewing lnsurance Trustee - TIB Voting Trust Trustee - Doyle Family Trust (3c) Director - United States Management (4a) 15,500 3.05% Personal 44O,4OL 86.78Yo Voting Trust 60,136 Lt.85% DoYle FamilY Trust (4b) N/A (4c) Doyle & Sons Cattle Company - Cattle Ranch 28.33% Doyle Farms P/S 50.00% 2 Bayous Ranch 50.00%
(1) Chrlstopher C. Doyle Texas City, Texas (2) President/CEO - Texas First Bank (3a) President/CEO, Director (3b) President/CEO, Director - Texas First Bank Vice President, Director- Rust Ewing lnsurance Trustee - TIB Voting Trust Trustee - Doyle Family Trust (3c) Director - United States Management (4a) 2,060 0.4tYo Personal 440,4OL 86.78Yo Voting Trust 60,136 17.85% Doyle FamilyTrust (4b) N/A (4c) N/A
(1) MitchellChuoke,lr. Texas City, Texas (2) CommercialPlumbingContractor (3a) Director (3b) Director - Texas First Bank Trustee - TIB Voting Trust (3c) N/e (4a) 6,238 L.23Yo Personal 44O,4OL 86.78% Votlng Trust (4b) N/A (4c) Mitchell Chuoke Plumbing - LOOo/o Commercial Plumbin6 Mitchell Chuoke, Jr. Propertie s - 50Yo Property Management CUK Properties, LLC - 50% Property Management A&S,lnc. -37.50% Property Management
(1) Gaddis P. Wittjen LaMarque, Texas (2) PropertyManagement (3a) Director (3b) Director - Texas First Bank Trustee - TIB Voting Trust (3c) N/A (4a) 19,000 3.55Yo Personal 440,40L 86.78Yo Voting Trust (4b) N/A (4c) B. Wittjen & Son - 50% Property Management Cambridge Farms - 50% Property Management Wynnewood Energy - 50% Property Management
(1) Texas lndependent Bancshares, lnc. Voting Trust Texas City, Texas Trustees: Mitchell Chuoke, Jr., Gaddis P. Wittjen Charles T. Doyle, Christopher C. Doyle, Matthew T. Doyle (21 N/A (3a) N/A TIB Y6 Rsvised
Page 4
(3b) N/A (3c) N/A (4a) 440,401 86.8Yo Voting Trust (4b) N/A JUL 10 2017 (4c) N/A
(1) T.l.B. Employees'401-k Proflt Sharlng Plan Texas City, Texas Trustees: Mitchell Chuoke, Jr., Gadis P. Wittjen Charles T. Doyle, Christopher C. Doyle, Matthew T. Doyle (2) N/A (3a) N/A (3b) N/A (3c) N/A (4a) 72,073 L4.2O% Voting Trust (4b) N/A (ac) N/A
(1) Doyle Family Trust Texas Gty, Texas Trustees: Christopher C. Doyle, Matthew T. Doyle (2) N/A (3a) N/A (3b) N/A (3c) N/A (4a) 60,135 11.85% Doyle Famlly Trust (4b) N/A (ac) N/A
(U Larry Del Papa,Jr. Texas City, Texas (2) N/A (3a) N/A (3b) N/A (3c) N/A (4a) 32,530 6.4L% Personal 20,000 3.94Yo Bancsha res Trust (4b) N/A (4c) Del Papa Distributing - 100% Budweiser Distributor Del Papa Holdings -LOOYo Aircraft L&L Realty - 50% Real Estate UD Holdings - IOO% Florida Asset
(1) Olivia Ann Esrada Houston, Texas (2) Homemaker (3a) N/A TlBY.5 Revl3ed
Page 5 EbTETflPE (3b) N/A (3c) N/A (4al 25,861 5.29Yo Personal JUL 1 0 2011 L9,192 3.78% Family Trust, Trustee
N/A 7,!55 t.4LYo Persona I Trust, Trustee (4b) N/A (4c) N/A
ADVISORY DIRECTORS Dennis R. Bettison (1) Galveston, Texas Attorney (2) Advisory Director, Legal Counsel (3a) Advisory Director, Legal Counsel- Texas First Bank (3b) N/A (3c) N/A (4a) 3,9L7 O.77% Personal 72,073 L4.2O% TIB 401-K Plan, Trustee (4b) N/A (4c) DBA Realty Partnership - 33.33% BDAB Realty Partnership - 33.33%
Joseph Blackhear (1) Galveston, Texas (21 lnsurance Broker (3a) Advisory Director (3b) President, Director - Rust-Ewing Insurance (3c) N/A (4a) 2,022 O.4O% Personal (4b) N/A (4c) N/A
Davld R. Doyle (1) Plano, Texas (2) Senior Officer, Brinker, lnc. (3a) Advisory Director (3b) Advisory Director - Texas First Bank Director - Rust-Ewing lnsurance (3c) N/A (4a) 1,883 O.37% Personal (4b) N/A (4c) N/A
(1) Patrick F. Doyle Texas City, Texas (2) Attorney, Title Company Owner (3a) Advisory Director TIB Y-6 Revlred
Page 5
(3b) Director - Rust-Ewing lnsurance (3c) Owner - see 4c below (4a) 6,743 1.33% Personal (4b) N/A JUL 10 (4c) DBA Realty Partnership - 33.33% Real Estate 20fi BDAB Realty Partnership - 33.33% Real Estate Texas Title Realty Holdings, LLC - 100% Title Company Realty Tax Search, lnc. - 100% Title Search Company Texas Title Holdings, LLC - 100% fitle Company Doyle Law Firm, PLLC - LOOYo Law Firm Prominent Title, LLC Title Company Security Abstract & Title Company Title Company Southland Title, LLC Title Company lsland Financial Solutions, LLC Accountlng Services
(1) Timothy R. O'Brlen League City, Texas (2) CEO - Texas First Bank (3a) CEO, Advisory Director (3b) CEO, Advisory Director - Texas City (3c) N/A (aa) N/A (4b) N/A (ac) N/A
(1) A. Pat Plaia, Jr. League City, Texas (2) Regional President - Texas First Bank (3a) Advisory Director (3b) Regional President - Texas Flrst Bank (3c) N/A (4a) N/A (4b) N/A (4c) N/A
(1) Catherine O. Potter Texas City, TX (21 Corporate Secretary, Texas First Bank (3a) Advisory Dlrector, Corporate Secretary (3b) Advisory Director, Corporate Secretary - Texas First Bank (3c) N/A (4a) 1,150 O.23% Personal Signature & Tltle (4b) N/A (4c) N/A Vrl Let') Imothy R. O'Brien CFO, Advlsory Director TEXAS II\DEPENDENT BANCSHARES, INC. CONSOLIDATED BALANCE SIIEETS DECEMBER 3I 2016 AND 2015
20r6 2015
ASSETS Cash and cash equivalents Cash and due from banks s 64,401,841 $ 55,386,284 Federal funds sold 2,098,000 5,125,000 Total cash and oash equivalents 66,499,E4L 60,511,284
Interest-bearing time deposits in other banks 100,000 100,000
Itrvestments Available-for-sale securities 55,249,417 59,649,330 Held-to-maturity securities (fair value of $321,968,339 iu 2016 and $335,960,940 in 2015) 325,932,058 336,243,700 Total invesblents 381,181,475 39s,E93,030
Loans receivable (net of allowance for loan losses of $8,556, l0l in 201 6 and $8,5E0,016 io 2015) 503,415566 454,699,730 Accrued interest receivable 4,274,769 4,094,877 Premises and equipment net 21,173,008 21,280,554 Nonmarketable equity securities 7,589,799 6,738,143 Goodwill 10,699,542 10,599,542 Core deposit intangibles, net, 437,722 540,590 Bank-owaed life irsurance 11,998,648 I 1,700,7EE Other real estate owned 3,449240 1,893,9I2 Other assets 2.591,048 3,598,9s5
TOTALASSETS $ 1,013,410,557 $ 971,751A06
LIABILmIES AlrD STOCKHOLDERS' EQITITY Liabilities Deposits Noninterest-bearing $ 329,999,550 $ 339,705,346 Interest-bearing 545,423,948 507,480.7M Total deposits 875,423,498 847,186,090
Accrued interest payable 77,972 9s,419
Notes payable 69,612 1 8 1,693 Other liabilities 5,811,137 4.904.949 Total liabilities 881,382,219 852,36E,151
Commitment and contingencies
Stockholders' equity Common stock- $ I par value; 2,000,000 shares authorized, 584,755 shares issued; 507,E49 and 504,478 outstanding 2015 and 2015, respectively 584,755 5847s5 Additional paid-in capital 569,627 283,210 Retained eamings 143,260,811 129,153,n4 Accumulated other comprehensive income 3,048,503 5,304,825 Treasury stock, at cost, 76,906 and 80,277 shares for 2016 and 2015, respectively (15,435J18) (ts,942,649) Total stockholders' equity 132,028,438 119,383,255
TOTAL LIABILTTIES AND STOCKHODLERS', EQUITy $ r,013,410,657 $ 971,751,406 TEXAS IhIDEPENDENT BANCSHARES, INC. AI\NIUAL MEETING OF' THE SHAREHOLDERS FT MARCH 23,2016
The 37fiAnnual Meeting of the Shareholders of Texas Independent Bancshares, Inc. (TIB), was convened at I l:10 a.m. on Wednesday,March23,20l6,atthe offices of Rust-Ewing Insurance Agency, 7900 Emmeft F. Lowry Expressway, Texas City, Texas 77591. Chairman Charles T. Doyle introduced himself, welcomed everyone, and called the meeting to order.
The invocation was given by Dickey Campbell. Chairman Doyle announced that he would be serving as Chairman and Cathy Logan would be serving as Secretary for purposes of this meeting.
Chairman Doyle thanked the employees who helped to make this meeting happen, including Shannon Belluomini, Candice Towles, and their commiffee, and also recognized Jordan Huggins for putting together the slide show.
Chairman Doyle confirmed that the Notices of Annual Meeting of the Shareholders were duly mailed to all shareholders of record on March 1,2016, along with copies of the Minutes of the Annual Shareholders Meeting held on April 14, 2015; the proxy statement; the Audited Financial Statement as of December 31, 2015; and the letter to the shareholders dated March 1,2016. Upon motion duly made by Warren T. Longmire, Jr., M.D., seconded by Lee Ardell, and unanimously carried, the Shareholders accepted the Affidavit of Notice of Annual Meeting of the Shareholders [Exhibit "A"].
Suzanne Brady-Dues reported thatthere were 479,946 shares, constituting 93.632percent ofthe shareholders represented by proxy/presence out of a possible 507 ,249 shares issued and outstanding, with 77 ,506 shares held as Treasury Stock. Upon motion duly made by Carlos Pefla, seconded by Carlos Gatza, and unanimously carried, the Report on the Certified Alphabetical List of Shareholders was accepted as presented. Chairman Doyle declared that the proxies were filed with the Secretary, legal notice had been duly given, a quorum was present, and the meeting was lawfully convened to transact business.
Upon motion duly made by Carlos Peffa, seconded by Carlos Garza, and unanimously carried, John Kelso, Vicki Estrada West, and Lee A. Sander were elected to serve as Inspectors of the Election. The Oath of the Inspectors was administered, as shown in the attached Exhibit "B."
Uponmotion duly made by Gaddis Wiffjen, seconded by Carlos Grza and unanimously carried,the Minutes of the Annual Meeting of the Shareholders of Texas lndependent Bancshares held on April 14, 2015, were approved as presented.
Chairman Doyle explained the system of govemance whereby the holding company, Texas lndependent Bancshares, Inc., has five Directors. The three inside Directors are Charles T. Doyle, Matthew T. Doyle, and Christopher C. Doyle; and the two independent Directors are Mitchell Chuoke, Jr., and Gaddis Wittjen. Gaddis P. Wittjen was the Director standing for re-election for a four-year term, with the remaining Directors having unexpired terms - Charles T. Doyle, one year; Mitchell Chuoke, Jr., two years; Matthew T. Doyle, three years; and Christopher C. Doyle having a permanent position on the Board as President and CEO.
Requests for nominations had been properly posted in the lobbies of the Banks, and no shareholder had submitted a written nomination as called for in the bylaws to fill the open seat. Chairman Doyle called for any nominations to fill the position which Gaddis P. Wittjen had held for the previous four years, and there were none. Upon motion duly made by Lee Ardell, seconded by Carlos Pefi4 and unanimously carried, Gaddis P. Wittjen was nominated for re-election to serve a four-year term on the Board of Directors of TIB. Upon motion duly made by Lee Ardell, seconded by Carlos Pefla, and unanimously carried, Gaddis P. Wittjen was re-elected to serve a four-year term on the Board of Directors of TIB.
Chairman Doyle reported that 2015 had been a record year, with the employees receiving an extra bonus for reaching their goal.
tage I of 3 TlBArnualShreholdeEM*inso3-23-2ol' obtain reasonable assurance about whether the financial statements are free from material misstatements. He He thanked Tim O'Brien for his assistance with the audit.
Chris Doyle reported that the Bank has an Internal Audit Team which is under the supervision and control of Briggs & Veselka another accounting firm. The Bank has two intemal auditors doing a lot of testing and paperwork and making sure the reports are accurate. Kitty Potter directs and oversees their efforts as well, and the Audit Committee also oversees the process.
Chris Doyle introduced employees present - from the Bank: Tim O'Brien, Kitty Pofier, Pat Plaia, David Daspit, Mike Burkhart, Sam McGee, Robin McDougald, Matt Crable, Jordan Huggins, Fabian Lewis, Debra Matthews, Suzanne Dues, Debbie Popovich, Kathy Cruse, and Shannon Belluomini; from the insurance agency: Joe Blackshear, Tommy Price, and Roy Stan.
Chris remarked that both the Bank and Insurance Agency had record years in 2015, and that was gefting harder and harder to do, and notjust because ofthe interest rate margins and things ofthat nature, but also because ofthe many regulations and related expenses.
Technology is really important in the banking industry, especially with the online companies competing for banking business. Chris stated Texas First Bank is investigating ways to deliver our products in a convenient and easy manner, while addressing the related risks. He briefly reviewed the Bank's history with online banking. Mobile Banking has been very successful. Mobile Deposit was introduced in 2015. Banking centers are being managed differently to address peak times for customers. Online credit applications are now available. Chip cards have been introduced to reduce fraudulent transactions. ApplePay is being tested as well, and Samsung Pay and Android Pay would also be introduced.
Chris discussed the employee wellness program using FitBit to improve employee health and reduce absenteeism and insurance costs.
A strategic planning session was scheduled to occur in June, which is only three years since the previous planning session instead of five. He asked that the shareholders provide him with any feedback to take to the planning process. Chris thanked the shareholders for attending.
Charles Doyle stated that he was still Chairman of the Board of Texas Independent Bancshares, Inc., but that he was now Chairman Emeritus of Texas First Bank and Matthew Doyle was now Chairman of the Board of Texas First Bank.
Chairman Doyle recalled working with Mr. Howard O. Payne at First State Bank of Hitchcock (now Texas First Bank - Hitchcock) in the early years and read the history of Mr. Payne who was one of the original founders ofthe Bank in 1962.
Chairman Doyle announced that the recipient of the 2015 Floward O. Payne Award was John W. Kelso, President of J.W. Kelso Company, Inc.; Texas Gulf Construction Company, Inc.; and Kelso Concrete Company, all located in Galveston, Texas. He read the bio on Mr. Kelso. Mr. Kelso came forward and accepted the award with thanks.
Chairman Doyle thanked everyone for their attendance at this meeting. There being no further business to come before the Shareholders at this time, upon motion duly made by Lee Ardell, seconded by Pat Doyle, and unanimously carried, the meeting was adjoumed al 12:07 p.m.
Charles T. Doyle, Chairman
Cathy S. Logan, Acting Secretary
Page 3 of 3 TIB Annual Shueholden Mccting 03-23-2016 He lping hxans BuiA Tbxat March 31,2017
Shareholder Name Address City, State ZIP
RE: Subchapter S Shareholder Certification
Dear Texas Independent Bancshares, Inc. Shareholder:
As you know, Texas Independent Bancshares, lnc. (sometimes referred to herein as "Company"), elected to be taxed as a Subchapter S corporation effective January 1,2014. In conjunction with the January l, 2014, Subchapter S reorganization, each Company shareholder entered into a Stockholders Agreement that outlines certain terms and conditions of the ownership of Texas Independent Bancshares, Inc., common stock. ln an effect to further improve our corporate governance procedures, to ensure the ongoing effectiveness of the Subchapter S election, and to confirm each shareholder's compliance with the terms of the Stockholders Agreement, we are requesting that each Company shareholder sign and return in the enclosed stamped return envelope the attached Shareholder Certification. As you will see, this Certification will allow each Company shareholder to make appropriate representations to the Company regarding the ownership of the Company common stock.
Thank you in advance for your time and attention to this Shareholder Certification. As always, please feel free to contact Kitty Potter at (409) 948-1990 or [email protected] if you have questions or need additional information from us. Thank you, also, for your continued support as a shareholder of Texas lndependent Bancshares, [nc. Sincerely,ffiq/, Christopher C. Doyle President and Chief Executive Officer
CCD:csl
Enclosures
P.O. Box 3344,3232 Palmer Highway, Texas City, Texas 77592-3344 409-948-557 7 * 2fJ1 -2AO-9422 uvuvrru. texasf irstban k. co m Texas lndependent Bancshares, Inc. Texas City, Texas
SIIAREHOLDER CERTIFICATION
Dear Texas Independent Bancshares, Inc.:
By execution of this Shareholder Certification, I hereby represent and warrant to Texas lndependent Bancshares, Inc. ("Comp&try"), and its related Directors, Officers, and employees the following:
l. I certif, that I am the shareholder of record for the Company common stock, and currently possess all legal and equitable rights of ownership to the Company common stock registered in my name.
2. I have not made any transfer, nor attempted to make any transfer, of the Company common stock since January 1,2014.
3. If my stock is held in trust, I have not made any amendment to the trust documents since January 1,2014, and the trust continues to qualiff as an eligible Subchapter S shareholder.
4. At all times during my ownership of Company common stock I have complied with each of the requirements, terms, and conditions of the Company's Stockholders Agreement.
5. I acknowledge the continued applicability of the Stockholders Agreement, and recogrize my responsibility to continue to comply with allterms and conditions contained therein.
6. My current state of legal residence is
This Shareholder Certification is executed this _ day of 2017
Certification of Individual Shareholder
Print Name Print Name (ifjoint ownership)
Signature Signature (ifjoint ownership)
Certification of Trust Shareholder
Print Name of Trustee Print Name of Trustee (if co-trustee ownership)
Signature of Trustee Signature of Trustee (if co-trustee ownership) Exhibit B
Texas Independent Bancshares, Inc. Consolidated Financ ial Statements and S upp lem entary Informat io n For the Years Ended December 31, 2016 and 20 I 5 CONTENTS
Page
Independent Auditors' Report
Consolidated Balance Sheets...... 3
Consolidated Statements of Income.... 4
Consolidated Statements of Comprehensive Income ...... 5
Consolidated Statements of Changes in Stockholders' Equity 6
Consolidated Statements of Cash Flows..... 7
Notes to Consolidated F inancial Statements...... 9
Supplementary Information
Schedule I - Consolidating Balance Sheet Information as of December 31, 2016..... JJ Schedule II - Consolidating Statement of Income lnformation for the Year Ended December 31,2016 34
Schedule [I[ - Consolidating Balance Sheet Information as of December 31, 201 5 35 Schedule IV - Consolidating Statement of Income Information for the Year Ended December 31,2015 36 s & Vese ko Co.
, (i-rt( r,: rrr,-t ,:, Cr,,riri,l f'L,rrlic ' tl r r,.: .Ar.ir :,:
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of Texas Independent Bancshares, Inc. Texas City, Texas
We have audited the accompanying consolidated financial statements of Texas Independent Bancshares, Inc. and subsidiaries (the "Company"), which comprise the consolidated balance sheet as of December 31,2016, and the related consolidated statements of income, comprehensive income, changes in stockholders'equity, and cash flows for the year then ended, and the related notes to the consolidated financial statements.
Management's Responsibility for the Financial Statements
Management is responsible for the preparation and fair presentation ofthese financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error.
Auditors' Responsibility
Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable a.ssurance about whether the furancial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditors' judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the Company's preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness ofthe Company's internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
713 b67 9147 Iel' 7)3 667 lb97 Fox lrJcpcn,i Opinion In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Texas Independent Bancshares, Inc. and subsidiaries as of December 31, 2016, and the results of their operations and their cash flows for the year then ended in accordance with accounting principles generally accepted in the United States of America. Other Matter Our audits were conducted for the purpose of forming an opinion on the consolidated financial statements as a whole. The consolidating information in Schedules I to IV is presented for purposes of additional analysis of the consolidated financial statements rather than to present the financial position, results of operations, and cash flows ofthe individual companies, and it is not a required part of the consolidated financial statements. Such information is the responsibility of management and was derived from and relates directly to the underlying accounting and other records used to prepare the consolidated financial statements. The consolidating information has been subjected to the auditing procedures applied in the audit of the consolidated financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the consolidated financial statements or the consolidated financial statements themselves, and other additional procedures in accordance with auditing standards generally accepted in the United States of America. In our opinion, the consolidating information is fairly stated in all material respects in relation to the consolidated financial statements as a whole. Prior Period Financial Statements The consolidated financial statements of Texas Independent Bancshares, Inc. and subsidiaries as of December 31,2015, were audited by other auditors whose report dated March 10, 2016, expressed an unmodified opinion on those statements. The supplementary information for the year ended December 31, 2015 was subjected to the auditing procedures applied by the predecessor auditors in the audit of those consolidated fi nanc ial statements. a eselka Co. Houston, Texas March 17,2017 (2) TEXAS INDEPENDENT BANCSHARES, INC. CONSOLIDATED BALANCE SHEETS DECEMBER 31, 20I6 AND 2OI5 2016 2015 ASSETS Cash and cash equivalents Cash and due from barks $ 64,401,841 s 55.3 86,284 Federal funds sold 2,098,000 5,125,000 'l'otal cash and cash equivalents 66,499,841 60,5 r r,284 Interest-bearing time deposits in other banks 100,000 100.000 lnvestments Available-for-sale securities 55,249,417 59.649.330 Held-to-maturity securities (fair value of $321,968,339 in 2016 and $336,960,940 in 2015) 32s.932.058 336,243.700 Total investments 381,t 8 1,475 3 95,893,030 Loans receivable (net of allowance for loan losses of $8,556,101 in 2016 and $8,580.016 in 2015) 503,415,566 454,699.730 Accrued interest receivable 4,274,169 4,094.877 Premises and equipment, net 2 I ,173,008 2 t,280,554 Nonmarketable equity securities 7,589,798 6,738, r 43 Goodwill 10,699,542 10,699,542 Core deposit intangibles, net 437,722 540,590 Bank-owned life insurance I1,998,648 I r,700,788 Other real estate owned 3,449,240 I ,893,9 I 2 Other assets 2,59 r,048 3.598.956 TOTAL ASSETS $ r,0r3.4r0,657 $ 971,751.406 LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities Deposits Noninterest-bearing $ 329,999,550 $ 339,705,346 I nterest-bearing 545,423,948 507,480.744 Total deposits 875,423,498 847. I 86,090 Accrued interest payable 77,972 95,4t9 Notes payable 69,612 t8 t,693 Other liabitities 5,8 I r.r37 4,904,949 Total liabilities 8E r,382.2 r 9 852.368. l 5 r Commitment and contingencies Stockholders' equity Common stock - $l par value; 2,000,000 shares authorized, 584.755 shares issued; 507,849 and 504,478 outstanding 2016 and 2015. respectively 584,755 5 84,755 Additional paid-in capital 569,627 283,2t0 Retained earnings 143,260,871 129.153.1r4 Accumulated other comprehensive income 3,048,503 5,304,825 Treasury stock, at cost, 76,906 and80,277 shares for 2016 and2015, respectively ( 15.43s.318) (15,942,649) Total stockholders' equity t32,028,438 I r9,3 83.255 TOTAL LIABILITIES AND STOCKHODLERS' EQUITY $ I,013,410,657 $ 97 r ,75 1.406 The accompanying notes are an integral part of these consolidated Jinancial slatemenls (3) TEXAS INDEPENDENT BANCSHARES, INC. CONSOLIDATED STATEMENTS OF INCOME FOR THE YEARS ENDED DECEMBER 3I, 20 I6 AND 20 I 5 2016 201 5 Interest income Loans. including fees s 27,759,548 $ 26,838,540 Debt securities: Taxable 4,382,446 5,177,950 Toi-exe mpt 3,954,353 3.29t.842 lnterest-bearing deposits 1 86,1 58 65,3 r4 Federal funds sold 27,295 8,005 Dividend income 546,202 60.396 Other interest r,494 2,160 Total interest income 36,857,496 35.444.207 Interest expense Deposits I,529,059 I .634.86 | Federal funds purchased 2,010 7.0 t5 Notes payable 10,979 | 6,825 Total interest expense l,542,048 | .658,70 r Net interest income 35,315,448 33,785.506 Provision lor loan losses 593,257 738,t40 Net interest income after provision for loan losses 34,722,191 33-047,366 Nonintcrest income Fees and service charges 6,457,718 6,353.990 Gain on sale of premises and equipment I,761,134 2.8t0 Gain on sale of other real estate owned 93,846 592,613 Gain on sale of securities 2,386,753 3.435,775 lnsurance commissions 9,762,379 9.013,463 Other noninterest income 407,365 466.428 Total noninterest income 19,869,195 I 9,865,079 Noninterest expense Salaries and related expenses 18,847,101 t7,789.827 Profit sharing and other employee benefits 3,167,450 3,2 r0.663 Occupancy and premises expense, net 4,S2g,gg2 4.649,507 Other operating expense 9,832,162 rr,24t.373 Total noninterest expense 36,375,695 3 6,89 r .3 70 NET INCOME $ 18,215,691 $ 16,021.075 The accompanying notes are an integral part of these consolidatedfinancial slalements (4) TEXAS INDEPENDENT BANCSHARES, INC. CONSOLIDATED STATEMENTS OF COMPREHENSTVE INCOME FOR THE YEARS ENDED DECEMBER 3I,2OI6 AND 20I5 2016 20r5 Net income $ 18,215,691 $ 16,021,075 Other comprehensive income (loss) Unrealized gains on securities: Unrealized gains on securlties available-for-sale 130,43t 1,763,932 Reclassification adjustment for realized gains included in net income (2.3E6,7s3) (3,435,77s) Total other comprehensive Ioss (2.256,3221 ( r,671,843) TOTAL COMPREHENSIVE INCOME $ 15,959J69 $ 14,349,232 The accompanying notes are an integral part of these consolidaledfinancial statements (s) o o o a dhmatr6o n t.l Gl € O tt ct= 6 O\F-.+e{ma.lOoo no\€aarroal \o a.) r) o mo6atmoaoaoo a-l\or-r)l/r)rno .at o c.tonoc{\o mrnrA\Of-Of- l+€ €= a.l a.l r- O \O a{ r) 0aFlrANf-6 o\ F- F' ='oe so\oha!n mFt6aNn o\ I- -rz -Y O\\Oh O.€.1 a{ O 'oH o o a ga o o o\ 6 \o oooah + -c)r-r)\oo€€ c.l 9.1 qq \o OtrFtC\ O h -:z @ \oho6 a.t ooo\o l') a.l m\oa{o\ \Of-O Et t'-- \O C.l m o\ rrr) t 9.6 \o ia o F o 4 6 4 q) o o co al \o + c.l at 9'A \o oo € ra \) o dtrc) \o + \o ca l-. a-- la ? s o\ \o 6l V) o 3(,ErE oc I \o al oE U o @ a o 6ln a] + r.) o cl oo co al F \q) Oc- 6 o\ €rt o o c-O t-- co \o r- € rl 6 (l E& \o mra|n N FI odl d c! 6t rl rlGl 6t r-l \o FI al N o o o(€ co \o O\6 U) E IL) sr o a l* c) i q) 4 o D q) o\ €F-61 r- o o\ ..1 \o 6t r! € 6l d6r) \o o h-= d 20 l6 2015 Cash flows from operating activities Net income $ 18,215,69t $ 16,021,075 Adjustments to reconcile net income to net cash from operating activities: Gain on sale of premises and equipment ( I,761,134) (2,8 r0) Gain on sale ofother real estate owned (93,846) (592,6 r 3 ) Gain on sale olsecurities (2,J86,753) (3,43s,77s) Amortization and accretion on securities 2,997,649 2.706.243 Depreciation 1,426,136 r,483,765 Amortization I18,035 336,8 r 7 Provision for loan losses 593,257 738,140 Write-down of other real estate owned 143,267 300,t0t Stock-based compensation 94,362 22,800 Changes in operating assets and liabitities: Accrued interest receivable (179,8921 (5 r 8,563) Accrued interest payable (17,447) ( r 2.343) Prepaid federal income tax (t77.61 t) Other assets 774,608 (5,997,249) Other liabilities 906,188 (45 1,026) Net cash from operating activities 20,820, r 2 I r 0,420,95 I Cash flows from investing activities: Purchase offixed assets (855,912) (644,99t) Proceeds from sale offixed assets 1,292,261 298,85 3 Purchase of nonmarketable equity securities (851,655) (4, r 52,004) Activity in available-for-sale securities: Sales 5,501,522 3,646,6 r0 Maturities, prepayments and calls I t7,366,690 39,5 75.606 Purchases (120,818,473) (23,069,434) Activity in held-to-maturity securitics: Maturities. prepayments and calls 44,506,436 5',1,095,687 Purchases (36,663,157) (78,7 r 5,448) Proceeds from sale olother real estate owned 498,822 t,644,370 Purcha-se of customer list ( 190,000) Net increase in customer loans (49.309,093) (30.52 r,632) Net cash from investing activities (39,522,559) (34,842,383) Cash tlows from financing activities: Net increase (decrease) in noninterest bearing deposis (9,705,7961 42.247.246 Net increase (decrease) in interest bearing deposits 37,943,203 (14,9s2,521) Repayment ofdebt (l l2,o8l ) ( r,s90,783) Cash dividends paid (3,978,434) (5.r56,88r) Proceeds from exercise ofstock options 227,s78 500,222 Purchase of treasury stock ( I 70,500) (265,335 ) Sale oftreasury stock 487,025 510,825 Net cash from financing activities 24,690,995 21.292,7'13 Net change in cash and cash equivalents 5,988,557 (3, r 28.659) Cash and cash equivalents, beginning ofyear 60,5 11,284 63 9.943 Cash and cash equivalents, end ofyear $ 66,499.84 r $ 60.5 I l.284 The accompanying noles are an integrol port of these consolidated financial statements. (7) TEXAS INDEPENDENT BANCSHARES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) FOR THE YEARS ENDED DECEMBER 3I,2016 AND 2OI5 2016 20t 5 Supplemental disclosure of cash flow information: lnterest paid $ 1,546,506 $ 1,671,044 Supplemental disclosure of noncash investing activities: Acquisition of real estate through foreclosure $ 2,103,572 $ 434,623 The accompanying notes are an integral part of these consolidated financial statements. (8) TEXAS INDEPENDENT BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 3I, 20I6 AND 20I5 NOTE 1 _ NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Texas Independent Bancshares, Inc. is a holding company whose principal activity is the ownership and rnanagement of its wholly-owned subsidiaries Texas First Bank (the "Bank") and Rust, Ewing, Watt and Haney, Inc. (Rust-Ewing), collectively the "Company". The Bank generates commercial, mortgage and consumer loans and receives deposits from customers located primarily in Chambers, Galveston, Hanis, Jefferson, Brazoriaand Liberty counties and the surrounding areas. At December 3l,20l6,the Bank operated 22 banking centers and 53 ATM locations in Southeast Texas to serve customers. The Bank operates under applicable bank charters and provides full banking services and is subject to regulation by the State Banking Depaftment ofTexas and the Federal Reserve Bank. Rust-Ewing is an insurance agency selling various types of insurance policies and is subject to regulation by the Texas Department of lnsurance. The Bank began operations in 1973, when agroup of investors, organized by Chuck Doyle, purchased First State Bank of Hitchcock. By the end of the 20th century, the group had established a network of community banks in all l0 incorporated cities in Galveston County. ln 2000, Texas Independent Bancshares, Inc. (the "Parent"), was formed as a financial holding company and immediately became the parent cornpany of the Bank. The acquisition of Rust-Ewing was completed shortly thereafter. Banking services continue to expand to meet the needs of business and consumer customers. With the addition of subsidiary Rust-Ewing, and the divisions: Texas First Mortgage, Texas First SBA Lending, and Texas First Investment Center; the Company now has a wide-range of financial service products to offer to its customers. Basis of Accounting and Principles of Consolidation - The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (U.S. GAAP) and conform with practices within the banking industry. The consolidated financial statements include the accounts of Texas Independent Bancshares, [nc. and its wholly-owned subsidiaries, Texas First Bank and Rust, Ewing, Watt and Haney, Inc. All intercompany accounts and trarrsactions have been eliminated. Use of Estimates - The preparation of financial statements in conformity with U.S. GAAP 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 revenue 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 deterrnination of the allowance for loan losses, and the valuation of stock-based compensation and fair value of financial instruments. Cash and Cash Equivalents - Cash and cash equivalents are balances due from banks and federal funds sold, allof which have original maturities of 90 days or less. Interest-Bearing Deposits in Banks - Interest-bearing deposits in banks mature within one and two years and are carried at cost. Investment Securities - The Company's investments in securities are classified in two categories and are accounted for as follows: a Available-for-Sale Securities - Available-for-sale securities consist of bonds, notes, debentures, and certain equity securities not classified as trading securities or held-to-maturity securities. Available-for- sale securities are carried at fair value with unrealized gains and losses reported in other comprehensive income. Any decision to sell a security classit'ied as available-for-sale would be based on various factors. including significant rnovement in interest rates, clranges in tlre rnaturity mix ol'tlte Compatty's assets and liabilities, liquidity needs, regulatory capital considerations, anclother similar factols. (e) TEXAS INDEPENDENT BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 3I,2OI6 AND 20I5 Realized gains (losses) on available-for-sale securities are included in noninterest income and, when applicable, are reported as a reclassification adjustment in other comprehensive loss on the consolidated statements of comprehensive income. Gains and losses on sales ofsecurities are recorded on the trade date determined on the specific-identification method. a Held-to-Maturity Securities - Bonds, notes and debentures for which the Company has the positive intent and ability to hold to maturity. Held{o-maturity securities are carried at amortized cost. The amortization of premiums and accretion of discounts are recognized in interest income using methods approximating the interest method over the period to maturity. Purchase premiums and discounts are recognized in interest income using the interest method over the terms of the securities. Declines in the fair value of held-to-maturity and available-for-sale securities below their cost that are deemed to be other than temporary are reflected in earnings as realized losses. [n determining whether other-than-temporary impairment exists, management considers many factors, including (i) the length oftime and the extent to which the fair value has been less than cost, (ii) the financial condition and near-term prospects of the issuer, and (iii) the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. Gains and losses on the sale of securities are recorded on the trade date and are determined using the specific identification method. Loans - Loans are stated at the amount of unpaid principal, reduced by uneamed income, net deferred fees, and an allowance for loan losses. Interest on loans is recognized using the simple-interest method on the daily balances of the principal amounts outstanding. Loan origination fees are deferred, while direct loan origination costs are recognized and expensed as incurred. For 2016 and 201 5, management believes that not deferring such costs and amoftizing them over the life of the related loans does not materially affect the financial position or results of operations of the Company. Loans are considered impaired when, based on current information and events, it is probable the Company will be unable to collect all amounts due in accordance with the original contractual terms of the loan agreement, including scheduled principal and interest payments. If a loan is impaired, a specific valuation allowance is allocated, if necessary, so that the loan is reported net, at the fair value of collateral if repayment is expected solely from the collateral or estimated future cash flows using the loan's existing rate. lnterest payments on impaired loans are typically applied to principal unless collectability of the principal amount is reasonably assured. Impaired loans, or portions thereof, are charged offwhen deemed uncollectible. The accrual of interest on loans is discontinued when there is a clear indication that the borrower's cash flow may not be sufficient to meet payments as they become due, which is generally when a loan is 90 days past due. When a loan is placed on nonaccrual status, all previously accrued and unpaid interest is reversed. lnterest income is subsequently recognized on a cash basis as long as the remaining book balance of the asset is deemed to be collectible. If collectability is questionable, then cash payments are applied to principal. A loan is placed back on accrual status when both principal and interest are cunent and it is probable that the Company will be able to collect all amounts due (both principal and interest) according to the terms ofthe loan agreement. From time-to-time, the Company rnodifies its loan agreement with a borrower. Current economic conditions have forced many borrowers and lenders to renegotiate the terms of existing loans. Borrowers unable to meet the current terms of the loan may request a lower interest rate, a reduction of principal, a payment deferral or a longer term to maturity. If an agreement is made to restructure the debt, the modified loan is considered a troubled debt restructuring when two conditions are met: (i) the borrower is experiencing financial difficulty and (ii) concessions are made by the Company that would not otherwise be considered for a borrower with similar credit risk characteristics. (l 0) TEXAS INDEPENDENT BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 3I,2OI6 AND 20I5 The Company has certain lending policies and procedures in place that are designed to maximize loan income with an acceptable level of risk. Management reviews and approves these policies and procedures on a regular basis and makes changes as appropriate. Management receives weekly reports related to loan originations, quality, concentrations, delinquencies, nonperforming and potential problem loans. Diversification in the loan portfolio is a means of managing risk associated with fluctuations in economic conditions, both by type of loan and geography. Agricultural Loans - Agricultural loans are subject to underwriting standards and processes similar to commercial loans. Agricultural loans are primarily made based on the identified cash flows of the borrower and, secondarily, on the underlying collateral provided by the borrower. Most agricultural loans are secured by the agriculture related assets being financed, such as farm land, cattle or equipment, and include personal guarantees. Real Estate Loans - Real estate loans represent the greatest concentration of loans. At December 31,2016, the majority of the Company's realestate loans were collateralized by properties located in the Company's market areas. Approximately $322,581,000 or 84.98yo, ofthe approximately $379,594,000 in real estate loans represent loans collateralized by commercial dwellings. Of those commercial real estate loans, approximately $233,960,000 are owner-occupied, $33,589,000 are nonowner-occupied and the remaining $55,033,000 are other construction loans. These loans are underwritten prirnarily based on projected cash flows and, secondarily, as loans secured by real estate. Generally, the repayment of real estate loans is largely dependent on the successful operation of the property securing the loans or the business conducted on the properfy securing the loan. Real estate loans may be more adversely affected by conditions in the real estate markets or in the general economy. The properties securing the Company's real estate portfolio are generally diverse in terms of type and geographic location within the Company's sewice area. This diversity helps reduce the exposure to adverse economic events that affect any single market or industry. Generally real estate loans are owner-occupied which further reduces the Company's risk. Real estate loans are divided into residential, commercial and construction loans. Residential loan originations are generated by our loan officers, in-house origination staff, marketing efforts, present customers, walk-in customers and referrals from real estate agents and builders. Residential loans primarily include origination of loans secured by first mortgages on owner-occupied, one to four family residences. The Company also originates home equity loans, which are included in the residential loan portfolio. Commercial real estate loans primarily include commercial office buildings, retail and offices, warehouse facilities, hotels and churches. In determining whether to originate commercial real estate loans, the Company generally considers factors such as the financial condition of the bonower and the debt service coverage from income of the property. Commercial Loans - Commercial loans are underwritten after evaluating and understanding the borrower's ability to operate profitably and effectively. Underwriting standards are designed to determine whether the borrower possesses sound business ethics and practices and to evaluate current and projected cash flows to determine the ability of the borrowerto repay theirobligations as agreed. Commercial loans are primarily made based on the identified cash flows of the borrower and, secondarily, on the underlying collateral provided by the borrower. Most commercial loans are secured by the assets being financed or other business assets, such as accounts receivable or inventory, and include personal guarantees, Consumer Loans - Substantially all consumer loan originations are made to consumers in the Company's market areas. The Company utilizes methodical credit standards and analysis to supplement its policies and procedures in underwriting consumer loans. The Company's loan policy addresses types of consumer loans that may be originated and the collateral, il-secured, which must be perfected. The relatively smaller individual dollar amounts of consumer loans that are spread over numerous individual borrowers also minimize the Company's risk. (l I ) TEXAS INDEPENDENT BANCSHARES, INC. NOTES TO CONSOLIDATED FTNANCIAL STATEMENTS DECEMBER 3I,20I6 AND 20I5 Allowance for Loan Losses - The allowance for loan losses is established through a provision for loan losses charged to expense. Loan losses are charged against the allowance when management believes the collectability of the principal is unlikely. Subsequent recoveries, if any, are credited to the allowance. 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 incurred in the balance of the loan portfolio, based on an evaluation of the collectability of existing loans and prior loss experience. This evaluation also takes into consideration such factors as changes in the nature and volume of the loan portfolio, overall portfolio quality, review of specific problem loans, concentrations and current economic conditions that may affect the borrower's ability to pay. While management uses the best information available to make its evaluation, future adjustments to the allowance may be necessary ifthere are significant changes in economic conditions. In addition, regulatory agencies, as an integral part of their examination process, periodically review the Company's allowance for loan losses, and may require the Company to make additions to the allowance based on their judgment about information available to them at the time of their examinations. The allowance consists of specific, general and qualitative components. The specific component relates to impaired loans. For such loans, an allowance is established when the discounted cash flows (orcollateralvalue or observable market price) of the impaired loan is lower than the carrying value of that loan. The general component covers nonclassified loans and is based on historical loss experience adjusted for qualitative factors. A qualitative component is maintained to cover uncertainties that could affect management's estimate of probable losses. The qualitative component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the portfolio. Premises and Equipment - Premises and equipment consists of land, buildings and equipment. Land is carried at cost. Other premises and equipment are carried at cost net of accumulated depreciation. Depreciation is computed using the straight-line method based on the estimated useful lives of the assets. Maintenance and repairs are expensed as incurred while major additions and improvements are capitalized. Gains and losses on dispositions are included in current operations. Bank-Owned Life Insurance - Bank-owned life insurance is carried at the aggregate cash surrender value of life insurance policies owned where the Company is named beneficiary. Increases in cash surrender value derived from crediting rates for underlying insurance policies is credited to noninterest income. Other Real Estate Owned (OREO) - OREO represents properties acquired through or in lieu of loan foreclosure and are initially recorded at fair value less estimated costs to sell and are grouped with other assets on the consolidated balance sheets. Any write-down to fair value at the time of transfer to OREO is charged to theallowanceforloanlosses. Costsofimprovementsarecapitalized,whereascostsrelatingtoholdingOREO and subsequent adjustments to the value are expensed, Nonmarketable Equity Securities - Other investments consist of limited partnership interests in private investment funds qualifoing as Small Business Investment Companies (SBIC) by the U.S. Small Business Administration (SBA). The invesflnents are carried at cost and periodically evaluated for impairment. The Company has subscription commitments of $3,900,000, of which $ I ,63 8,81 7 has been advanced, The Company also owns stock in the Independent Bankers Financial Corporation (IBFC), the parent company of The Independent BankersBank. IBFC stock is carried at cost, and periodically evaluated for impairment based on ultimate recovery of par value. Both cash and stock dividends are reported as income. The Company, as a member of the Federal Reserve Bank of Dallas, is required to maintain an investment in capital stock. The stock is canied at cost, classified as restricted security, and periodically evaluated for impairment based on ultimate recovery of par value. Both cash and stock dividends are reported as income. (12) TEXAS INDEPENDENT BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 3I, 20I6 AND 2OI5 Stock-Based Compensation - The Company issues stock options and restricted stock awards on a periodic basis. Stock-based compensation cost is measured at the grant date based on the fair value of the award and recognized as expense over the vesting period of the stock award using the straight-line method. Goodwill and Intangible Assets - Goodwill represents the excess of cost over fair value of assets of businesses acquired. Goodwill and intangible assets acquired in a purchase business combination and determined to have an indefinite useful life are not amortized, but instead are tested for impairment at least annually. Intangible assets which consist of core deposits are amortized over their estimated life, and are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount ofan asset may not be recoverable. An impairment loss is recognized to the extent that the carrying amount exceeds the asset's fair value. For goodwill,theimpairmentdeterminationismadeatthereportingunitlevelandconsistsoftwosteps. First,the Company determines the fair value of a reporting unit and compares it to its carrying amount, Second, if the carrying amount of a reporting unit exceeds its fair value, an impairment loss is recognized for any excess of the carrying amount of the reporting unit's goodwill over the implied fair value ofthat goodwill. The implied fair value of goodwill is determined by allocating the fair value of the reporting unit in a manner similar to a purchase price allocation. The residual fair value after this allocation is the implied fair value of the reporting unit goodwill. Management has determined that there has been no impairment of goodwill or intangibles during 2016 or 2015. Income Taxes - The Company's stockholders have elected to have the Company's income taxed as an S corporation under provisions of the Internal Revenue Code. Therefore, taxable income or loss is reported to the individual stockholders for inclusion in their respective tax returns and no provision for federal income taxes is included in these financial statements. The Company files a consolidated federal income ta.x return with its wholly-owned subsidiaries. In accordance with Financial Accounting Standards board (FASB) Accounting Standards Codification (ASC) 740,Income Taxes, the Bank believes that it has no uncertain tax provisions that qualifr for either recognition or disclosure in the financial statements. The Company converted to an S corporation on December3l,2013 and is subject to the built-in gains tax for a period not to exceed five years from that date. The state margin tax applies to legal entities conducting business in Texas. The tax is calculated by applying a tax rate to a base that considers both revenues and expenses and, therefore, has the characteristics ofan income tax. As a result, the Company accrued approximately $42,900 and $132,200 in state margin taxes for 2016 and 2015, respectively. The state margin tax is included in other operating expenses in the consolidated statements of income. Fair Value Measurements - FASB ASC Topic 820, Fair Volue Measurements and Disclosures, defines fair value, establishes a framework for measuring fair value under GAAP, and requires ceftain disclosures about fair value measurements (see Nole l6). In general, fair values of financial instruments are based upon quoted market prices, where available. If such quoted market prices are not available, fair value is based upon internally developed models that primarily use, as inputs, observable market-based parameters. Valuation adjustments may be made to ensure that financial instruments are recorded at fair value. These adjustments rnay include amounts to reflect counterparty credit quality and the Company's creditworthiness, among other things, as well as unobservable parameters. Any such valuation adjustments are applied consistently over time. The three levels of the fair value hierarchy are described as follows: Level I - Quoted prices in active markets for identical assets or liabilities; includes certain U.S. Treasury and other U.S. Govemment agency debt that are highly liquid and are actively traded in over-the-counter markets. (t 3) TEXAS INDEPEI{DENT BANCSHARES, INC. NOTES TO CONSOLIDATED FTNANCIAL STATEMENTS DECEMBER 3I,20I6 AND 20I5 a Level 2 - Inputs other than Level I that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. a Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value ofthe assets or liabilities. Level 3 assets and liabilities include financial instruments rvhose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant managementjudgmentor estimation. The asset or liability's fair value measurement level within the fair value hierarchy is based on the lowest level ofanyinputthatissignificanttothefairvaluemeasurement. Valuationtechniquesusedneedtomaximizethe use of observable inputs and minimize the use of unobservable inputs. Financial Instruments With Off-Balance-Sheet Risk - [n the ordinary course of business, the Company enters into off-balance-sheet financial instruments consisting of commitments to extend credit, commitments under credit card arrangements, commercial letters of credit, and standby letters of credit. Such financial instruments are recorded in the financial statements when they are funded or related fees are incurred or received. Treasury Stock- Treasury stock is the Company's own stock, which has been issued and reacquired but not canceled or retired. The stock is stated at cost, and no cash dividends are paid on this stock. Subsequent sales of treasury stock are accounted for using the first-in, first-out method of accounting. Reclassification - Certain reclassifications have been made to the 2015 financial statement presentation to correspond to the current year's format. Total stockholder's equity and net income were unchanged by these reclassifications. Recent Accounting Pronouncements - In May 2014, the FASB issued Accounting Standards Update (ASU) No.20l4-09, Revenue From Contracts With Customers (fopic 606),establishing a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers. This update provides a five-step analysis in deterrnining when and how revenue is recognized. The new model will require revenue recognition to depict the transfer of promised goods or services to customers in an amount that reflects the consideration a company expects to receive in exchange for those goods or services and will supersede most of the existing revenue recognition guidance, including industry-specific guidance. In August20l5,theFASB issuedASUNo.20l5-l4,Revenue FromConlracts WithCustomers (Topic 606): Deferral of the Effective Date, which deferred the effective date of ASU No. 2014-09 for all entities by one year. Therefore, ASU 2014-09 is effective for annual reporting periods beginning after December 1 5, 201 8, for nonpublic entities. Earlier application is permitted only as of annual reporting periods beginning after December 15, 2016. The Company is assessing the method of adoption and the impact this new accounting guidance will have on its financial statements. In January 20l6,the FASB issued ASU No. 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities. The new guidance makes targeted improvements to GAAP impacting equity investments (other than those accounted for under the equity method or consolidated), financial liabilities accounted for under the fair value election, and presentation and disclosure requirements for financial instruments, among other changes. (l 4) TEXAS INDEPENDENT BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 3I,2016 AND 20I5 The new guidance is effective for the nonpublic companies for annual reporting periods beginning after December 15, 2017, with early adoption prohibited other than for ceftain provisions. The Company is evaluating the impact that the new guidance would have on its financial statements and related disclosures. In February 201 6, the FASB issued ASU No. 2016-02, Leases (fopic 842). The ASU will require most leases to be recognized on the consolidated balance sheets as lease assets and lease liabilities and will require both quantitative and qualitative disclosures regarding key information about leasing arrangements. Lessor accountingislargelyunchanged. TheguidanceiseffectivebeginningafterDecemberl9,2019,fornonpublic companies. The standard may be early adopted and requires a modified retrospective transition approach to apply. The Company is evaluating the effect that ASU 2016-02 will have on its financial statements and related disclosures. In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses Oopic 326): Measurement of Credil Losses on Financial Instrumenfs. The amendments in this ASU replace the incurred loss model for recognition of credit losses with a methodology that reflects expected credit losses over the life of the loan and requires consideration ofa broader range of reasonable and supportable information to calculate credit loss estimates. The amendments are effective for nonpublic companies for fiscal years beginning after December 15,2020. The Company is currently evaluating the impact of the adoption of this standard would have on its financial statements. In August20l6, the FASB issued ASU 2016-15,Statement of Cash Flows (fopic 230): Classificationof Certain Cash Receipts and Cash Paymenls. This update provides guidance on how to record eight specific cash flow issues, and how the predominant principle should be applied when cash receipts and cash payments have more than one class of cash flows. This standard is effective for fiscal years beginning after December 15, 2018 and interim periods beginning after December 15, 2019, with early adoption permitted. Adoption will be applied retrospectively to all periods presented. The Company is currently evaluating the impact this guidance will have on its financial statements and related disclosures. NOTE 2 _ CASH AND DUE FROM BANKS 2016 20t5 Cash and cash items $ 17204,445 $ 19,953,484 Federal Reserve Bank 23,439,657 18,753,020 Texas Independent Bank, Dallas 202,649 1,605,446 Texas Capital Bank 12,110,472 Frost Bank 11264,263 14,772,974 Other banks 181"355 301,360 Totals $ 64,401,841 $ 55,3 86,284 The Bank is required to maintain average balances on hand or with the Federal Reserve Bank of Dallas. At December 31,2016 and2015, these reserve balances amounted to $24,079,000 and $18,566,000, respectively. (1s) TEXAS INDEPENDENT BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 3 I, 20 I 6 AND 20 I 5 NOTE 3 - INVESTMENTS The amortized cost and fair value of available-for-sale securities and held-to-maturity securities with gross unrealized gains and losses, follows: Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value December 31,2016 Securities available-for-sale: U.S. Government agencies $ 5,020,150 s 3o,9oo $ $ 5,051,050 State and municipal securities 8,027,406 60, I 56 8,087,562 Mortgage-backed securities 38,296,667 309,843 (823,205) 37,783,305 Equiry 610,101 3,716,793 4,327,500 Totals $ 5t,954,930 $ 4,111,692 S (823,205) $ 55,249,417 December3l,20 l5 Securities available-for-sale: U.S. Government agencies $ 10,029,784 $ 36,650 $ (8,334) $ 10,0s8,100 State and municipal securities 11,772,321 169,467 I I ,941,788 Morlgage-backed securities 31,458,922 53 I,678 (7s0,see) 3 l,240,00 t Equiry 740,144 5,669,297 6,409,441 Totals $ s4,00 l,l7l $ 6,40'7,092 $ (758,933) $ 59,649,330 December 31,2016 Securities held+o-marurity: U.S. Government agencies $ 9,999,850 s S (255,400) $ 9,744,450 State and municipal securities 216,869,281 1,097,509 (3,882,802) 214,083,988 Mortgage-backed securities 99,062,927 512,597 (1,435,623) 98,139,901 Totals $ 325,932,058 $ 1,610,106 S (5,573,825) $ 321,968,339 December 31,2015 Securities he I d-to-maturity : U.S. Govemment agencies $ t4,996,332 $ 100 s (77,832) $ 14,9 r8,600 State and municipal securities 198,89 r,555 I ,941,33 8 ( 1,408,91 8) 199,423,975 Mortgage-backed securities 122,355,813 I ,153,371 (8e0,8 re) 122,618,365 Totals s 336,24 3,700 $ 3,094 ,809 $ 377 $ 336 960 940 At December 31, 2016 and 2015, securities with carrying values of $127,397,666 and $153,006,855, respectively, were pledged to secure public deposits and for other purposes required or pennifted by law. Tlre amortized cost and estimated fair value of debt securities at December 31,2016, by contractual maturity, are shown below. Maturities of mortgage-backed securities and collateralized mortgage obligations will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Therefore, these securities are not included in the maturity categories below. Equity securities are shown separately since they are not due at a single maturity date. (16) TEXAS INDEPENDENT BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31,2016 AND 20I5 Available-for-Sale Securities Held-to-Maturity Securities Amortized Fair Amortized Fair Cost Value Cost Value Due in one year or less $ 5,524,826 s 5,547,974 $ 13,618,299 $ 13,628,588 Due in one to five years 7,522,730 7,590,638 63,016,527 62,570,838 Due from five to ten years l0l ,802,448 100,352,043 Due after ten years 48 431 857 47,276,969 13,047,556 13,138,612 226,869,131 223,828,438 Mortgage-backed securities 38,296,667 37,783,305 99,062,927 98,139,901 Equity 610,'707 4,327,500 Totals $ 5t,954,930 $ 55,249,417 $ 325,932,058 $ 321,968,339 The following table summarizes securities with unrealized losses at December 31, aggregated by major security type and length of time in a continuous unrealized loss position: Less thm l2 Months More thm l2 Months Total Cross Cross Gross Estimated Unrealized Estimated Unrealized Estimated Unrealized Fair Value Losses Fair Value Losses Fair Value Losses Dc*ember 31,2016: Available-for-sale: Mongage-backed securilies 9_15,848,1!9 s (4e6,s82)s r2,203,3s7 $ (326,623) s 29,0sr,517 $ (823,205) Held-to-maturity: U.S Covemment agencies s 9,744,450 $ (2s5,400) $- $ $ 9,744,450 s (2ss,400) State md municipal securities 142,442,0t8 (3.4s6,486) I 2,655,590 (426,3r6) I s5,097,628 (3,882,802) Morl gage-backed secuities 63,64r,01I fl.03E.385) 9,474,851 (397.238) 73,r 15.868 (r,43s,52J) Totals $ 215,E27,499 $ (4,750,271) $ 22,t30,447 $ (823,ss4) $ 237,9s7,946 $ (5,s73,82s) December 31,2015: Available-for-sale: U.S. Govemment agencies $ 4,989,800 (8,3.14) $- s $ 4,989,800 s (8,334) Mort gage-backed secuities I 5,435,287 (582.r67) 4,585,985 fl68.412) 20,02t,272 (750.5e9) Totals $ 20,425,087 $ (590,50t ) s 4,585,985 $ (168,432) $ 25,0 il,072 $ (758,933) Held-tcmaturiw: U.S. Govemment agencies s 4,e73,950 (25,800) s 4,944,550 $ (52,032) $ 9,9t8,500 $ (77,832) State md mmicipal secuities 8 t ,546,1 95 (e r 4,093) 12,437.079 (494,825) 97,981,2't4 (r.408,9t8) M ortgage-backcd secuities 24,208. I 8 I ( l 90.654) 25,046,'.l23 (700, I 65) 49,254,904 (890,819) Totals $ il0,728,326 $ (r,130,547) S 42,428,152 s (1,247,022\ $ 153,rs6,678 $ (2,37?,569) The Company had 481 and 330 investments in an unrealized loss position at December 3l ,2016 and 2015, respectively. The Company believes these unrealized losses are temporary as (i) the Company does not have the intent to sell investment securities prior to recovery and (iD it is more-likely-than-not that the Company will not have to sell these securities prior to recovery. The unrealized losses noted are interest rate related due to the level of interest rates at December 31,2016 and2015. The Company has reviewed the ratings of the issuers and has not identified any issues related to the ultimate repayment of principal as a result of credit concerns on these securities. (17\ TEXAS INDEPENDENT BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 3I,2OI6 AND 20I5 NOTE 4 - LOANS RECEIVABLE A summary of the balances of loans receivable were as follows at December 3l: 2016 Percent 2015 Percent Agriculture $ 3,691,873 0.7Y. $ 3,042,975 0.7% Real estate 319,827,615 74.3Y" 356,091,355 76.8% Commercial I16,389,406 22.70h 86,063,741 18.6% Consumer and other 11,926,479 2.3o/o 17,951,008 3.9% Overdrafts 136.294 r30.667 Subtotal 511,971,667 )0J% 463,279,746 100.0% Allowance for loan losses (8,556,101) (8.s 80,016) Loans receivable, net $ 503,415,566 $ 454,699,730 Nonaccrual and Past Due -Nonaccrual loans totaled $2,249,203 and $2,684,580 at December 31, 2016 and 2015, respectively. Had nonaccrual loans performed in accordance with their original contractterms, the Company would have recognized additional interest income of $102,913 and $218,914 in 2016 and20l5, respectively. Accruing loans past due more than 90 days totaled S-0- and approximately $289,000 at December 31,2016 and 20 I 5, respectively. Loans are segregated into classes based upon the nature ofthe collateral and the borrower. These classes are used to estimate the credit risk component in the allowance for loan losses. The following table is a summary of amounts included in nonaccrual loans, segregated by class of loans as of December 3l : 2016 2015 Real estate s 2,111,944 $ 2,661,142 Commercial 131,259 23 438 Totals $ 2,,249,203 $ 2,684,580 Past Due Loans - The following table represents an aged past due loans, segregated by class of loans (in thousands ofdollars): Recorded Greater Thil Total Investmfit > 30 - 89 Days 90 Days Total Loms 90 Days and P6t Due Pasl Due Pasl f)r re Cr Recervab e December 31,2016: Agricultue s- s $ 3,692 $ 3,692 $ Real estate 955 1,566 2,522 377,J06 J79,828 Commercial E3 l3r 214 lr6,l76 I 16,390 Constmer and other 84 l8 102 11,824 I 1,926 Overdrafts 25 llt 136 Totals $ I,148 S rtTrs s 2,863 s 509,109 $ 511,972 S - (18) TEXAS INDEPENDENT BAIICSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 3 1, 20 I6 AND 20 I 5 Recorded Creater Thm Total lnvestment > 30 89 Days 90 Days Total Loms 90 Days and Past Due Pesl Due Past Duc Cffient Rece vab e Accruing December S l, 20 1 5: Agriculhrre 5- $ I 3,041 $ 3,043 $ Real estate 716 t,257 3,031 353,058 156,09 I 28't Comercial 45 45 86,019 86,064 Consmer md other 69 2 7t I 7,880 I 7,951 Overdrafts 3l 100 l3t Totals s 1,259 S 1,180 $ 460,100 s 463,280 $ 289 Impaired Loans - The following table presents impaired loans, segregated by class of loans as of December 31,2016 and2015, respectively. No interest income was recognized on impaired loans subsequent to their classification as impaired. Recorded Recorded Unpaid lnvestment lnvestment Total Average hincipal With no wirh Recorded Related Recorded Balmce Allowance Allowance lnvestment Allowmce lnvestmenl December 31, 2016: Real estate S 10,3'18,9{5 $ 8.J33,s99 $ 1.923.347 $ 10,256.946 $ sJ2.686 s 9.948.641 Commercial tJl.259 I 3l,259 13r.259 J2,8t5 80,291 Consmer and other 280.343 2s8,343 22,000 280,343 22,000 t44,647 Totals $ 10,760,5.t7 s 8,591,942 $ 2,076,506 $ t0,668,5.t8 S 587,501 $ 10,17J,579 Decembs 3 l, 20 l 5: Real estate s 9,548.116 ! 8,258,44 I s 659,426 S 8,9t7.E67 $ 173.804 $ 7.838.835 Comrnercial 29.323 23.438 - 23.438 t7t.95l Consumer md other 8,95 I 8,95 I 8,95 I 8,95 I 76 Totals $ 9,586,6t0 $ 8,281.879 $ 668,377 $ 8,950,256 $ t82,755 S 8,0t5,262 Troubled Debt Restructuring - A loan is accounted for as a troubled debt restructuring (TDR) if the Company, for economic or legal reasons related to the borrower's financial difficulties, grants a concession to the borrower that it would not otherwise consider. A troubled debt restructuring typically involves a modification of terms such as a reduction of the stated interest rate or face amount of the loan, a reduction of the accrued interest, or an extension of the maturity date(s) at a stated interest rate lower than the cunent market rate for a new loan with similar risk. During 2016 and 2015, the terms of certain loans were modified as troubled debt restructurings. The following tables present modifications of loans that the Company considers to be troubled debt restructured loans: 20t6 2015 Outstanding Number Outstanding Number Loan of Loan of Balance Contracts Balance Contracts Real estate $ 4,890,701 $ 7 $ 5,597,253 $ 7 There were no troubled debt restructurings that subsequently defaulted during 2016 and 201 5 Credit Risk Monitoring and Loan Grading - The Company employs several means to monitor the risk in the loan portfolio including volume and severity of loan delinquencies, nonaccrual loans, internal grading of loans, historical loan loss experience and economic conditions. (le) TEXAS INDEPENDENT BANCSHARES, INC. NOTES TO CONSOLIDATED FTNANCIAL STATEMENTS DECEMBER 3I, 2OI6 AND 20I 5 Loans are subject to an internal risk grading system which indicates the risk and acceptability of that loan. The general characteristics of the risk grades are as follows: a Pass (11 and 12) - Loans that have adequate sources of repayment, with liftle identifiable risk of collection and conform to Bank policy and applicable regulations. a Pass Watch (01) - Loans with the potential for future deterioration which, if continued, would result in critic ism and/or classifi cation. a Special Mention (02) - Loans that have emerging weaknesses and are requested to be placed on the Company's watch list to receive special attention. Loans of this quality would exhibit some deteriorating trends in margin, leverage, and performance. a Substandard (03) - Loans that are inadequately protected by current sound net worth, paying capacity of the borrower, or pledged collateral. These loans would typically have one or more well-defined weakness that could jeopardize the repayment of debt. a Doubtful (04) - Loans with inherent weaknesses which collection or liquidation in full is questionable. a Loss (05) - Loans which are considered uncollectable and of such little value their continuance as an active Bank asset is not warranted. This does not mean that the asset has no recovery or salvage value, but, rather, that the asset should be charged offnow, even though partial or full recovery may be possible in the future. The classification judgment will rely upon the factual evidence available and the extent and nature of the variable factors. The following table presents internal loan grading by class of loans as of December 31 Consumcr Apgicultue Real Estate Commercial and Otlrer Overdrafts Totals Credit Quelity - 2016 I and 12 - Pass s 3,688,53? 363,71 6,709 s [6,052,802 $ 11,649,472 S 136,29{ $ 495,243,8t4 0l - Pass watch 4,320,r30 4,320, t30 02 - Special mention 1,533,830 205,3{5 1,7J9, I 75 03 - Substmdud 3,J36 r0,2s6,946 r3 t,259 277,007 10,568,-548 04 - Doubtful 05 - Loss Tota s s 3,69t,873 $ 379,827,6rS S [5,389,406 S 11,926,479 S 136,294 S 5rr,97r,667 Credit Qu,ality - 201 5 I I and 12 - Pass $ 3,042,975 334,737,202 85,374,499 I 7.75 7,659 s I 10,667 5 44 t,041.002 0l - Pass watch 4,007,765 245,?44 96,5't4 - 4,-149.583 02 - Special mention 902,03 I 23 1.567 - I, t-11,598 0l - Substandard t 6,444.357 212,431 96.1't5 - 16,75.1,563 04 - Doubtful 05 - Loss Totals $ 3,042.975 $ 356,09t,155 $ 86,061,741 $ t7.951,008 $ l-10.667 S 463,21e,746 (20) TEXAS INDEPENDENT BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 3 I , 20 I6 AND 20 I 5 Allowance for Loan Losses - The following tables detail the activity in the allowance for loan losses by portfolio segment (in thousands of dollars): Period-End Anromts Allocated to Loms Evaluated for Impaiment Beginning Provision for Ending Balance Lom Loss Charee-offs Recoveries Balance lndividuallv Collectively December 31, 20t6: Algicultue S 39 $ {3 s $ ,t3 Real estate 6,528 6,375 5J3 5,842 Commercial 1,6E8 1,80t 33 I,768 Consumer md other 322 134 22 312 Overdrafls J 3 J Totals s 8,580 !J S 749 S lJ2 $ 8,ss6 S s88 $ 7,968 December 3 I, 2015: Agiculture $ 35 S 4 S $ _39 S 3q Real estate 6,049 490 t58 t47 6,528 t'14 6.354 Commercial 1,564 il9 1,688 |,688 Consumer and other 3t9 25 98 76 322 3ll Overdrafts l3 100 165 55 3 rotals 9_Z€!9. $ 738 $ 421 s 283 $ 8,580 S 183 $ 8.197 The Company's recorded investment in loans related to the balance in the allowance for loan losses on the basis of the Company's impairment methodology is as follows at December 3l: 2016 2015 Loans Evaluated for Impairment Loans Evaluated for Impairment Individually Collectively Individually Collectively Agriculture $ $ 3,691,873 $ $ 3,042,975 Realestate 10,256,946 369,570,669 8,917,867 347,173,488 Commercial 131,259 116,258,147 23,438 86,040,303 Consumer and other 280,343 11,646,136 8,951 17,942,057 Overdrafts 136,294 130,667 Totals $ 10,668,548 S 501,303,119 $ 8,950,256 $ 454,329,490 NOTE 5 _ PREMISES AND EQUIPMENT Major classifications of these assets are summarized as follows at December 3l : 2016 2015 Land $ 4,568,596 $ 4,t34,749 Building 28,243,774 28,880,051 Equipment 9287,220 8,772,914 Construction in process 102,491 42,202,081 41,787,714 Less: accumulated depreciation (21,029,073) (20,507, I 60) Totals $ 21,173,008 $ 21,2 80,554 (21) TEXAS INDEPENDENT BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 3I,2OI6 AND 2OI5 Depreciation expense of $ 1,426,136 and $ 1 ,483,7 65 in 2016 and 2015, respectively, is included in occupancy and premises expense, net. NOTE 6 _ NONMARKETABLE EQUITY SECURITIES The Company's investments in nonmarketable equity securities are as follows at December 3l 20t6 20r5 Federal Reserve Bank of Dallas $ 1,006,600 $ 1,006,600 IBFC 3,944381 3,576,867 Other nonmarketable equity securities 2,638,817 2,154,676 Totals $ 7,589,798 $ 6,738,143 NOTE 7 - OTHER REAL ESTATE OWNED An analysis of the allowance for losses on other real estate owned was as follows at December 31: 2016 2015 Balance, beginning of year $ 1,893,912 $ 2,81 I ,147 Additions 2,103,572 434,623 Cash settlements (498,822) (1,644,370) Write-downs (143,261) (300,101) Realized gain included in other noninterest income 93,845 592,613 Balance, end ofyear $ 3,449,240 NOTE 8 _ DEPOSITS The following table summarizes deposits by category at December 3l 2016 201s Noninterest-bearing: Demand $ 329,999,550 S 339,705,346 Interest-bearing: lnterest-beari n g demand 178,268,496 159,748,625 Money market 32,486,663 25,380,211 Savings 176,596,854 154,658,282 Time deposits less than $250,000 98,953,281 108,368,887 Time deposits $250,000 and over 59,118,654 59,324,739 Total interest-bearing 507,480,744 Total deposits $ 875,423,498 $ 847,186,090 (22) TEXAS INDEPENDENT BANCSHARES, INC. NOTES TO CONSOLIDATED FTNANCIAL STATEMENTS DECEMBER 3I, 20I6 AND 20I5 At December 31,2016, the scheduled maturities of time deposits were as follows: For the Year Ending December 3l Amount Three months or less $ 57,624,953 Over three months through l2 months 76,764,963 Over one year through three years 19,016,392 Over three years 4,665,627 Total s I 58,071,935 AtDecember3l,20l6and20l5,theCompanyhadapproximately$59,1l8,654and$59,324,739,respectively, in time deposits $250,000 and over. At December3l,2016, approximately $56,502,000 of time deposits $250,000 and over mature within one year. lnterest expense on time deposits in denominations of $250,000 or more amounted to $408,182 for 2016. NOTEg-NOTESPAYABLE The Company had a $9,000,000 line of credit with Frost Bank which matured on December 31, 2015 and was increased to $10,000,000 at the time of renewal. The renewed line of credit was extended through February 28,2018. There were no advances on the line as of December 31,2016 and 201 5. The line of credit bears interest at the prime rate and is secured by the stock of the Bank. The Company assumed a loan from Alexander Ham ilton Life Insurance Company of Arnerica for the purchase of a building in Pearland, Texas. The loan bears interest at a rate of 8.375% per annum with payments due monthly and matures ia 2017. A summary of notes payable is as follows: Balance Balance December 31, December 31, 2015 Additions Retirements 2016 Alexander Hamilton Life Insurance Co. note $ 181,693 $ $ (ll2,o8l) $ 69,612 NOTE 10 - PROFIT SHARING PLAN Full time regular employees ofthe Company are covered by profit sharing plans. The employer's contribution for each fiscal year is allocated among the employees in proportion to the compensation paid each employee for that fiscal year. Employees are vested in the plan at the rate of 20%o per each full year of continuous employment. ContributionstotheplantotaledSl,0l2,T9Tard$973,944during20l6and20l5,respectively, which is included in profit sharing and other employee benefits in the accompanying consolidated statements of income. (23) TEXAS INDEPENDENT BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31,20I6 AND 20I5 NOTE 1I _ DEF'ERRED BENEFIT COMPENSATION The Company sponsors a Deferred Compensation Plan and a Salary Continuation Plan (the "Plans") for the benefit of certain oflicers and directors of the Company. The Plans are indirectly funded by purchases of Bank-owned life insurance contracts. The benefits payable under the Plans commence on the date of retirement, or death if earlier and continue over defined periods. The benefits payable are accrued monthly in an amount whereby the accrual at the date of participant's retirement will equal the present value ofthe future benefits payable. Assets, liabilities and expenses related to the Plans were summarized as follows at December 3l : 2016 201 5 Accrued benefits in connection with the Plans (included as a component of other liabilities) $ 130,282 $ 39,093 Expense recognized in connection with the Plans (included as a component of salaries and employee benefits) s 91,189 $ 39,093 NOTE 12 - COMMITMENTS AND CONTINGENCIES Financial Instruments with Off-Balance-Sheet Risk- In the normalcourse of business, the Company has outstanding commitments and contingent liabilities, such as commifinents to extend credit and standby letters of credit, which are not included in the accompanying financial statements. The Company's exposure to credit loss in the event of nonperforrnance by the other party to the financial instruments for commitments to extend credit and standby letters ofcredit is represented by the contractual or notional amount of those instruments. The Company uses the same credit policies in making such commitments as it does for instruments that are included in the consolidated balance sheets. As of December 3 1, 201 6 and 201 5, financial instruments whose contract amount represents credit risks were as follows: 2016 20r5 Unfunded commitments under lines of credit s 93,035,000 $ I 13,529,000 Standby letters of credit 2,2951000 6,224,000 Totals $ 95,330,000 $ I 19,753,000 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. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management's credit evaluation. Collateralheldvariesbutmayincludeaccountsreceivable,inventory,propeftyandequipmen!and income-producing commercial properties. (24) TEXAS INDEPENDENT BAI{CSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 3 I, 20 I 6 AND 201 5 Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of acustomertoathird-party. Standbylettersofcreditgenerallyhavefixedexpirationdatesorothertermination clauses and may require payment of a fee. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The Company's policies for obtaining collateral, and the nature of such collateral, are essentially the same as those involved in maliing commitments to extend credit. Concentrations of Credit Risk- Principally all of the Company's loans, commitments to extend credit and standby letters of credit have been granted to customers in our market area. The concentrations of credit by type of loan are set forth in Note 4. The distribution of commitments to extend credit approximates the distribution of loans outstanding. Standby letters of credit were granted primarily to commercial borrowers. Contingencies - The Company is subject to claims and lawsuits which arise in the ordinary course of business. It is the opinion of management that the disposition or ultimate resolution of such claims and lawsuits will not have a materially adverse effect on the consolidated financial position of the Company. NOTE 13 _ TREASURY STOCK At December 31,2016 and 2015, the Company has acquired 76,906 and80,277 shares, respectively, of its own stock. The stock is carried at a range of cost from $104.21 to $275.00 per share for stock acquired during the years 2006 to 2015. NOTE T4 - DIVIDENDS The Boards of Directors of the Company may, subject to statutory limitations, declare quarterly, semiannually, or annually dividends of so much of the net profits of the Company as they may judge expedient. No dividends may be declared that would impair the capital of the Company. Dividends in the amount of $3,978,434 and $5,156,881 were declared and paid during 2016 and 2015, respectively. NOTE 15 - STOCK-BASED COMPENSATION Stock Options - The Company's Employee Share Option Plan (the "Plan"), which is stockholder approved, permits the granting of stock options to its employees for up to I 00,000 shares of common stock. The fair value of each option award is estimated on the date of grant using a binomial option valuation model that uses the assumptions noted in the following table. Expected volatility is based on historical volatility of the Company's stock and other factors. The expected term of options granted is derived from the output ofthe option valuation model and represents the period of time that options granted are expected to be outstanding. The risk-free rate for periods within the contractual life of the option is based on the U.S. treasury yield curve in effect at the time of grant. There were no stock options issued during 2016 and 2015. (2s) TEXAS INDEPENDENT BANCSHARES, INC. NOTES TO CONSOLIDATED FTNANCIAL STATEMENTS DECEMBER 3I, 2016 AND 20I5 A summary of option activity under the Plan is presented as follows: Weighted- Average Shares Exercise Price December 31, 2016 Outstanding, beginning of year 51,026 $ 128.25 Granted $ Exercised (2,120) $ 107.73 Forfeited or expired $ Outstanding, end of year 48,906 S 129.14 Exercisable, end of year 48,906 $ 129.14 December 31,2015 Outstanding, beginning of year 54,880 $ 127.t8 Granted $ Exercised (3,854) $ lL2.91 Forfeited or expired $ Outstanding, end of year 51,026 $ 128.2s Exercisable, end of year $ 128.25 AllsharesinthePlanwerefullyvestedasofDecember3l,2016and20l5. Nocompensationcostrelatedto stock-based compensation arrangements granted under the Plan was recognized for 2016 and2015. The aggregate intrinsic value of options outstanding as of December 3l , 2016 and 2015 was approximately $9,300,000 and $7,500,000, respectively. Restricted Stock Awards - The Company periodically issues common stock grants to key ernployees. These awards of stock are measured at their fair value at the date of grant and amortized to expense over the vesting period of I 0 years. During 2014,2,000 shares were granted at a fair value of $228 per share. Additionally, 100 shares vested in both 2016 and 2015, respectively. Total unvested shares as of December 31, 2016 were 1,800, Compensationexpensefor20l6and2015was$94,362and$22,800,respectively. During20l5,akey employee terminated employment with the Company which reduced current and future compensation expense. As of December 3l ,2016 and 2015, there was $338,833 and $408,576, respectively, of total unrecognized compensation cost related to nonvested shares granted. (26) TEXAS INDEPENDENT BANCSHARES, INC. NOTES TO CONSOLIDATED FTNANCIAL STATEMENTS DECEMBER 3I, 2016 AND 20I5 NOTE 16 - FAIR VALUES OF FINANCIAL INSTRUMENTS The following table sets forth by level, within the fair value hierarchy, the Company's assets at fair value as of: Fair Value Measurements Using Level I Level2 Level 3 Fair Value December 31, 2016 Recurring basis Available-for-sale securities $ $ 55,249,417 $ $ 55,249,417 Nonrecurring basis lmpaired loans 10,668,548 10,668,548 OREO l,gg3,gl2 l,gg3,gl2 Totals $ $ 55,249,417 S 12,562,460 $ 67,811,877 December3l,20l5 Recurring basis Available-for-sale securities $ $ 59,649,330 $ $ 59,649,330 Nonrecurring basis Impaired Ioans 8,950,256 8,950,256 OREO l,gg3,gl2 1,893,912 Totals $ $ 59,649,330 $ 10,844,168 $ 70,493,499 There have been no changes in the methodologies used at December 31,2016 and 201 5 Tlrere were no transfers between levels during 2016 and 2015 Securities - Where quoted market prices are available in an active market, securities are classified within Level I of the valuation hierarchy. Level I securities include highly liquid government bonds, mortgage products and exchange-traded equities. [f quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics or discounted cash flows. Level2 securities include certain collateralized mortgage and debt obligations and certain municipal securities. In certain cases where Level I or Level 2 inputs are not available, securities are classified within Level 3 ofthe hierarchy and include certain residual municipal securities and other less liquid securities. Certain financial assets and financial liabilities are measured at fair value on a nonrecurring basis; that is, the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances. Financial assets and liabilities measured at fair value on a nonrecurring basis include the following: Impaired Loans - Ceftain impaired loans are reported at fair value of the underlying collateral if repayment is expected solely from the collateral. The impaired loans are reported at fair value through a specific valuation allowance allocation of the allowance for possible loan losses. Collateral values are estimated using Level2 inputs based on observable market data or Level 3 inputs based on customized discounting criteria. (27) TEXAS INDEPENDENT BANCSHARES, INC. NOTES TO CONSOLIDATED FTNANCIAL STATEMENTS DECEMBER 3I, 20I6 AND 20I5 Other Real Estate Owned - OREO acquired by foreclosure is recorded at the fair value of the property, but not greater than its loan amount, less any selling costs, as applicable, at the time of foreclosure. If necessary, carrying amounts are reduced to reflect this value through charges to the allowance for possible credit losses upon foreclosure. Subsequent to foreclosure, real estate is carried at the lower of its new cost basis or fair value, less estimated costs to sell. OREO is fair valued under Level 3 at the lower of cost or fair value based on property appraisals less estimated costs, which include both observable and unobservable inputs, at the time oftransfer and as appropriate thereafter. The following table presents estimated fair values of the Company's financial instruments for December 3l 20t6 201 5 Carrying Fair Carrying Fair Amount Value Amount Value Financial assets Cash and cash equivalents $ 66,499,841 $ 66,499,841 $ 60,51 1,284 $ 60,5 1 r,284 Securities avai Iab le-lor-sale 55,249,417 55,249,417 59,649,330 59,649.310 Securities held-to-maturity 325,932,058 321,968,058 336,243,700 336,960,940 Loans receivable, net of allowance 503,415,566 491,407,566 454,699,730 422,054,907 Nonmarketable securities 7,589,798 7,589,798 6,738,143 3,592.739 Accrued interest receivable 4,274,769 4,274,769 4,094,877 4,094,877 Financial liabilities Deposits $ 875,423,498 $ 875,418,498 $ 847, r 86,090 $ 820,346.363 Accrued interest payable 77,972 77,972 95,4 19 95,419 Notes payable 69,612 69,612 t8 r,693 18 r.693 FASB ASC 825, Financtal Instruments, requires disclosure of the fair value of financial assets and financial liabilities, including those financial assets and financial liabilities that are not measured and reported at fair value on a recurring or nonrecurring basis. The methodologies for estimating the fair value of financial assets and financial liabilities that are measured at fair value on a recurring or nonrecurring basis are discussed above. The methodologies for other financial assets and financial liabilities are discussed below Cash and Cash Equivalents - The carrying amounts reported in the consolidated balance sheets, for cash and due from banks, time deposits and federal funds sold approximate their fair value. Loans, Net - For both fixed and variable rate loans in 2016 and 2015, fair values are estimated using discounted cash flow analysis and curent interest rates charged for the types of loans in the portfolio. Deposits - The fair values estimated for transactional deposit accounts (interest and noninterest checking, savings and money market accounts) are considered to be their carrying amounts. Fair values for fixed rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of the aggregate expected monthly maturities on time deposits. Borrowed Funds - The estimated fair value approximates carrying value for short-term borrowings. The fair value for long-term fixed-rate borrowings is estimated using quoted market prices, if available, or by discounting future cash flows using interest rates for similar financial instruments. (28) TEXAS INDEPENDENT BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 3I,20I6 AND 20I5 Commitments to Extend Credit and Standby Letters of Credit - The fair value of commitments is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. For fixed-rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates. The fair values of the guarantees and letters of credit is based on fees currently charged for similar agreements or on the estimated costs to terminate them or otherwise settle the obligations with the counterparties at the reporting date. Estimating the fair values of the commitments and letters of credit is not practical when considering the preceding factors. Accrued Interest Payable and Accrued Interest Receivable - The carrying amounts reported in the consolidated balance sheets, for accrued interest payable and accrued interest receivable approximate their fair value. NOTE 17 - RELATED PARTY TRANSACTIONS The Company has entered into transactions with certain directors, executive officers, significant stockholders, and their affiliates. Such transactions were made in the ordinary course of business on substantially the same terms and conditions, including interest rates and collateral, as those prevailing at the same time for comparable transactions with other customers, and did not, in the opinion of management, involve more than normal credit risk or present other unfavorable features. The aggregate amount of loans were as follows at December 3l : 2016 2015 Outstanding at January I $ 29,350,172 $ 28,009,22s New loans 4,6161136 2,3 50,801 Repayments (12,138,981) (1,009,954) Loans outstanding at December 3l $ 21,827327 s 29,350,172 Deposits from related parties held by the Company at December 3 l, 201 6 and 2015 amounted to $34,552,97 I and $38,045,930, respectively. NOTE 18 - OPERATING LEASES The Company and the Bank lease various branch locations and other facilities from other lessors generally over periods ranging up to l0 years. At December 31,2016, the required future minimum rental payments are as follows: For the Year Ended December 3l Amount 20t7 $ 280,893 201 8 280,882 2019 274,252 2020 162,551 Total $ 998,578 (2e) TEXAS INDEPENDENT BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 3 I, 20 I 6 AND 20 I 5 Rental expense incurred underthe operating leases was $332,078 and $346,078 for 2016 and 2015, respectively. The Company and the Bank leases office space to tenants under operating leases with terms of five to ten years. The following is a schedule by years of future minimum rental income under the leases at December 31,2016: For the Year Ending December 3l Amount 2017 $ 164,1 l0 201 8 155,3 l0 2019 118,042 2020 99,408 2021 74,556 Total s 611,426 Rental income earned underthe leases was $185,570 and $174,570 for20l6 and 2015, respectively NOTE 19 _ REGULATORY MATTERS The Company is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum regulatory capital requirements can initiate certain mandatory, and possibly additional discretionary actions by regulators that, ifundertaken, could have a direct material effect on the fi nancial statements. Under the regulatory capital adequacy guidelines and the regulatory framework for prompt conective action, the Company must meet specific capital guidelines that involve quantitative measures ofthe Company's assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Company's capital amounts and classification under the prompt corrective action guidelines are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Quantitative meursures established by regulation to ensure capital adequacy require the Company to maintain minimum amounts and ratios (set forth in the table below) of total risk-based capital and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined in the regulations), and Tier I capital to adjusted totalassets(asdefinedintheregulations). Managementbelieves,asofDecember3l,20l6,thattheCompany meets all capital adequacy requirements to which they are subject. As of December 3 l, 2016, the most recent notification from the FDIC categorized the Company as adequately capitalized under the regulatory framework for prompt corrective action. To remain categorized as well capitalized, the Company must maintain minimum total risk-based, Tier I risk-based, and Tier I leverage ratios as disclosed in the table below. There are no conditions or events since the most recent notification that management believes have changed the Company's prompt corrective action category. In July 201 3, the Federal Reserve Bank published final rules for the adoption ofthe Basel [[I regulatory capital framework (the "Basel III Capital Rules"). The Basel III Capital Rules, among other things, (i) introduce a new capital measure called "Common Equity Tier 1", (ii) specif, that Tier I capital consist of Common Equity Tier I and "Additional Tier I Capital" instruments meeting specified requirements, (iii) define Common Equity Tier I narrowly by requiring that most deductions/adjustments to regulatory capital measures be made to Common Equity Tier I and not to the other components of capital, and (iv) expand the scope of the dedu ctions/adj ustments as compared to existin g regu lations. (30) TEXAS INDEPENDENT BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 3I, 20I6 AND 20I 5 The Basel III Capital Rules became effective for the Company on January 1,2015 with cerlain transition provisions fully phased in on January 1,2019. The Company's actual and required capital amounts and ratios are also presented in the tables below (presented in thousands): To Be Well Capitalized Under For Capital Prompt Corrective Actual Adequacy Purposes Action Provisions Amount Ratio Amount Ratio Amount Ratio As of December 31, 2016: Total Capital (to Risk-Weighted Assets) Consolidated $ 126,337 l8.72Yo $ 54,000 28.00% N/A N/A Texa-s First Bank $ 107,509 16.600/o $ 5l,819 >8.00% $ 64,174 >10.00% Tier I Capital (to Risk-Weighted Assets) Consolidated s t 18,017 17.48'/. S 40,500 >6.00yo N/A N/A Texas First Bank $ 99,407 rs.3s% $ 38,865 N.00% $ 5r.819 >8.00% Common Tier I Capital (to Risk-Weighted Assets) Consolidated $ I18,0t7 l7.48Yo $ 30J7s 24.50o N/A N/A Texas First Bank $ 99,407 15.35% $ 29,148 >-4.50Yo $ 42,103 x.s0% Tier I Capital (to Average Assets) Consolidated $ I18,0t7 ll.93o/o $ 39,561 >4.00o/" N/A N/A Texas First Bank $ 99,407 l0.zlv" $ 38,949 >4.OOV" $ 48,686 x.00% As of December 3 l. 2015: Totat Capitat (to Risk-Weighted Assets) Consolidated $ r 10.846 t7.32% $ 51,200 >8,00% N/A N/A Texas First Bank $ 93.338 l5.6lYo $ 47,850 >8.00% $ 59.812 210.00% Tier I Capital (to Risk-Weighted Assets) Consolidated $ 103.1 l5 16.llo/o $ 3 8,400 >6.00Yo N/A N/A Texas First Bank $ 85,848 14.35o/o $ 35.887 >6.00y, $ 47,850 >8.00% Common Tier I Capital (to Risk-Weighted Assets) Consolidated $ r03,r r5 l6.llYo $ 28,800 >4.50Yo N/A N/A Texas First Bank s 85.848 14.35% s 26.916 >4.50Vo $ 3 8.878 >6.50% Tier I Capitat (to Average Assets) Consolidated $ r03,1 l5 10.59o/o s3 8.96 t >4.00Yr N/A N/A Texas First Bank $ 85,848 9.14% $3 7,563 >-4.00Yo $ 46,954 >5.00% (31) TEXAS INDEPENDENT BAI\ICSIIARES, INC. NOTES TO CONSOLTDATED FINANCIAL STATEMENTS DECEMBER 3I, 2OI6 AND 2OI5 NOTE 20 - SUBSEQUENT EVENTS In preparing the financial statements, the Company has evaluated all subsequent events and transactions for potential recognition and disclosure through March 17,2017, the date on which the financial statements were available for issuance. During this period there have been no material events that would require recognition or disclosure in these financial statements. (32) TEXAS INDEPENDENT BANCSHARES, INC. SCHEDULE I _ CONSOLIDATTNG BALANCE SHEET TNFORMATION DECEMBER 31,2016 Texas Independent Rust, Ewing, Bancshares, Inc. Texas Watt, and (Parent Only) First Bank Haney, Inc. Eliminations Consolidated ASSETS Cash and cash equivalents Cash and due from banks $ 8,r39,362 $ 57,J71,972 $ 1,786,087 $ (2,895,580) $ 64,40 I ,841 Federal lunds sold - 2,098,000 2,098,000 Total cash and cash equivalents 8. r39.362 59.469.972 l,786,087 (2,8e5,s80) 66,499,84 I Interest-bearing time deposis in other banks 450,000 (3s0,000) I 00,000 Investments Available-for-sale securities 4,327,s00 50,921,9t7 55,249,417 Hcld-to-maturity securities 325.932,058 325,932,058 Total investments 4,327,500 376,853,975 l8 I,l8 I ,475 Loans receivable, net 503,4 I 5,566 503,4 I 5,566 Accrued i nterest receivable 4,2'14,'169 4,2't4.769 Premises and equipment, net 4,764.655 14,522.4t7 r,885,936 21,t73,008 Nonmarketable equity securities I,000,000 6,589,798 7.589,798 Coodwill 4,93'7,785 5,62s,385 t36,372 I 0,699,542 Core deposit intangibles, net 437,722 437,727 Bank-owned Iife insurance 228,000 |,770,648 I I,998.648 Other real estate owned 3,449,240 3,449.240 Other assets 13 1,845 802,066 2, r 84,6 r0 (s27,473\ 2.s91.048 lnvestment in consolidated subsidiaries l 08.875,338 ( 108.87s.338) TOTAL ASSETS $ 132,404,485 $ 987,21 1,558 $ 6,443.00s $ (112,648,3er) $ 1,013,410,657 LLAB ILITlES AN D STOCKHOLDERS' EQUTTY Liabilities Deposits Non interest-bearing $ $ 333,298,r89 $ $ (3,298,639) $ 329,999,550 Interest-hearing (474.414) 545.423,948 Total deposits 879, l 96,55 I (3.773,0s3) 875,423,498 Accrued interest payable 77,972 77,972 Notes payable 69.6 l2 69,612 Other liabilities 306,43 5 1,3 10.229 2,194,473 5,8 r r.137 Total liabilities 376,047 882,584,7s2 2,t94.471 (3,773.053) 88r,382,2r9 Stockholders' equity Common stock 584,75 5 7s0,000 t2,250 ('162,250) 584.755 Additional paid-in capital s69,627 34.5 r 6,5 l0 (34,5t6,510) 569.627 Retained eamings t43,260,811 70,028,585 4,236,282 (74,264,867\ I 43.260.87 I Accumulated other comprehens ive income (loss) 3.048,503 (668.289) 668,289 3,048,503 Treasury stock, at cost ( 15,435.3 I 8) (15.435,3 l8) Total stockholders' equity r32,028,438 104,626.806 4,248,532 008.87s.318) 132.028.438 TOTAL LIABILTTIES AND STOCKHOLDERS' EQUITY $ r32,404,485 $ 987,21 1,s58 $ 6,443.00s $ (l 12,648,39r) $ r ,01 3,4 r 0,657 See independent audilors' report. (33) TEXAS INDEPENDENT BANCSHARES, INC. SCHEDULE II _ CONSOLIDATING STATEMENT OF INCOME INFORMATION FOR THE YEAR ENDED DECEMBER 31,20I6 Texas Independent Rust. Ewing, Bancshares, lnc. Texas Watt, and (Parent Only) First Bank Haney, Inc Eliminations Consolidate d lnterest income Loans, including lees $ $ 2'1,759,s48 $ $ $ 27.759,548 Debt securities: Ta,rable 4,382,446 4,182.446 Tax-exempt 3,954,353 3,9s4,3s3 Interest-bearing deposits r 86,r 58 186,158 Federal funds sold 27,295 )7 ?O< Dividend income s46.202 546,202 Other interest t,494 I,494 Total interest income t,494 36,856,002 36,857,496 lnterest expense Deposits t,529,059 I,529,059 Federal funds purchased 2,0r0 2,0 t0 Notes payable 10,979 10,979 Total interest expensc 10,979 r ,53 I,069 I,542,048 Nct interest income (expense) (9,485) 35,324,933 35,3 15,448 Provision for loan losses 593,257 593,257 Net interest income after provision for loan losses (9.485) 34;111.676 34,722,191 Noninterest income Fees and service charges 6.457 .718 6,457,7 t8 Gain on sale of premises and equipment 896.85 r 864,283 1,76 1,131 Cain on sale ofother real estate owned 93,846 93.846 Gain on sale of securities 2,3'18,6t t 8,142 2,386,753 Insurance commissions 123,228 8,639,15 r 8,762.379 Other noninterest income 4 r 0,039 324,574 4,t01 (33 r.349) 407.365 Total noninterest income 3,808,729 7,748,563 8,643,2s2 (33 r,349) 19,869,1 95 Noninterest expense Salaries and related expenses 365,049 r 3,097,068 5,573.324 ( r 88,340) r8.847,t 0 l Protit sharing and other employee benefits 317,892 2.403,05 r 446,s07 3, r 67,450 Occupancy and premise expense, net 499,733 1,724,923 447.335 ( r 43,009) 4,528,982 Other operating expense 263,063 9,203,408 365,69 | 9,832.t62 Total noninterest expense I ,445.737 2 (331.349) 36,37s,695 lncome before distributions 2,353,507 I 4,05 l,789 I ,810,395 18,2 t 5,69 r Dividends and equity in undistributed eamings of subsidiary t5,862,t8t (r5,862.18r) NET INCOME $ r8.2r5,688 $ r4,05r,789 $ 1,810,395 $ (15,862,181) $ 18.2 l 5.69 r See independent auditors' reporl (34) TEXAS INDEPENDENT BANCSHARES, INC. SCHEDULE III - CONSOLIDATING BALANCE SHEET INFORMATION DECEMBER 31,20I5 Texas lndependent Rust, Ewing, Bancshares, Inc. Texas Wan, and (Parent Only) First Bank Haney. lnc. Eliminations Consolidated ASSETS Cash and cash equivalents Cash and due from banks $ 4,376,433 $ 55,356,889 $ 3,052,430 $ (7,399,468) $ s5,386,284 Federal funds sold - 5,125.000 5, r 25,000 Total cash and cash equivalents 4,376,413 60,48 1,889 3,052,430 (7,39e,468) 60,5 I I,284 Interest-bearing time deposits in other banks 450,000 (3s0,000) I 00,000 lnvestments Avai lable-for-sale securities 6,409,441 53,239,889 59,649,330 Held+o-maturi ty securities 316,243,700 336,243,700 Total investments 6,409,441 389,483,589 395,893,010 Loans receivable, net 454,699,'t30 454,699,730 Accrued interest receivable 4,094,877 4,094.877 Premises and equipment, net 5,258.864 t4,223,609 r,656,682 2 t,r 39,1 55 Nonmarketable equity securities 1.000,000 5,738, r43 6,738, r4l Goodwill 4.937,786 5,625.3 84 t36,372 10,699,_s42 Core deposit intangibles, net 540,590 540,590 Other assets I ,920.661 I 4, I 99,956 1,690,327 (475,889) r 7,335,055 Investment in consolidated subsidiaries 96,762,279 (96,762.279',) TOTAL ASSETS $ r20.665.464 $ 949,087,767 $ 6,985,8il $ (104,987,636) $ 97r.751,406 LIABILITIES AN D STOCKHOLDERS EQUITY Liabilities Deposits Non interest-bearing $ $ 347,456.804 $ $ (7,7s 1.458) $ 339,705,346 Interest-bearing 507 954.661 (473.9t7) s07,480,144 Total deposits 855,41r,465 (8.22s,37s\ 847, r 86,090 Accrued interest payable 95,4 t 9 95,4 I9 Notes payable l8 I ,693 r I t.693 Other liabilities r,100,5 12 2,25s,94t 1,548,729 (233) 4,904,949 Total liabilities l.282.205 857.762.82s t,548,729 (8,225,608) 852,368.1 5 r Stockholders' equity Common stock 584,75 5 750,000 12,250 (762,250) 584,755 Additional paid-in capital 283,2 r0 32,801 ,95 r (32,801,95 r) 283,2 r 0 Retained earnings 129,t53,t t8 58,137,462 s,424.832 (63,562,298\ t29,t53,1 t4 Accumulated other comprehensivc income (loss) 5,304,825 (364,471) 364.471 5,304.825 Treasury stock, at cost 11s.942,649) (t s,942,649) Total stockholders' equity 119,383,259 91,124,942 -s.437.082 (96;162.028\ r 19.383,255 TOTAL LTABILITIES AND STOCKHOLDERS' EQUITY $ r20,665,464 $ 949,087,767 $ 6.985,81 I $ (104,987,636) s 971 ,7s 1,406 See independent auditors' report. (35) TEXAS INDEPENDENT BANCSHARES, INC. SCHEDULE IV - CONSOLIDATING STATEMENT OF INCOME INFORMATION FOR THE YEAR ENDED DECEMBER 3I, 20I5 Texas lndependent Rust, Ewing, Bancshares. Inc. Texas Watt, and (Parent Only) First Bank Haney. [nc. Eliminations Consolidated Interest income Loans, including fees $ $ 26,838,540 $ $ $ 26,838,540 Debt securities: Tarable 5, I 77,950 5, r 77,9s0 Tax-exempt 3,29t,842 3,291,842 Interest-bearing deposits 6 t,434 3,880 65,3 14 Federal funds sold 8,005 8,005 Dividend income 60,196 60,196 Other interest 2,r60 2,t60 Total interest income 2,t60 35,438.167 1.880 35,444,207 lnterest expense Deposit accounts r,634,860 t,634,860 Federal funds purchased 7,0 t5 7,0 l5 Notes payable l 6,825 r 6,825 Total interest expense r6,825 t,64 t,875 r,658,700 Net interest income (expense) ( r 4.665) 33,796,292 3,8 80 33,785,50 7 Provision for loan losses 738, I 40 738,140 Net interest income (expense) after provision for loan losses ( 14.665) 33.058, | 52 3,880 33,047,36'.1 Noninterest income Fees and service charges 6,353,990 6,3 53,990 Gain on sale of premises and equipment 592,613 592,613 Gain on sale ofother real estate owned 2,8 l0 2,8 t0 Cain on sale ofsecurities 3,435,77 5 3,435,'17 5 lnsurance commissions r 26,893 8,886,570 9,0t3,463 Other noninterest income 940,7 tJ 251,02t (869,745) 323.989 Total noninterest income 4,503,18 r 7,202,434 8,886.570 (869,745) 19,722,640 Noninterest expense Salaries and related expenses 5t9,729 12,t26.048 s,3 73,054 (72't,306\ t7,29t,525 Profit sharing and other employee benefits 507,939 2,483,871 717 ,155 3,708,965 Occupancy and premises expense, net 5t6,494 3,905, I 74 44t,246 (142,43e) 4,720,475 Other operating expense 783.602 9,744,26t 500, I 04 I I ,027 ,967 Total noninterest expense 2,327,764 28,259,354 7,03 1,559 (869,745) 36. 748p32 Income before distributions 2,160,952 t2.001,2i2 I ,858,89 l l 6,021 ,07s Dividends and equity in undistributed eamings of subsidiary r 3.860. 1 27 ( r3,860,r27) NET INCOME $ 16,021,079 $ 12,001,232 $ l.8s8,89 l $ (11.860,127) $ r6,02r,075 See independent auditors' report. (36)