Texas Independent Bancshares, Inc. 3l2sl2oL9 FR Y.6 Annual Repoft of Bank Holding Companies As of LzlStltg
Repoft Item 1: Annual Report to Shareholders - Exhibit A Note: Independent audit is Exhibit B
Report Item 2(a): Organization Chaft: Texas Independent Bancshares, Inc. Incorporated in Texas No LEI available Texas City, TX 77590
I Texas First Bank - 100o/o Rust, Ewing, Watt & Haney, Inc. - 100% Incorporated in Texas Incorporated in Texas Texas City, TX 77590 Texas City, TX 77591 No LEI's available
Report Item 3: Securities Holders Shares- o/o Owned Common Texas Independent Bancshares, Inc. Voting Trust 86.670/o 435,802 Texas City, Texas (United States) Mitchell Chuoke, Jr., Trustee Gaddis Wittjen, Trustee Charles T. Doyle, Trustee Christopher C. Doyle, Trustee Matthew T. Doyle, Trustee
T.I.B. Employees' 401-K Plan L4.98o/o 75,333 Texas City, Texas (United States) Dennis Bettison, Trustee
Doyle Family Children's Trust LL.96o/o 60,136 Texas City, Texas (United States) Matthew T. Doyle, Trustee Christopher C. Doyle, Trustee
Charles T. Doyle Citizen of United States Texas City, TX USA Shares: Voting Trust 435,802 Doyle Family Trust 60,136 11,96% Personal Counted in Voting Trust (60,136) Employees'401-K Plan 75,333 14.98o/o Counted in Voting Trust (75,333) Charles T. Doyle 70,782 2.14olo Personal Counted in Voting Trust (10,782) Matthew T. Doyle L9,64t 3,910/o Personal Counted in Voting Trust (19,641) Christopher C. Doyle 6,510 1,310/o Personal Counted in Voting Trust (6,202) Patrick F. Doyle 6,743 1.34olo Personal Counted in Voting Trust (6,468) David R. Doyle 1,883 0.37% Personal Counted in Voting Trust (1,534) TOTAL 436,834 86.870/o TOTAL
Lawrence J. Del Papa, Jr. Citizen of United States Galveston, TX USA Shares: 32,530 6.470/o Personal Lawrence J. Del Papa, Jr. 20,000 3.98o/o Personal 10,380 2.060/o Trust, Children Subtotal - Lawrence Del Papa 62,910 12.51o/o Laura Del Papa Murray 59,810 11.89o/o Personal TOTAL L22,720 24.41o/o W** Counted in Voting Trust -LLL,074 -22.090/o TOTAL L1,646 2.32o/o
Olivia Estrada, + Estrada Estate Citizen of United States Houston, TX USA Shares: 26,861 5.34o/o Personal L9,t92 3.82o/o Family Trust 7,600 1.51o/o Wm. J.Estrada, II - Tru: 9,070 1.80o/o Vicki Criezis West 2012 7,L55 1.42olo Olivia Estrada Trust Counted in Voting Trust -69,878 -13.90o/o TOTAL O 0.00o/o
Mitchell Chuoke, Jr. Citizen of United States Texas City, TX USA Shares: 6,238 t.24o/o Personal 435,802 86.57% W*x Counted in Voting Trust -5,988 -l.L9o/o TOTAL 435,052 86.72o/o
Texas Independent Bancshares, Inc, - 40l-k Shares 75,333 t4.980/o Dennis Bettison - Trustee 3,917 0.78olo Personal Counted in Voting Trust -79,250 -15.760/o TOTAL 0 TEXAS INDEPENDENT BANCSHARES, INC. Report ltem 4: lnsiders
(1) Name & Address (2) Principal Occupation - Other than with holding company (3a) Title & Position with holding company (3b) Title & Position with Subsidiaries (3c) Title & Position with Other 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, Director (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) L0,782 2.L4% Personal 435,802 86.67% Voting Trust (4b) N/A (4c) United States Management - 100%
(1) Matthew T. Doyle Texas City, Texas (21 N/A (3a) Vice Chairman, Director (3b) Chairman, Director - Texas First Bank Chairman, Director - Rust Ewing lnsurance Trustee - TIB Voting Trust Trustee - Charles T & Mary Ellen Children's Trust (3c) Director - United States Management (4a) L9,641 3.97Yo Personal 435,802 86.67% Voting Trust 60,135 tL.96o/o Doyle Family Trust (4b) N/A (4c) Doyle & Sons Cattle Company - Cattle Ranch 28.33o/o Doyle Farms P/S 50.00% 2 Bayous Ranch 90.OO%
(1) Christopher C. Doyle Texas City, Texas (2) Banking (3a) President/CEO, Director (3b) President/CEO, Director - Texas First Bank Vice President, Director - Rust Ewing lnsurance Trustee - TIB Voting Trust Trustee - Charles T & Mary Ellen Doyle's Children's Trust (3c) Director - United States Management (4a) 6,610 t.3t% Personal 435,802 86.67% Voting Trust 60,136 t1.96% Doyle Family Trust (4b) N/A (4c) N/A
(1) Mitchell Chuoke, Jr. Texas City, Texas (2) Commercial PlumbingContractor (3a) Director (3b) Director - Texas First Bank Trustee - TIB Voting Trust (3c) N/A (4a) 6,238 L.24% Personal 435,802 86.67% Voting Trust (4b) N/A (4c) Mitchell Chuoke Plumbing - 100% Commercial Plumbing Mitchell Chuoke, Jr. Properties - 50% 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) 18,000 3.58Yo Personal 435,802 86.67% 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 (3b) N/A (3c N/A (4a 435,802 86.7% Voting Trust (4b N/A (4c) N/A
(1) T.l.B. Employees'401-k Profit Sharing Plan Texas City, Texas Trustees: Mitchell Chuoke, Jr., Gadis P. Wittjen, Dennis Bettison, Charles T. Doyle, Christopher C. Doyle, MatthewT. Doyle (2) N/A (3a) N/A (3b) N/A (3c) N/A (4a) 75,333 L4.98% Voting Trust (4b) N/A (4c) N/A
(1) Trustee - Charles T & Mary Ellen Doyle's Children's Trust Texas City, Texas Trustees: Christopher C. Doyle, Matthew T. Doyle (21 N/A (3a) N/A (3b) N/A (3c) N/A (4a) 60,136 17.96% Doyle Family Trust (4b) N/A (4c) N/A
(1) Larry Del Papa, Jr. Texas City, Texas (2) Beer distributor (3a) Principal Securities Holder (3b) N/A (3c) N/A (4a) 32,530 6.47% Personal 20,000 3.98Yo Ba ncsha res Trust (4b) N/A (4c) Del Papa Distributing - tOO% Budweiser Distributor Del Papa Holdings - lO0% Aircraft L&L Realty - 50% Real Estate UD Holdings - I0O% Florida Asset
(1) Olivia Ann Estrada Houston, Texas (21 Homemaker (3a) Principal Securities Holder (3b) N/A (3c) N/A (4a) 26,867 5.34o/o Personal t9,792 3.82o/o Family Trust, Trustee N/A 7,L55 L.42Yo Personal Trust, Trustee (4b) N/A (4c) N/A
ADV!SORY DIRECTORS Dennis R. Bettison (1) Santa Fe, Texas Attorney (2) AdvisoryDirector, LegalCounsel (3a) Advisory Director, Legal Counsel - Texas First Bank (3b) N/A (3c) N/A (4a) 3,9t7 O.78% Personal 75,333 L4.98% TIB 401-K Plan, Trustee (4b) N/A (4c) DBA Realty Partnership - 50% BDAB Realty Partnership - 50%
George C. "Jerry" Blystone (1) Houston, Texas (2) lnsurance Broker (3a) Advisory Director (3b) President, Director - Rust-Ewing lnsurance (3c) N/A (aa) N/A (4b) N/A (4c) N/A
David R. Doyle (1) Plano, Texas (2) Retired (3a) Advisory Director (3b) Advisory Director - Texas First Bank Director - Rust-Ewing lnsurance (3c) N/A (4a) 1,883 O.37Yo Personal (4b) N/A (4c) N/A
(1) Patrick F. Doyle Texas City, Texas (2) Attorney, Title Company Owner (3a) Advisory Director (3b) Director - Rust-Ewing lnsurance Director - Texas First Bank (3c) Owner - see 4c below (4a) 6,743 7.34% Personal (4b) N/A (4c) DBA Realty Partnership -33.33% Real Estate 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% Title Company Doyle Law Firm, PLLC - LO1% Law Firm Prominent Title, LLC Title Company Security Abstract & Title Company Title Company Southland Title, LLC Title Company Texas Title lnsurance Title lnsurance Washington County Abstract Title Research lsland Financial Solutions, LLC Accounting Seruices
(1) Timothy R. O'Brien League City, Texas (2) Financial Management - Banking (3a) CFO, Advisory Director (3b) CFO, Advisory Director - Texas City (3c) N/A (aa) N/A 50 O.O7% Personal (4b) N/A (4c) N/A
(1) Catherine O. Potter Texas City, TX (2) Accountant (3a) Advisory Director, Corporate Secretary (3b) Advisory Director, Corporate Secretary - Texas First Bank (3c) N/A (4a) 1,150 O.23% Personal (4b) N/A (4c) N/A
Slgnature & Title
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3 a Exhibit A
L Hrlpt"gTlxaw BuiATirus
March 25,2019
TO: Shareholders of Texas lndependent Bancslrares, lnc.
SUBJECT Annual Nleeting of the Shareholders
Wednesday, April 17, 2019, l2:00 Noon
Dear Fellow Shareholder:
We are pleased to invite you to attend the Fortieth Annual Meeting of our Corporation at l2:00 Noon on Wednesday, April I7.2019, at the Rust-Ewing lnsurance Agency located at: 7900 Ernmett F. Lowry Expressway Texas City, Texas 77591.
Attached are the Notice of Annual Meeting and a Proxy Statement. You are requested to comDlete the
ShoLrld you attend the meeting in person. the Proxy may be canceled. and you will be permitted to vote your shares in person.
Enclosed arethe financial statements as of December3l,20 18. A copy ofthe audited financial statements will be available at the meeting and will also be available to any shareholders at the TIB offices in Texas City. lf you wish to have a copy, please contact Kitty Potter at (409) 948-1990. Financial information will be reviewed as a part of the Operations Report at the Annual Meeting.
Representatives from the accounting firm Briggs & Veselka Co., CPAs, will be available to answer any questions regarding the 20 l8 audit. You are free to contact our auditors at any time during business hours if you have any questions:
John Flatowicz, Partner (713) 353-lel0 [email protected] Lincoln McKinnon. Manager (7r3) 366-8s2s [email protected]
The federal tax return and the K- I s were completed by Herman & Sexton, P.C. If there are any questions in regards to your K- I, you may contact Tim O'Brien, CFO, at (409) 766-4314 or contact Don Hennan or Tim Sexton at Herman & Sexton. P.C.:
Don Herman, Partner (281) 44s-1120 [email protected] Tim Sexton. Partner (28r) 44s-r 120 [email protected]
(Continued on revese side )
P.O. Box 3344,3232 Palmer Highway, Texas City, Texas 77592-33t14 409'948-6577 * 281 -280-9422 www.texasfirst.bank Shareholders of Texas lndependent Bancshares. lnc, March 25. ?019 Page 2
The economy in Texas continued to thrive throughout 2018. Small business and consumer sentiment reached an all-time high and fueled another record year for oLrr company. As reflected in the financial highlights below. loan growth at the Bank level pushed earnings to a new record. Also, Rust-Ewing acquired the Assurance One lnsurance Agency in Houston to help boost revenues for years to come. We would like to welcome the Assurance One team to tlre farnily.
Jerry Blystone, the new President at the Agency, and the entire Rust-Ewing staff developed a company-wide strategic plan that will provide a long-term roadrnap for their continued success. Texas First Bank developed its own strategic plan related to technology and disruptive innovation. Our quest is to become a rnore data-driven Bank while retaining the soul of our company: independent community banking and rvorld-class customer service. lf you have not heard by norv, TIB entered into a Definitive Agreement to purchase Pref'erred Bank headquartered on the Katy Freeway in Houston, Texas. lt is a $280 rnillion bank with five locations in the Houston area. Most importantly, there are 40 community-bank-minded employees that will soon be part of our ever-growing family. We hope to have our regulatory approval in 90 days and close the transaction sometime this summer.
Please remember that we can help you with any of your financial needs. As an owner, you benefit in many ways by partnering with the Bank and lnsurance Agency. We also ask that you encourage your fanrily. friends, and business associates to do the same.
Listed below are financial highlights forthe year ending Decernber 31. 2018. Please note the financials highlights are in thousands;
20L8 2077 $ Growth % Growth Texas First Bank Total Assets 1,089,990 7,067,t4L 22,849 2.7o/o Total Deposits 956,505 952,553 t3,942 1.5% Total Loans 613,115 568,405 44,770 7.9% Total Stockholder's Equity 1.14,784 111,519 3,265 2.9% Net lncome 77,849 15,51.1 2,338 L5.1% Tier 1 Capital to Average Assets t0.14% LO.22% -o.o8% -o.8% Tier 1 Capital to Risk Weighted Assets 74.72% t5.o5% -o.34% -2.3% Total Capital to Risk Weighted Assets ]-s.95% 75.30% -0.3s% -2.L%
Rust, Ewins, Watt & Hanev, lnc. Total Assets 9,048 5,756 2,892 47.O% Total Stockholder's Equity 7,228 5,046 2,L82 43.2o/o Gross Revenues 9,552 8,417 1,075 72.7% Net lncome L,382 1,601 (21e) -L3.7% Shareholders of Texas lndependent Bancslrares. Inc March 25. 2019 Page 3
2018 20L7 S Growth % GroMh Texas !ndependent Bancshares, lnc, Consolidated Total Assets L,1L5,22g 1,og8,ogg 28,L29 2.6% Total Deposits 953,554 943,460 10,094 L.t% Total Loans 673,776 568,406 44,770 7.9% Total Stockholder's Equity 15L,810 74O,lO4 L7,706 8.4% Net lncome 78,244 L6,44L 1,903 7t.o% Tier 1 Capital to Average Assets 12.O0% lL.80% o.20% r.70/o Tier 1 Capital to Risk Weighted Assets 17.O9% t7.72% -o.73% -O.8o/o Total Capital to Risk Weighted Assets 78.680/o t8.43% 0.25% L.4%
(shareholder values in whole dollars) Average Outstanding Shares 504,651 509,982 (5,331) -7.O% Earnings per share (basic) 36.15 32.24 3.91 12.t% Evaluation per share 38s 350 25 6.9%
For 2018, TIB distributed 36.772,005 to our shareholders, which represented approximately 48.5% of adjusted taxable income. The Board generally distributes funds to our shareholders to cover their potential tax liability associated with TIB. a Subchapter S corporation Lmder the IRS code.
You will find enclosed copies of the Minutes of our Annual Meeting held on March 22,2018, and we ask you to review them carefully for any amendments or corrections prior to this year's meeting. Nominations to the Board are posted at each banking facility'. in accordance with our By-Laws. Matthew T. Doyle is tbe Director nominated for re-election, with Mitchell Chuoke, Jr.l Charles T. Doyle: Gaddis P. Wittjen; and Christopher C. Doyle continuing unexpired tenns as Directors.
We encourage each of our shareholders and their spouses to join in the business session of our Annual Meeting. Should you lrave any questions regarding our reports, please feel free to call us or submit them in writing in advance of our meeting. Food and refreshments will be served. We look forward to seeing you at l2:00 Noon on Wednesday. April 17, at the Rust-Ewing lnsurance Agency.7900 Emmett F. Lowry Expressrvay. Texas Citv. Texas.
As you recall, our shareholders elected to be taxed as a Subchapter S Corporation effective January 1.2014. It is extrenrely important that we. as company and shareholders. continue the governance to maintain the Subchapter S status. To that end. we are includine for each shareholder a certification statement and ask that you please read carefully, sign. and return it promptly in the enclosed envelope.
Sincere yours. trW 6t0 Charles T Matthew T. Doyle Christopher C. Doyle Chairman Vice Chairman President
C'l-D'MTD:CCD:csl
Enclosures: Notice of Shareholders Meeting Proxy Statement with self-addressed, stamped envelope Financial Statement - December 3 l. 201 8 Mintrtes of the Annual Meeting of March 22.201t1 D $C. March 25, 2019
NOTICE OF ANNUAL SHAREHOLDERS MEETING
Notice is hereby given that the Annual Meeting of the Shareholders of TD(AS INDEPENDENT BANCSHARES, lNC., Texas City, Texas, will be held at Rust-Ewing lnsurance Agency, 7900 Emmett F. Lowry Expressway, Texas City, Texas, on Wednesday, April 17,2019, at 12:00 Noon for the election of Directors and the transaction of such other business as may properly come before the meeting.
Below is a Proxy Statement which you are requested to please sign and return in the envelope provided. ln the event that you are able to be present at the meeting and desire to vote in person, you may withdraw your proxy and do so.
Respectfully,
CHARLES T. DOYLE CHAIRMAN OF THE BOARD
F<
D c, PROXY STATEMENT -
KNOW ALL MEN BY THESE PRESENTS that the undersigned Shareholder of TE)GS INDEPENDENT BANCSHARES lNC., of Texas City, Texas, hereby constitutes and appoints CHARLES T. DOYLE or the true and lawful attorney and proxy of the undersigned at the ANNUAL MEETING OF TEXAS INDEPENDENT BANCSHARES, lNC., to be held at Rust-Ewing lnsurance Agency, 7900 Emmett F. Lowry Expressway, Texas City, Texas, on Wednesday, April 17,2019, at 12:00 Noon, and for and on behalf of the undersigned to vote on any question, proposition, or resolution, or any other matter or thing that may come before said meeting, or any adjournment or adjournments thereof, according to the number of shares of stock of said corporation which the undersigned would be entltled to vote if personally present, and the undersigned hereby gives and warrants unto said attorney and proxy full power of substitution and revocation, thereby conflrming all that said attorney and proxy shall do in the premise.
lN WITNESS WHEREOF, I have hereunto set my hand this the day of_,2019.
SIGNED IN THE PRESENCE OF: SIGNED
WITNESS (Signature) SHAREHOLDER (Signature)
Shareholder's Name - Printed
Home Phone Numb l) Cell Phone Numbe (\
E-MailAddress TEXAS INDEPENDENT BANCSHARES, INC CONSOLIDATED BALANCE SHEETS DECEMBER 3I, 20I8 AND 2017 (Dollars in thousands)
20t8 2017 $ Variance o/o Variance ASSETS Cash and cash equivalents Cash and due from banks $ 3 2.310 $ 32. I 34 $ 196 O.6Yo lntcrest-bcaring deposits with banks 42. I 86 48.0 r9 (5.833) -l2.lo/o Federnl funds sold 8.3 00 500 7.800 t560.0% '[ otal cash and cash cquivalents 82.U r6 80.653 2.163 2.7o,'o lntercst-bearing time deposits in other banks 201 200 0.5o/o
I nvestnrents
Avai lab le-lbr-sale securities 7 5.709 72.443 3.266 4.5% lleld-to-maturitv sccurities 285. I 5s 313.297 (28.142) -9.0v, 'l-otal investmcnts 160.864 185.740 (24-8761 -6.4o/a
Loan rcceivables [-oans rcceivables 6t3.rr6 568.406 44.710 7.gYr
Allorvance fbr loan losses (9.303 ) (8.756 ) (547) 6.2o/o 'l'otal l,oans receivable. net 603.8 t3 5 59.650 44.163 7.9%
Accrued interest receivable 4.80 r 4.805 (4) -0.t% ['remiscs and equipment. nct 21.983 20.673 t.3 t0 6.3o/o
Nonmarketable equitl' securities 9.459 8.18 I 1.2'78 15.6% Coodrvill t2.l l6 r 0.674 1.442 13.5o/u lrrtangibles. core deposits. and other. net 1.695 697 998 l43.2Yo
Bank-orvned I ile insurance I 3.03 0 12.690 340 2.1Vo Other rcal estate owncd 2.6 t5 2.070 545 26.3o/o Other assets 2.83 5 2.065 7'70 3'l .3Yo
ToTNL ASSE'TS $ t.t t6.228 $ 1.088.098 $ 28.130 2.6Vr
LIA B I 1. ITI ES AND S'I-OCIKHOLDERS' EQU ITY Liahilities Dcposits Non interest-bcaring s 377.548 $ 383.552 $ (6.004) -l.6Vo I nterest-bearing 576.006 559.907 16.099 2.9o/o '['otal dcposits 953.554 943.459 r0.095 I .1,/,
Federal ljome Loan Bank advances 5.000 nla Accrued interest payable 160 99 6t 61.6Yo Other liabilities 5.704 4.436 t-268 28.60/o 'l'otal liahilities 964.4 r8 947.994 16.424 1.7o/o
Stockh o I ders' eq u it-n" Common Stock 58-s 585 0.00h Additional paid-in capital 1.270 8'79 39t 44.5Vo Retained earnings t64.t63 ts2.76s r r.398 7.5Yo Accumulated othcr conrprehensive income 5.03 7 4.329 708 t6.4% 'I'reasttrl' 516c1 ( r9.24_s ) ( r8.454) (7el) 4.3V'.o 'l otal stockholders' equitl, r5r.8r0 r40.r04 r 1.706 8.4Vi
'f OTAL LIABI l.ITIlrs AND STOCKFIOLDERS' EQLl tTY s t. r t6.228 $ r.088.098 $ 28.1 30 2.6% TEXAS TNDEPENDENT BAIICSHARES, INC CONSOLIDATED STATEMENTS OF INCOME DECEMBER 3I. 2OI8 AND 20I7
(Dt'rl lars in thousands )
20 t8 2017 $ Variance o/o Variancc Interest income Loans. including fees $ 34.79r S 30.826 $ 3.965 12.90/o Debt securities Taxable 4.r75 3.920 255 6.5Yo Tax-exempt 4.2t7 3.942 175 7.lYo Interest-bearing d eposits 693 436 257 58.9% Federal funds sold 53 3i 20 60.6% Dividend income 2t7 403 0 86) -46.2Yr Total intercst income 44.146 39.560 4.586 I l.6Vo lnterest expense Deposits 2.566 1.675 89t Federal funds purchased l4 l0 4 Federal Home Loan Bank bonowings 146 t46 Notes payable 2 (2) Total interest expense 2.726 r.687 1.039
Net inlerest income 4 r.420 37.873 3.547 9.4o/o Provision for loan losses 2.008 965 r.043 108.r% Net interest income after provision lbr loan losses 39.412 36.908 2.504 6.8Yo
Noninterest inconre Fees and service chargcs 6.940 6.r9l 749 t2.lvo Cain on sale of premises and equipment ll 3l (20) -64.50/o Cain (loss) on sale of other real estate owned (1421 206 (348) -168.g%o
Gain (loss) on sale of securities ( t0) 40 (-s0 ) -125.0o/o Insurance commissions 9.s47 8.464 1.083 12.8o/o Other nonintcrest income 580 994 (4 r4) -41 .6orc Total non interest income 16.926 15.926 1.000 6.3V"
Noninterest expenses Salaries and related expenses 18.246 t7.446 800 4.60/o Profit sharing and other employee benet'its 5.679 4.998 681 13.60/o Occupancy ald premises expense. net 4.436 4.45 r (15) -0.3o/o Other operating expense 9.733 9.498 235 2.501, 'l'otal noninterest expenses 3 8.094 36.393 1.701 4.7%
NET INCOME $ 18.244 $ I 6.441 $ 1.803 I l.0olo ANNUAL MEETING OF THE SHAREHOLDERS March 22,2018
T)re 39th Annual Meeting of the Sharelrolders ofTexas lndependent Bancshares, lnc. (TIB), was convened at I l:36 a.m. on Thursday. March 22.2018, at the Rust-Ewing lnsurance Agency. 7900 Emmett F Lowry Expressway, Texas City, Texas 7759 I . Chairman Charles T. Doyle introduced himself. welcorned 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 lvould be serving as Secretary for purposes of this meeting.
Chainnan Doyle thanked the employees who helped to put the meeting together, including Kitty Potter. Shannon Belluornini. Pam Longoria. and Patsy Foster. He also recognized Corinna Bahr and Lindsay Rosenhagen 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 7.2018, along with copies of the Minutes of the Annual Shareholders
Meeting held on April 20. 201 7: the proxy statement; the Audited Financial Statement as of December 3 I , 2017; and the letter to the shareholders dated February 22.2018. Upon motion duly made by Dr. Warren T. Longmire. Jr.. seconded by Travis Hardwick. and unanimously carried, the Shareholders accepted the Affidavit of Notice of Annual Meeting of the Sharelrolders [Exhibit "A"].
Kitty Pofter repofted that there were 468.247 shares. constituting 92.69 percent of the shares represented by proxy/presence out ofa possible 505, I 95 shares issued and outstanding, with 79,560 shares held as Treasury Stock. Upon motion duly rnade by Dennis Bettison. seconded by Mitchell Chuoke, Jr.. and unanimously carried. the Report on the Certified Alphabetical List of Shareholders was accepted as presented. Clrainnan Doyle declared that the proxies were filed with the Secretary, Iegal notice had been duly given. a quorunr was present, and the meeting was lawfully convened to transact business.
Upon motion duly made by Dennis Bettison, seconded by Dr. Warren T. Longmire, Jr., and unanimously carried, H.C. Broome, Andrea Founds Maceo. and Norman Franzke were elected to serve as Inspectors oftlre E,lection. The Oath of the lnspectors was administered. as shown in the aftached Exhibit "B."
Upon motiorr duly made by Mitchell Chuoke, Jr., seconded by Thomas Smith. and unanimously carried, the Minutes of the Annual Meeting of the Shareholders of Texas Independent Bancshares, lnc., held on April 20. 2017. were approved as presented.
Chaimran Doyle explained the system of govemance whereby the holding company, Texas Independent Bancshares. lnc.. has five Directors. The three inside Directors are Charles T. Doyle, Matthew T. Doyle, and Christopher C. Doylel and the two independent Directors are Mitchell Chuoke. Jr.. and Gaddis P. Wittjen. Mitchell Chr-roke. Jr., was the Director standing for re-election for a four-year term. with the remaining Directors having unexpired terms - Matthew T. Doyle, one yeart Gaddis P. Wittjen. two years: Charles 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 ofthe Banks, and no shareholder had submitted a written nomination as ca.lled for in the bylaws to fill the open seat. Upon motion duly made by Travis Hardwick, seconded by Thomas Smith. and unanirnously canied. Mitchell Chuoke, Jr,, was nominated for re-election to serve a fonr-year term on the Board of Directors of TlB. and he accepted the nomination. Chairman Doyle called for any other nominations to fillthe position which Mitchell Chuoke, Jr., had held for the previous four years. and there were none. Upon motion duly made by Dennis Bettison. seconded by Travis Hardwick, and unanimously carried, Mitchell Chuoke, Jr.. was re-elected to serve a four-yeat term on the Board of Directors of TIB.
Chairman Doyle congratulated Mitchell on his re-election and thanked him for all his hard work. especially Page I o[ 4 l'tB Annucl shareholdr-E MerlrnB r.t.--ltili especially serving as Chairman of the Loan Conrmittee
Upon motion dLrly made by Travis Hardlvick, seconded by Carlos Garza, and unanimously caried, the actions of the Directors and Officers dLrring 2017 were approved.
At this time Chairman Doyle turned the renrainder of the meeting over to President/CEO Christopher Doyle. Chris introduced CFO Timothy O'Brien for the financial presentation.
Tirn O'Brien stated that the Bank had another phenornenal year. Assets have grown to $ I .088.098 ,843 - a7 .4 percent increase fronr the prior year. Loans grew slightly to 5568,405.720. Deposits were at $943,2159.945, an increase of 7.8 percent. Capitalgrew frorn $132,028.438 to $140.104.085.
At the holding company interest income was $39,5-59,557; interest expense was S 1,687.280; so, net interest income was $-37,872.557 which was an 8.4 percent irtcrease over the prior year. Non-interest income was $ I 5.854.8 l2 which was a small increase; and uon-interest expense was $36,392.642 which was an increase of I percent. Net income before non-recurring events was $ 16,369,727 compared to the previous year, which was $14,056,506. That lepresents a 6 percent increase; an excellent year.
Distributions to slrareholders in 2017 were $6.1 million and in 20I 6 were $6.2 million. The goal of the Board is to distribute to shareholders the tax liability they willincur as a result of the Subchapter S status at the highest tax bracket. With the new tax schedules the highest ta.r bracket will be reduced to approximately 33.4 percent, the nomral distribution.
He reviewed the history of growth. Loans continue to grow. and deposits are also growing. He reviewed the graphs showing the growth since the conversion to a Subchapter S Corporation. Chailman Doyle explained that TIB had invested in a banking technology conrpany, Q2, on whose Board he sits. That company has gone public, and the shareholders are making a large amount of money from their investment. Texas First Bank is also a customer of Q2. Q2 provides community banks with the technology needed to compete with the big banks.
Tim O'Brien stated that TIB had engaged the services of Vining Sparks to do an independent appraisal of the value of its stock as of December 31, 20I7 - ln2017 earnings were $32.24 per share, and the appraised value was $360.00 per share, which represents a 12.5 percent increase in value over the previous year. The appraised value increased $40.00 per share over the prior year.
Mr. O'Brien stated that he would be happy to answer any questions shareholders had about the presentation or valuation of the stock. Next, he introduced the auditors from Briggs & Veselka Co., CPAs. Lincoln McKinnon, the senior manager onsite who performed the audit. along lvith Dan St. Clair, Audit Director. Mr. McKinnon stated that Briggs & Veselka had issued a clean audit opinion on February 13, 2018. A fomral meeting had been held with the TIB Audit Comnrittee, where the financial statements had been reviewed in detail and any questions had been answered. and there were no significant audit issues or findings. There being no questions for the auditors at this time, the shareholders were reminded that the phone number for the auditors was in the letter they received. so they could contact them at any time should a question arise.
Next, Chris Doyle named the Directors, announcing those who chair the Cornmittees of the Bank: Lee Ardell, Ardell, Asset/Liability & Investrnent Committee Chair: Mitchell Chuoke. Jr., Loan & Discount Committee Committee Chair; Charles T. Doyle: Christopher C. Doyle; Mattlrevr, T. Doyle; Patrick F. Doyle; Carlos Carza: Travis Hardwick; Stephen Holnres; Warren T. Longmire, Jr.. M.D.; Carlos Peiia, Regulatory Compliance, Risk Management. and Strategic Planning Committee Chair; and Gaddis P. Wittjen. Audit Committee Chair; and Advisory Directors: Dennis Bettison. Michael C. Burkhart, Dickey Campbell, David David Daspit. David R. Doyle, Tim O'Brien. and Kittv Potter. The TIB Advisory Directors were also introduced: Dennis Bettison, jerry Blystone. David R. Doyle, Patrick F. Doyle. Tirnothy R. O'Brien, and Catherine O. Potter. Chris explained that Jerry Blystone took over as President of RLrst-Ewing at the beginning of 2018 when Joe Blackshear decided to retire from the presidency. Chris thanked all of the
Page I oI 4 TlBAnnurlshnehold.Elueetrrgot-r-:|lx Directors for tlreir hard work.
Next, he introduced the Texas First Bank Executive Team members who meet monthly to discuss strategy and have discussions on problems. challenges, and opportunities every month: Matt Doyle, Chris Doyle. Corinna Bahr, Mike Burkhart. Dickey Campbell, Matt Crable, David Daspit, Kenneth Holbrook, Sam McGee. Robin McDougald, Tirn O'Brien. and Kitty Potter. He thanked the Team for their work.
Chris introduced the Rust-Ewing employees present: Joe Blackshear, Tommy Price. and Roy Starr. He thanked Rust-Ewing for their hard work and contributions to the earnings every year.
Chris reviewed the recent products and features that had been introduced by the Bank to make banking easier for customers of Texas First.
With the SecurLOCK Equip app. Bank customers have fte abilitv to turn off their Texas First Bank debit or credit card if the card is rnisplaced or lost and, also. to routinely monitor the transactions as they are taking place with that card. Tlris is a great tool for fraud prevention and has saved the Bank a lot of money. The Bank will be conducting an advertising campaign to get more customers to join this service.
a Pay Up is another service the Bank now olfers, where Bank customers can send firnds to other people using their cell phone number or email address. The parties do not have to divulge their bank account information to the pelson paying or receiving funds. so it is very secure.
a Texas First is in the process of updating the entire ATM fleet within the next two years. Sorne of the new ATM units will accept deposits to Texas First accounts. inclLrding cash and checks.
a Hurricane Harvey helped identify a need to improve communication with employees. so the Bank has partnered with AT&T to communicate via text or ernail with all employees. lt enhances communications with our employees and customers and provides relief of anxiety during crisis situations.
a Texas First Mortgage has now partnered with Finance Home America to process applications. Finance Home America is a fintech company that can perform that function better than Texas First and makes the process much quicker and more convenient for customers.
a Texas First recognized the need to attract and keep millennials as employees and customers, so we formed the Millennial Committee. The Committee came up with five priorities internally and extemally. and those are being executed now. One such priority was to update the benefits package to include paid time ofi which has now been inrplemented.
a The Cyber Security and Crisis Management Plans were updated and worked well during Hurricane Harvey.
A new Intranet site for employees has been launched and improves communications within the Bank and lnsurance Agency. Enrployees are able to communicate back and forth. and the site announces birthdays. anniversaries, and importanl events. There is a brag board to praise a coworker for assistance they have provided. It is a great tool for the employees to utilize.
Chris stated that the Bank and lnsurance Agency are always actively seeking new acquisitions and opportunities to expand our market area.
The HR Deparfilent is working to create a nice, safe work environnrent for our employees with a good benefits package and a good career path. Rust-Ewing is developing a strategic plan; and Texas First's lnformation Technology Officer, Sam McGee, is
Page -3 ol' 4 nU Annual She{holdetr Iteelrng lr-l-l-'-:rrl,l McGee, is working on developing an tnf'ormation teohnolory sirateglc plan. ehris $tated that the plan is to krep naoving fonpard rvith teehnology so we do not becsme obsoletc.
Iv1att Doy,lo thanked all the sharel,plders for attending the meeting and providing their inv-esE-nent and sLrpBort of TIB.
Chairrratr-l Doyle thanked.ev€ryone for iheit attentl-ance at this meeting as welfl. The-re eiag nB further businEss to come before. the Shareholders at this tirne, upon motion duly rnade by Maa Doylq peoonded by Charles Doyle, and unanimsusly- camied, the meeting was adjourned at 12:20 p.rn.
Charles T. Doyle, Chairrnan
Cathy S. Log"o, Acting Secretary
Fage 4 of ,4 IIB Anrusl SlEretslulE Mldio8 03-2:+l.ll8, HclpingTeru* BuildTsas
March 25-2019
Shareholder
RE: Subchapter S Shareholder Certification
Dear Texas lndependent Bancshares, Inc. Shareholder:
As you know, Texas lndependent Bancshares, Inc. (sometimes referred to herein as "Comparry"), elected to be taxed as a Subchapter S corporatiou effective January 1.2014. In conjunction with the January l. 2014, Subchapter S reorganization. each Company shareholder entered into a Stockholders Agreement that outlines ceftain terms and conditions of the ownership of Texas Independent Bancshares. Inc., cornrnon stock. In an effort to further improve our corporate governance procedures, to ensure the ongoing effectiveness of the Suhchapter S election. and to confirm each shareholder's compliance with the terms of tlre Stockholders Agreement. we are requesting that each Cornpany shareholder sign and return in the enclosed stamped return envelope the attached Shareholder Certification. As you will see, this Certification will allow each Company slrareholder to make appropriate representations to the Cornpany regarding tlre ownership of the Cornpany common stock.
Thank you in advance for your time and attention to this Shareholder Certification. As always, please feel free to contact Kitqv 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, Inc.
Sincerely. I
Christopher C. Doyle President and Chief Executive Officer
CCD:csl
Enclosures
P.O. Box 334,3232 Palmer Highway, Texas City, Texas 77592-3344 409-948-6577 * 281 -280-9422 www.texasfirst.bank ]tT Texas City, Texas
SHAREHOLDER CE RTI FICATION
Dear Texas Independent Bancshares. lnc
By execution of this Shareholder Certification. I hereby represent and warrant to Texas lndependent Bancshares. lnc. ("Company"), and its related Directors, Officers, and employees the following:
L I certifo that I aur the slaareholder of record for the Company comn'lon 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. lf my stock is held in trust, I have not made any arnendment to the trust documents since January 1,2014, and the trust continues to qualify 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 applicabilitv of the Stocklrolders Agreement, and recognize my responsibility to continue to comply with all terms and conditions contained therein.
6. My current state of legal residence is
This Shareholder Certification is executed this _ day of .2019
Certifrcation of lndividual Shareholder
Print Name Print Name (ifjoint ownership)
Signature Si gnature (if joint ownership)
Certification of Trust Shareholder
Print Name of Trustee Print Name of Trustee (if co-trustee ownership)
Signature ofTrustee Signature of Trustee
( i f co-trustee ownership) Exhibit B
Texas Independent Bancshares, [nc. Consolidated Financial Statements and Supplementary Information For the Years Ended December 3 l, 201 8 and 201 7 CONTIENTS
Fqge
Independsnt Aud itoro' Ruport, r:in. !r..r.. +.!.,i.,n r...r:. I
Comol ldated StatenremB of'Cornprehensive Ineome 6
,6s:ns.alidatedStdsrreslsof 'etangesilrStoEkl,rElders' it
S upplernmtary [n form'atdon :
Sphedutle | - Colnsolidatilrg Bhtkmce'S:lleefr finfbrnlatilsrl as of Decermnber 31, 201 tu..ti 34
SOhedqle II - eonsqli'da.ti4g Srhterner-,rt of lm'Eulrne ln&ft4atiion
Schedule lll - eonsolida.tirrg Balanee Sheet Inforunatlqm,as'ofiDecember 3lt, 2Q;l7,o,,,.rr,ii..ri.ri,!ii,.r..n.:a':i.,.r!!. 36
Seltied,ul]e nV - Xnforiuafio.tn, for tloe Vear n99s & Veselko Co.
'lr.rl{eC Prrt' .'.(.(ir :frrr: t,, il E':,nr- i.1,,.,,.
TNDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of Texas lndependent Bancshares, lnc. Texas City, Texas
We have audited the accompanying consolidated financial statements of Texas lndependent Bancshares. lnc. and Subsidiaries. which comprise the consolidated balance sheets as of December 31. 2018 and2017, and the related consolidated statements of income. comprehensive inconre, changes in stockholders' equity, and cash flows for the years then ended, and the related notes to the consolidated financial statements. We also have audited Texas Independent Bancshares, [nc. and Subsidiaries' internal control over financial reporling. including controls over the preparation of regulatory financial statements in accordance rvith the instructions for the financial statements for Bank Holding Companies (Forrn FR Y-9SP), as of December3l,20l8, based on criteria established inthe 2013 Internal Control - Integrated Frameu'ork issued by the Committee of Sponsoring Organizations of the Treadway Comtnission.
Management's Responsibility for the Financial Statements and Internal Control Over Financial Reporting
Texas lndependent Bancshares, lnc. and Subsidiaries' rnanagement is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of Arnerica; this includes the design. implernentation and maintenance of effective internal control over financial reporling relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error. Management is also responsible for its assessment about the effectiveness of internal control over financial reporling. included in the accompanying report on management's Assessment of lnternal Control Over Financial Reporting.
Auditors' Responsibility
Our responsibility is to express an opinion on these finarrcial statements and an opinion on the Texas Independent Bancshares, Inc. and Subsidiaries' internal control over financiaI reporting based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of Arnerica. Those standards require that we plan and perform the audit to obtain reasonable assurance about rvhether the financial statements are free from material misstatement and whether effective internal control over financial reporting was maintained in all material respects.
An audit of the financial statements 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 misstatemerrt of the financial statements. whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity's preparation and fair presentation of the financial staternents in order to design audit procedures that are appropriate in the circumstances. An audit of financial statements also includes evaluating the appropriateness ofaccounting policies used and the reasonableness ofsignificant accounting estimates made by management, as well as evaluating the overallpresentation of the financial statements.
i l i l., Lt::' allr Tr 1 r l.i aa,, la;l Flr , ; i,. r,:,if::: ,, -1,, r'l ,,'r i r: '..1i ! wwbvccpo.com
r,'1"ii l,.i ::,i ir.arller IP,it:'l:rrr:'r,rrir lrlrrri '1,t,-'.",,,:t,inL:t, :::1 irrtiie,iP-rbi.A,:cr'trr lon: BKR To the Board of Directors and Stockholders of Texas lndependent Bancsltares. Inc. Re: Independent Auditors' Reporl
An audit of internal control over financial reporlirrg involves performing procedures to obtain evidettce about whether a material weakness exists. The procedures selected depend on the auditors' judgmerrt. including the assessment of the risk tlrat a material rveakness exists. An audit of internal control over financial reporting also irrvolves obtaining an understanding of internal control over f ittancial leporting and testing and evaluating the design and operating effectiveness of internal control over financial reporting based on the assessed risk.
We believe that the audit evidence we obtained is sufficient and appropriate to provide a basis for our audit opinions.
Definition and [nherent Limitations of Internal Control Over Financial Reporting
An errtity's internal controlover financial reporting is a process effected by those charged witlr goverttance. ntanagelrent. and otlter personnel. designed to provide reasonable assurance regarding the preparation of reliable financiaI statements in accordance rvith accounting principles generally accepted in the United States of America. Because management's assessrnent and our audit were conducted to meet the reporting requirenrents of Section I l2 of the Federal Deposit Insurarrce Corporation Improvemertt Act (FDICIA), oLrr audit of Texas Independent Bancshares, Inc. and Subsidiaries'internal control over financial reporting included controls over the preparation of finarrcial statements in accordance with accounting prirrciples generally accepted in the United States of,America with the instructions to the financial statements f,or Bank Holding Cornpanies (Form FR Y-gSP). An entity's internal control over financial repofting includes those policies and procedures that (l) pertain to the nraintenance of records that, in reasonable detail. accurately and fairly reflect the transactions and dispositions of the assets of the entity; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance rvith accounting principles generally accepted in the United States of Aurerica. and that receipts and expenditures of the entity are being made onlv in accordance with authorizations of managernent and those charged with governance; and (3) provide reasonable assurance regarding prevention. or tirnely detection and correction, of unauthorized acquisition, use. or disposition of the entity's assets that could have a material effect on the financial staternents.
Because of its inherent limitations. internal control over financial reporling may not prevent. or detect and correct, misstatements. Also, projections of any assessment of effectiveness to future periods are subject to the risk that controls nray becorne inadequate because of changes in conditions, or that the degree of compliance with tlre policies or procedures may deteriorate.
Opinion
In our opinion. the consolidated financial statements referred to in the first paragraplr plesent fairly, in all material respects, the financial position of Texas Independent Bancshares, lnc. and Subsidiaries as of Decernber 31, 2018 and 2011. and the results of their operations and their cash flows for the years then ended in accordance with accounting prirrciples generally accepted in the United States of America. Also in our opinion, Texas Independent Bancshares, Inc. and Subsidiaries maintained, in all rnaterial respects, effective internal control over financial reporting as of December 31. 2018 based on criteria established irr the 2013 Internal Control - Integrated Frarnework issued by the Comrnittee of Sponsoring Organizations of the Treadway Conrmission.
Other Matter
Our audits rvere conducted for the purpose of forrning an opinion on the consolidated financial staternents as a whole. The consolidating information in Schedules I to Ms presented for purposes of additional analysis and it is not a required parl of the consolidated financial staternents. Such inforrnation 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.
(2) 'To the Board of Directors and Stockho,lders o,f Texas indepefrdent Bates,lhnres; [n6, Rq,nderpenderrt Audit=o'rs' Rep,or,t
The eonsolidating inf,onnation has,b:een sufieetod to dre arrrditing proeedrlres apptied in the audits, ofthe solr,solidatpd finan.eial statsrRemsrind sert5im addttional pFt)6eduresr, in-eluding eonoparing and rreco,rtoilitlg +6, :sueh in,fodlnEtiqm dflrecdy ffie,r[nderly tl,_g aeoqrsBling and othcr recordq rqsed g ,p[epa.re th,e:eonEotridatgd f,tla,anciarl $aEernents or'the oonsolildated financia[lstatemeilfs t],renoselves, and other additio,rla,l ,procedures i-n aecordan@with - In o.uropinton, th.e eo,nso,lidatin:g in lldated flnameial 5,tEte[nem]ts as, a. whrole.
4A Vesejka C:o.
(3) TBXAS INDEPENDENT BANCSHARES, INC. CONSOLI DATED BALANCE SHEETS DECEMBER 3I, 20I8 AND 2017 fDo lars in thorrqands)
201 8 2011 ASSETS Ca-sh and cash equivalents Cash and due from banks $32.330 $r2. r 34 Interest-bearing deposits with banks 42. I 86 48.01 9 Federal funds sold 8J00 500 l-otal cash and cash equivalents 82,8 r6 80.653
Interest-bearing time deposits in other banks 201 200
Investments Avai Iable-for-sale securities 75,109 72.443 Held-to-maturity securities (fair value of $279.263 in 2018 and $3 I 0.242 in 20 I 7) 285,155 313.297 Jbtal investments J60,864 185.740
l.oans receivable (net olallowance lor loan losses of$9.303 in 2018 and $8,756 in 2017) 603,8t3 559.650 Accmed interest receivable 4,801 4.805 Premises and equipment. net 2 r,983 20.673 Nonmarketable equity securities 9,459 8. r8l Coodwill l2,r l6 t0.674 Intangibles. core deposits. and other. net I,695 697 Bank-owned lif'e insurance t3.030 r2.690 Other real cstate owned 2.6t5 2.070 Other assets 2,83s 2.065 .I'OTAL ASSETS $t,il6,228 $1.088.098
LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities Deposits Noninterest-bearing s377,548 s383.552 I nterest-bearing 576.006 559.907 Total deposits 953.554 943.459
Federal l.lome Loan Bank advances 5,000 Accrued interest payable r60 99 Other liabilities 5.704 4.,136 Total liabilities 964,418 947.994
Stockholders'equity Common stock par value $ I ; authorized 2,000.000 shares authorized: 584.755 shares issued:502.845 and 503.485 outstanding for 20 I 8 and 20 I 7. respectively 585 585 Additional paid-in capital 1,270 879 Retained eantings 164,163 1s2.765 Accumulated other comprehensive income 5.037 4._129 Treasury stock. at cosl 81.910 and 81.270 shares lor20l8 and 2017. respectively ( -l'otal r 9.24s) ( r 8.454) stockholders' equitl, | 51.810 t40.t04 -roTAL LTABILITTES AND STOCKHOLDERS' EQUTTY $l,t I 6,228 $ r.088.098
The accomparying notes qre an integral part of these consolidated.financial slatements. (4) TEXAS INDEPENDENT BANCSIIAR-ES, INC. CONSOLIDATED STATEMENTS OF INCOME FOR THE YEARS ENDED DECEMBER 3 I, 20 I 8 AND 20 I 7 (Dollars s)
20t8 2017 lnterest income Loans, including fees $34,791 s30,826 Debt securities Taxable 4,175 3.920 Tax-exempt 4,217 3^942 lnterest-bearing deposits 693 436 Federal funds sold 53 i3 Dividend income 2t7 403 Total interest income 44,146 39,560
lnterest expense Deposits 2,566 1.675 Federal funds purchased t4 l0 Federal Home Loan Bank borrowings t46 Notes payable 2 Total interest expense 2,726 1,687
Net interest income 41,420 37,873 Provision [or loan losses 2,008 965 Net interest income after provision for loan losses 39,412 36,908
Noninterest income Fees and service charges 6,940 6.t9t Gain on sale of premises and equipment il 3l Gain (loss) on sale of other real estate owned (r 42) 206 Gain (loss) on sale of securities (t 0) 40 Insurance cornmissions 9,541 8.464 Other noni nterest income s80 994 Total noninterest income 16,926 15,926
Noninterest expenses Salaries and related expenses 17.446 Profit sharing and other employee benefits 4.998 Occupancy and premises expense, net 4,451 Other operating expense 9,498 Total noninterest expenses 36,393
NET INCOME $18,244 S 16.441
The accompanying notes are an integral part oJ'these consolidatedfinqncial statemenls.
(5) TEXAS I$DEPEI-'{D$[,T BANC,EEAE,E$ tr{C", EONSO,Li]DATED STATEIT{E|I\I O'F COMPREHENSIVE INCOME FO&THE YEli.n$ E-NDIE:D DE€Eri\llBER 3i1,,2CI18 At{D 2"0nT (Dol,lals in thousands)
rli$eit inco,rmE
O&er s.orrTprc efi ,Olive lneor-n g (l oss) Urrr.ealizettr gains (!oose$, qn s.eewitiEs
U'nrealizcd gains on se"curifiBs amiilabXe.fior-sq,le 51i,8, Reclansiificuirin ac.irushienr fhr,reaniaed (geim$ fissses,includgd [n fis[ in]opme m AnortizAti-bn of basis a Sdbctraptir S cEnyeus-ior,r, 130, Total o,tfu er cor,prehsusi\ae income
TOTA L EO,TvIP]FTEI=IENSTVE TN EOIIIIE
Th-e-accompwytngfiatei 6tra'aain:rcgtalpw,tof these,eor$otidqtedfinswi,qlstateneills, (6) €-OmN- *r-ca6s E N
.OdNr ,a 3'-.o rn cr $nr- t 6eic\N t? Ev 9 ,)€-N o\ 6 r +o\ a 6l o N aa F o'= $ Vr dco ra a9,;1 avoEE= 9 E OE - 10 I 4 -J F r N \O* 6 6l N \ot t- \c E& N* \o 6l t6r F cC n€ \o N€ \o \o dE daod s 4, o\ \o $ o. \o-tt U r \o (-- r- d a N qI !-=6 q 1, ': d'; iC- l- 3v of, r! 5r t?t \i U) o € 6 6 a t/ft tll E c :l E U J O 6 C) $ Y"- o c E -rO btr U 6tn =N o € € ta irC oL zZ a .Q*=< s r r [-i.l o - Zes i, (r]*-= _: Tctu ?+H rH;= \ I- lr.J Z- F- tr\ ca>: 2018 20r7 Cash llous tiorn operating activitics Net inconre $ t 8.244 sl6.44t Adiustnrents to reconcile net inconle to net cash lrorn operating activities Gain on salc olpremises irnd equiprnent (l l) (31) (Gain) loss on sale ofother real estate orvned 142 (206) (Gain) loss on sale of securities l0 (40) Amortization and accretion on sccuritics 2,613 2.956 Depreciation |,367 r.353 Amortization 307 t39 l)rovision lor loan losses 2,008 965 Write-dou'ns on other real estate owncd r32 163 Stock-bascd compensation 64 64 Change in operatirr-e assets and liabilities Accrued interest receivable 4 ( 530) Other assets (1,t09) (r66) Accruecl interest payahle 6I 2l Other liahilities 978 ( 1.376) Net cash ttom operating activities 24,810 19.753 Cash llows from investing activities Purchase of fixed assets (4.2 n ) (8U7) Procceds from sale ol fixed asscts l,s43 65 Purchase of nonnrarketable equ ity securities ( r,278) (_5e l ) Activitl, in avai lab le-for-sale securities Sales 21.301 Maturities. prepa),nrcnts and cal ls 262,3t9 2 l]. r56 Purchases (26s,3 r 7) (250.852 ) Activitl, in held-to-rnaturiry, securities Sales 4,990 Maturities- prepa-vments and calls 30,932 33. r 59 Purchases ( r 0,023) (3'1.826) Procecds lrom sale ofother real estate ou'ned 996 1.9?4 Purchase ofcustomer list and noncornpete agrecment (2,4ss) (173 ) Purchase oltime deposits in other banks (l) (100) Net increase in customer loans (47,987) (,18.8.36 ) Net cash investing liom activities (30,492) (63.8-57 ) Cash tlous lrom financing activitics Nct incrcase (decrease) in noninterest-bearing deposits 16,099 i3.553 Net increase (decrease) in interest-bearing deposits (6,004) l4.,l8l lncrease in Federal Flome Loan Bank advances 5.000 Repal'ment of debt (70 ) Proceeds lrom exercise ofstock options 48 853 Purchase oltreasun stock ( 1,293) (1.852 ) Sale oltrca-sury stock 707 5tl Cash dividends paid (6,712!, (6.221 ) Nct cash fi'om linancing activities 7,785 58.257 Nct change in ca^sh and cash equivalents 2,t63 l.+.1-i3 Ca-sh and cash equivalents at beginning of t,ear 80,653 66.500 Cash and cash equivalents at end ofy,ear $82,816 $80.653 Supplemental disclosurc olcash florr inlormation Interest paid $2,665 $ I.666 Noncash investing activities: 'Iranst'er ol loans to loreclosed prope rlics $I,8t5 s.r.502 The accontpan\,ing noles are an integral parl o/'these con.solidated.financial statements (8) TEXAS INDEPENDENT BANCSHARES, tNC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DFCFIVIBF]R 1I 20I8 AN )ot1 NOTE I - NATURE OF OPERATIONS AND SUMMARY OF SIGNTFICANT ACCOUNTING POLICIES Texas lndependent Bancslrares. Irrc. ("the Parent"). is a holding company rvhose principalactivity is the orvnership and nranagenrent of its wholly-owned subsidiaries Texas First Bank (tlre "Bank") and Rtrst. Ewing. Watt and l-{aney,. lnc. (Rust-Ewing), collectively the "Company". The Bank generates colnrrercial. mortgage atrd constttner loans and receives deposits fiom customers located primarily in Chambers. Galveston. Harris. Jeffersort, Brazoria and Libeny counties and the surrounding areas. At Decernber3l.20l8. the Bank operated 22 banking centers attd 'l-lte 54 ATM locations in Southeast Texas to serve custorners. Battk operates under applicable bank charters anci provides full banking services and is subject to regulation by the State Bankirr-9 Departntent of Texas and the Federal Reserve Bank. Rust-Ewing is an insurance agency selling various types of itrsttrance policies artd is subject to regulation by the Texas Depaftment of Itrsurance. The Bank began operations in 1973, when a group of irrvestors, organized by Chuck Doyle, purchased First State Bank of Hitchcock. In 2000, the Parent, was fonned as a financial holding company and immediately became the parent colnpany of the Bank. The acquisition of Rust-Erving was cornpleted shorlly tltereafter. Basis of Accounting and Principles of Consolidation - The accompanying consolidated financial statenrents Irave beetr prepared in confonnity with accounting principles generally accepted in the United States olAnrerica (U.S. GAAP) arrd conf,orrn u,ith practices n'ithin tlre banking industry'. The consolidated financial statenrents inclLrde the accounts of Texas Independent Bancshares, Inc. and its rvholll,-orvned subsidiaries. Texas First Bank and Rust, Erving, Watt and Haney, lnc. All irrtercompany accounts and transactions ltave been elinrinated. Use of Estimates - The preparation of consolidated financial statements in conformity with U.S. GAAP requires rnanagernent to make estimates and assumptious that affect the reported alnounts of assets and liabilities and disclosure of contiugent assets and liabilities at the date of the financial staternents and the repofted anrounts ol revenue and expenses during the reporting period. Actual results could differ fi'om those estimates. Material estimates that are particularly sLrsceptible to significant change relate to the deterrnination of the allorvance lor loan losses. the valuation of stock-based compensation arrd the lair value of financial instrunrents. Cash and Cash Equivalents - For purposes of reporting caslr flows. cash and cash equivalents includes cash on Itand, balances dLre fi'om banks and federalfurrds sold, all of which have original maturities of 90 days or less. Interest-Bearing Deposits in Banks - Interest-bearing deposits in barrks mature within one and two years and are carried at cost. Comprehensive Income - U.S. GAAP requires that recognized revenue. expenses. gains and losses be included in tret incolrre. Certain changes in assets and liabilities. such as unrealized gains and losses on available-for-salc. securities. are reported as a separate cornponent of stockholders'equity orr the consolidated balance sheets, Such items. along with net incorne, al'e cornponents of cornprehensive incorle. Investment Securities - The Cornpany's itrvestnrents in securities are classified in trvo categories and are accounted for as fbllows: Available-for-Sale Securities - Available-for-sale securities consist of bonds. notes. and debentures that the Cornpany intends to hold for an indefinite period of time but not necessarily to maturiry and ceftain equity securities with readily determinable lair values not classified as trading securities or lreld-to- maturitv securities. Available-for-sale securities are carried at estimated fair value based on irrfonnation provided by a third party pricing senvice u,ith unrealized gains and losses excluded from net irrcome ancl repofted in accuntulated other comprehensive incolne, which is a separate cotnponent of stockholders' equiry'. Any decision to sell a security classified as available-fbr-sale rvould be based on various factors. irrcludirrg sigrrificarrt movernent in interest rates, changes in the maturity mix of the Company's assets and liabilities, changes in the financial condition of the issuer, liquidity needs. regulatory capital (e) TEXAS INDEPENDENT BANCSHARES, tNC. STATEMENTS NOTES TO CONSOLIDATED-tI FINANCIAL DECEMBER 20r8AND2017 considerations. and other sirnilar factors. Realized gains (losses) on available-for'-sale securities are included in noninterest ittcome and. u'hen applicable. are repofted as a reclassification adjustrnettt in other compreltensive inconte (loss) orr the consolidated statements of comprehensive income. Held-to-Maturity Securities - Bonds. notes aud debentures for which the Conrpany has the positive intelt and abiliry to hold to rnaturity regardless of changes in ntarket conditions, liquidity needs or changes in general econonric conditions. Held-to-rnaturity securities are carried at amoftized cost, adjLrsted fbr' anrortization of premiuur and accretion of discounl. The anrotlizatiolr ol premiums and accretion of discounts are recognized in interest income using methods approxirnatirrg the itrterest method ovet' the peliod to rnaturity. Dividend and interest income. including amoftization of prerniutn and accretion of discount arising fronr acquisition, frorn all categories of investment securities are included in interest income on the consolidated statements of income. Purchase premiums and discounts are recoguized irr interest income using the interest method over the ternrs of tlte securities. Declines in the fair value of held-to-nraturity and available-for-sale securities belorv their cost that are deerned to be otherthan temporaty are reflected in eanrings as realized losses. [n detertnining whetlter other-than- tempot'ary impairment exists, managementconsiders many f'actors, including (i) the length ol'tinte and the extettt to w,hich the fair value has been less than cost, (ii) the financial condition arrd near-term prospects of the issuer, artd (iii) the intent and ability of the Cornpany to retain its investrnent in the issuel for a period of tirne sufficierrt to allow for any anticipated recovery in fair value. Gains and losses on the sale of securities and the arnounts reclassified out of accumulated other comprehensive income into earnings are recorded on the trade date and are deterrnirred using the specific identification method. Loans - Loans are stated at the amount of unpaid principal. reduced by unearned incotne. net deferred fees. and arr allowance fbr loan losses. Interest on loans is accrued at the contractual rate using the sirlple-interest ntetltod on the daill,balances of the principal amounts outstandirrg. lt is the Company's policy to discontirrue the accnral ol interest when circurnstances indicate that collectability is doubtful. Loan origirration fees are deferred ancl anrorlized to incorre as a yield adjustment over the life of the loan using the straight line rnethod, while direct loan origination costs are recognized and expensed as incurred. For 2018 and 20 17, managetrent believes that not def-erring such costs and amortizing them over the life of the related loans does not materially affect the financial position or results of operations of the Company. Management considers loans impaired rvhen, based on current information and events. it is probable the Company will be unable to collect all amounts due in accordance rvith the original contractual terms of the loan agreement. irrcluding scheduled principal and interest payments. Generally, irrpaired loans do not include large groups of smaller balance homogeneous loans such as residerrtial real estate and consuruer type loans which are evaIuated collectively for inrpairment and are generalll, placed on nonaccruaI wherr the loan becclrnes 90 clays past due as to principal and interest. 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 flor.vs 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. lmpaired loans, or poftions thereof. are char-qed off when deemed uncollectible. The accrual of irtterest otr loans is discontinued when there is a clear indication that the borrorver'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. Interest inconre is subsequently recognized on a cash basis as long as the renraining book balance of the asset is deerned to be collectible. If collectability is questionable, then cash payments are applied to principal. A loan is placed back on ( l0) TEXAS INDEPENDENT BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 3I. 201 8 AND 201 7 accrlral status when both principal and interest are current and it is probable that the Company will be able to collect all amounts due (both principaland interest) according to the terms of the loan agreement. From time-to-time, the Company nrodifies its loan agreen'lent with a borrower. Borrowers unable to meet the current tenns of the loan may request a lower interest rate, a reduction of principal. a payrnent deferral or a lotlger tenn to nraturity. If an agreement is made to restructure the debt. the nrodified loan is considered a troubled debt restructuring when two conditions are rnet: (i) the borloweL is experiencirrg financial difficulty and (ii) concessiotrs are made by the Company tlrat would not otherwise be considered for a borrower with sinrilar credit risk c haracteri st ics. 'fhe Comparry has certain lending policies and procedures in place that are designed to maxitttize loan income rvitlt an acceptable level of risk. Managernent reviews and approves these policies and procedures on a regular basis and makes changes as appropriate. Management receives monthly reports related to loan originations. quality. concentrations, delinquencies, nonperforming and potential problem loans. Diversiflcation in the loan portfolio is a means of managing risk associated with fluctuations in econornic conditions, both by rype of loan and geography. Commercial Loans - Comrnercia[ loans are underwritten after evaluating and understanding the borrorver's abilitl' to operate profitably and eflfectively. Underwriting standards ale designed to detennine whether the borrou,er possesses sound business ethics and practices and to evaluate current and projected cash florvs to determine the ability of the bonorver to repay their obligations as agreed, Comntercial loans are prinrarily made based on tlte identified cash flows of the borrower and, secondarily, on the underlying collateral provided by the borrorver. Most commercial loans are secured by the assets being financed or other business assets. such as accottt.tts receivable or inventoty, and include personal guarantees. RealEstateLoans-Realestateloansrepresentthegreatestconcentrationofloans. AtDecenrber3l.20lS.the ntajority of the Company's real estate loans were collateralized by properlies located in the Company's nrarket areas. Apploxirnately $248,673.000 or 51.54%. of the approximately $482.464,000 in real estate loans represent loans collateralized by commercial dwellings. Of those commercial real estate loans. approximately, $133.781.000 are owner-occupied, $64,764,000 are nonowner'-occupied and the rernaining $50.128.000 are other construction and development loans. These loans are underrvritterr prirnarily based on projected cash flols and. secondarily. as loans secured by reaI estate. Generally, the repaymertt of real estate loans is large[1' dependent on the successful operatiou of the propefty securing the loans or the business conducted on thc propefty securing the Ioan. Real estate loans nray be more adversely affected by conditions in the real estate rnarkets or in the general economy. The properlies securing the Company's real estate portfolio are generally diverse in terms of type and geographic location within the Company's service area. This diversity helps reduce the exposure to adverse economic events that affect any single market or industry. General[y real estate loans are owner-occupied which further reduces the Company's risk. Real estate loans are divided into residential. conrmercial and constructiorr and development loans. Residential loan originations are generated by our loan officers, irr-house origination staff, nrarketing efforts- present custorlrers. walk-irr custorrers and referrals fi'om real estate agents arrd builders. ResidentiaI loans primarily include origination of loans secured by firsl moftgages on o\ /ner-occupied. one to four family residences. 'fhe Company also originates home equity loans, which are included in the residential loan portfolio. Commercial realestate loans primarily include comnrercialoffice buildings, retailand offices, warehouse facilities. hotels and churches. Irr determining whether to originate commercial real estate loans. the Company generally considers factors such as tlre financial condition of the borrower and the debt service coverage fi'orn income of the propelty. Agricultural Loans - Agricultural loans are subject to undenvritirrg standards and processes sinrilar to commercial loans. Agricultural loans are prirnarily 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 farmland, cattle or equipment. and include personal guarantees. (lt) TEXAS INDEPENDENT BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER3I.20I8 AND 20t'7 Consumer Loans - SLrbstantially all consumer loan originations are nrade to consu]nel's in tlie Company's tnarket areas. The Companv utilizes methodical credit startdards and analysis to supplernent its policies and procedures itt undenvriting consumer loans. The Company's loan policy addresses types of consutner loans that may be originated and the collateral, if secured, rvhich must be perfected. The relatively smaller individLral dollar amouttts of consumer loans that are spread over nuulerous individual borrowers also minimize the Company's risk. Allowance for Loan Losses - The allowance for loan losses reflects management's judgment of probable loan losses inherent in the portfolio at the balance sheet date. The Cornpany Llses a disciplined process and rlethodology to establish the allowance for loan losses each quafter. To determine the total allowance for loan losses, managernent estimates the reserves needed for each seglnent of the pofffolio, including loans anal1,7gd individually and loans analyzed on a pooled basis. The allowance for loan losses consists of amounts applicable to: (i) the agriculture porlfolio (ii) the real estate portfoliol (ii) the conrmercial porlfolio, (iii) the consutner attd other poftfolio, and (iv) overdrafts. The classes withirr the comnrercial porrfolio segments are commercial loans that are unsecured and secured by personal propefty. The classes within the real estate poftfolio segtrent are residential moftgage, home equity, home irnprovement, and conrmercial real estate. The classes within the consumer and credit card portfolio segment include credit card, direct/indirect consr.rrner and other consurner loatrs. Under this accounting guidance, the allowatrce is presented by porlfblio segtnent. The allowance for loan losses is established as losses are estinrated to have occurred through a provision for loarr losses charged to expense. Loan losses are charged against the allowance when lranagement believes the collectabiliry" of the principal is unlikely. Subsequent recoveries. if any. are credited to the allow'ance. The allowance is based on two basic principles of accounting: (i) Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 450,Cortingencies, which requires that losses be accrued rvhen they are probable oloccurling and estimable and (ii) FASB ASC 310. Rec'eirobles. which requires tlrat losses on irrpaired loans be accrued based on the differences betrveert the loan balance and either the value of collateral. if such loalrs are considered to be collateral dependent and in the process of collection. or tlre present value of future cash florvs. or the loan's value as obserrvable in tlre secondary rnarket. A loan is considered irnpaired u,hen. based on current infonnation and events. the Company has concerns about the ability to collect the scheduled payments of principal or interest when due according to the contracfual terrns of the loan agreement. Factors considered by rnanagement in detenninirrg impainrent include paynrent status, collateral value and the probabiliry of collecting schedLrled principal and interest payments when due. Loans that experience insignificant payment delays and payrnent shortfalls generally are not classified as impaired. Management detennines the significance of payment delays attd payment shortfalls on a case-by-case basis, taking into consideration all of the circurnstances surrounding the loan and borrower, including the leng1h of the delay, the reasons for the delay. the borrow'er's prior payment record, and the arrount of the shorlfall in relation to the principal and interest owed. 1-he Cornpany's allowance for loan losses has three basic components: the specific allowance. the forrnula allorvance and the pooled allowance. Each of these components is deternrined based upon estirnates that can and do change when the actual events occur. As a result of the uncertainties inherent in the estirnation process, nranagement's estitnate of loan losses and the related allowance could change in the near term. The specific allow'ance cornponent is used to individually establish an allowance for loans identified lor impairment testing. When inrpairment is identified. a specific reserve rnay be established based on the Companl,'s calculation of the estimated loss embedded in the individual loan. lnrpairnrerrt testing includes consideration olthe borrower's overall financial condition, resources and payment record, support available from financial guarantors and the fair rnarket value of collateral. These factors are conrbined to estimate the probabilio, und severity ol inherent losses. Large groLrps of srnaller balance, homogeneous loans are collectively evaluated for impairrnent. Accordingly, the Bank does not separately evaluate individual consurner and residential loans for impairnrent. The fonnula allowance component is used for estimating the loss on internally risk-rated loans exclusive of those identified as irnpaired. The loans meeting the Cornpany's intemal criteria for classificatiorr, such as special nrention, substandard. doubtful and loss, as well as specifically identified inrpaired loarrs, are segregated fronr perfonning loans within the porlfolio. These internally classified loans are then grouped by Ioan type. Each loarr ( t2) TEXAS INDEPENDENT BANCSHARES, INC. NO'TES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 3 r 201 8 AND 2017 rype is assigned an allowance factor based on managernent's estitnate of the associated risk. cornplexiry artd size ol tire individlal loans within the particular loan category. Classified loans are assigrred a higher allowance factor than nol-classified loans due to managernent's concems regarding collectability or lnal'lagemelrt's ktrowledge of pamicslar elements surrounding the borrower. Allowance factors increase with the worsening of the intenral risk rating. The pooled fonnula component is used to estimate the losses ittherent in the pools of nortclassifled loans. These loans are then also segregated by loan type arrd allorvance factors are assigned by tnanagement based on delinquencies. loss history, trends in volume arrd terms of loans. effects of changes irr lending policy'. the experience and depth of management, national and local ecotrornic trends. concentrations of credit. results o[ the loan review system and the effect of extemal factors (i.e. competition and regulatoft requirements). The allowance factors assigned differ by loan type. Allor,vance factors and overall size of the allowance may change fi'om periodto-period based on managetrtetrt's assesstnent of the above-described factors and the relative weights given to eaclt factot'. lrr addition, various regulatory agencies periodically revierv the allowance for loan losses. These agencies nray require the Cornpany to rnake additions to the allowance for loan losses based on their judgments of collectability based on infonnatiott available to them at the time of their examination. The Company's charge-off policy states that after all collection effofts have been exhausted and the loatrs are deenred to be a loss, it rvill be charged to the Conrpany's established allowance lor loatt losses. Cotrsumet' loatts subject to the Uniform Retail Credit Classification are charged-off as follows: (a) closed-errd loans ale charged-of1' no later than 120 days after becoming delinqLrent. (b) consrrmer loans to borrowers who subsequentll,declare bankruptcy. where the Company is an unsecured creditor, are charged-off within 60 days of leceipt of the notification fi'orn the bankruptcy courl, (c) fraudulent loans are charged-off within 90 days of discovery and (d) death of borrower will cause a chalge-off to be incurred at such time an actual loss is detennined. All other lvpes of loans are generally evaluated for loss potential at the 90th day past due threshold. and any loss is recogrrized no later than the l20th day past due threshold: each loss is evaluated on its specific facts regalding the appropriate timing to recogrize the loss. Premises and Equipment - Premises and equipment consist of land. buildings and equipnrent. Land is carried at cost. Other premises and equiprnent are carried at cost rret of accunrulated depreciation. Depreciation is cornpLrted usingthe straight-line method based on the estirnated Lrsefi.rl lives of the assets, which rauge from three to ten years for equiprnent and 39 years for buildings. Maintenance and repairs are expensed as incurred while nrajor additions arrd improvements are capitalized. Gains and losses on dispositions are included in curlent operations. Bank-Owned Life Insurance - Bank-owrred life insurance is carried at the aggregate cash surrender value of life insurarrce policies owned where the Cornpany is narned beneficiary. lncreases in caslr surrerrdel value delived frorn crediting rates for underlying insurance policies are credited to noninterest incorne. Other Real Estate Owned (OREO) - OREO represents propefties acquired through or in lieu of loan foreclosule and are initially recorded at fair value on the date of acqLrisition less estimated costs to sell. Any write-down to fair value at the time of transfer to OREO is charged to the allowance for loan losses. Subsequent transfer adjLrstments. if necessary. to repoft these assets at the lower of (a) fair value minus estimated cost to sell or (b) cost are experrsed as incurred. Costs of improvements are capitalized, wlrereas costs relating to lrolding OREO are expensed as incurred. Nonmarketable Equity Securities - Other investments consist of limited partnership interests in private investntent ftrnds qualiSring as Srnall Business Investtnent Compatries (SBIC) by the U.S. Srnall Business Adnrinistration (SBA). The investmerlts are can'ied at cost and periodically evaluated for irnpairnrent. The Cornpany has subscriptiorr commitments of $3,900.000 of which $2.512.000 has been advanced. ( l3) TEXAS INDEPEN'DENT BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 3I. 0r8AND20l7 The Cornpany also orvns stock iu the Independent Bankers Financial Corporation (IBFC), the parent cornpalty of T[e Independent BankersBank. IBFC stock is carried at cost, and periodically evalLrated lor impairnent based on Lrltirnate recovery of par value. Both cash and stock dividends are reporled as income. 'fhe Company. as rnembers of the Federal Resewe Bank and the Federal Home Loatt Bank. is required to maintain an investment in capital stock. The stock is carried at cost, classified as restricted security. and periodicall.v evaluated for iurpainlent based on ultimate recovery of par value. Both cash and stock dividends are repofted as lncotT)e. Stock-Based Compensation - The Company issues stock options artd restricted stock awards on a periodic basts. Stock based compensation cost is measured at the grant date based on the fair value of the award and recogttizecl as expense over the vesting period of the stock award usittg the straight-line method. Goodwill and Intangible Assets - Goodwill represents the excess of cost over fair value of assets of businesses acquired. Goodwill and irrtangible assets acquired irr a purchase business combination and determitred to have an indef inite useful life are not arnoftized, but instead. are tested for impairrnent at least annually. Intangible assets rvhich consist of core deposits intangibles are amorlized over their estintated life of l0 years Lrsirrg tlre straight line amoftization. Customer lists are arnoftized over eight years usirrg the straight line rnethod. Noncornpete agreernents are anroftized over three years using the straight-line method. These intangible assets are reviewed for irnpairment whenever events or changes in circumstances indicate that the carrying ar.noltnt ol atr asset nray not be recoverab[e. An impainnent loss is recognized to the extent that the carrying amount exceeds the asset's fair value. For goodwill, the impairrnent determination is made at the reporling unit level and consists of two steps. First. the Corrpany detennines the fair value of a repofting unit and corrpares it to its carrying arnount. Secorrd. if the carrying arnount of a reporting unit exceeds its fair value, arr irnpairrnent loss is recognized for any excess of the 'Ihe canying amount of the reporting unit's goodwill over the implied fair value of that goodwill. inrplied lair value of goodwill is determined by allocating the fair value of the reporting unit in a rnanrrer sirnilar to a purchase pliceallocation. Theresidualfairvalueafterthisallocationistheirnpliedfairvalueofthereportin,eunitgoodwill. There was no impairment of goodwill for 2018. The Conrpany closed an unprofitable division in2017 and rvrote offgoodwill associated with that line of business in the amount of $25,000, The impairrnent is included in other' operating expense on the consolidated statement of income. Income Taxes - The Conrpany's stockholders have elected to have the Cornparry's incorne taxed as arr S corporation under provisiorrs of the Internal Revenue Code. Under the provisions of a subchapter S co4roration. the Cornpany does not pay corporate incorrre taxes on its income and, therefore, no incorne taxes are nettecl against cornpreltensive income (loss) or accumulated other comprehensive inconre (loss). Taxable incoure or loss is reported to the individual stockholders for inclusion in their respective incorne tax returns arrd no provision for fbderal iuconre taxes is included in these financial statements. The Company files a consolidated federal income tax return rvith its wholly-owned subsidiaries. In accordarrce with FASB ASC 740, Income Tcxes, the Company believes that it has no unceftain tax provisions that quali[, for either recognition or disclosure in the financial statements. The Cornpany corlverted to an S corporation orr December 31.2013 and is subject to the builrin gains ta,r for a period not to exceed five yeals fi'om that date. 'fhe -fhe state rnargin tax applies to legalentities conducting business in Texas. tax is calculated by applying a tax rate to a base tlrat considers both revenues and expenses arrd, therefore. has the characteristics of an incorne tax. As a result, the Cornpany accrued approximately $59,700 and $45.900 in state margin taxes for 2018 and 2017, respectively. The state margin tax is included in other operating expenses in the consolidated statenrents of t nconte. ( l4) TEXAS TNDEPENDENT BANCSI{ARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 3 l. 2018 AND 2017 Fair Value Measurements - The Company follows the guidance of FASB ASC Topic 825. Fincmciul Instrttments, and FASB ASC Topic 820 Fair Value Measuremenl. This guidance pennits entities to Itreasure tnatrl' financial instruments and ceftain other items at fair value. The guidance clarifies that fair value is an exit price. representing the amount that would be received to sell an asset or paid to transfer a liability in alt orderly transaction between market parliciparrts. Under this guidance. fair valtte tneasurettrents are not adjtrsted fbr transaction costs. The guidance establishes a fair value hierarchl,that prioritizes the inputs to valuation tecltniques used to rneasu[e fair value and requires ceftain disclosures aboLrt fail valtte tneasuretlents (see ltlole ]6). Itl general. fairvalues of financial instruments are based upon quoted market prices. rvhere available. If suclt qtroted rnarket prices are not available, fair value is based upon internally developed models that prirnarily use. as inprrts. observable market-based parameters. Valr-ratiorr adjustments rnay be tnade to ensure that flrrancial instruments are recorded at fair value. These adjustments rnay inclr.rde atnounts to reflect counterpatt)- credit quality and the Company's creditworthiness, antong other things, as well as unobseryable parameters. Any such vaIttatiott adjustrnents are applied consistently over titne. The three levels of the fair valLre hierarchy are described as follows: o Level I - QLroted prices in active markets f'or identical assets or liabilities. includes ceftain U.S. Treastrryr and other U.S. Goverrunent agency debt that are highly liquid and are actively traded in over-the-col-lltter tnat'kets. o 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 irr markets tlrat are not active. or other inputs tltat are observable ot' can be corroborated by observable market data for substantially the full tenn of the assets or liabilities. a Level 3 - Unobservable inputs that are suppofted by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments r.vltose value is deternrined using pricing rnodels, discounted cash flow rnethodologies. or sirnilar techniqLres. as well as instruntents for which the deternrination of fair value requires significant rnanagernent judgment or estinration. The asset or liabiliry's fair value measurerlent level within the fair value hierarchy is based on the lowest level of any inpr-rt that is significant to the fair value rneasurenrent. Valuation techniques used need to maxirlize the use ol obser.vable inputs and minimize the use of unobseruable inputs. Financial Instruments with Off-Balance-Sheet Risk - In the ordinary course of business, the Conrpany enters into off-balance-sheet financial instruments consisting of comnritnrents to extend credit, cornmitments under credit card arrangements, cornmercial letters of credit. and standby letters ol credit. Suclr financial instrurnents are recorded in the financial statements when they are funded or related fees are incurred or received. Treasury Stock - Treasury stock is the Conrpany's own stock. wlrich lras been issued and reacquired but not canceled or retired. The stock is stated at cost. and no cash dividends are paid on tllis stock. SLrbsequent sales of treasuty stock are accounted for using the first-in. first-or-rt method olaccounting. Reclassification - Cerlain reclassifications have been made to the 20lJ financial statement presentation to correspond to the cunent year's format. Total stockholder's eqLrity and net income u'ere unchanged by these rec lassifications. Recent Accounting Pronouncements - In May 2014, the FASB issued Accounting Standards Update (ASU) No.20l4-09. Revenue From Contracts l|tith Ctrstoners (Topic 606).establishing a single cornprehensive rnoclel for entities to use in accounting for revenue arising from contracts with custorners. This update provides a five- step analysis in determining rvhen and holv revenue is recognized. The new nrodel will require l-evenLle recognition to depict the transfer of pronrised goods ol services to custorrers 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 revenlre recogttition guidance, including industry-specific guidance. This gLridance is effective lor annual reporting periods beginning after December 15,20,l8, for nonpublic entities. The Cornpany is currently assessing the impact this new accounting standard and its subsequent amendments will have on the financial ( ls) TEXAS INDEPENDENT BANCSHAR-ES, INC. NOTE,S TO CONSOLIDATED FINANCIAL STATEMENTS DF,CEMBER 3I. IR AND 20I7 statements and related disc losures. ln January 2016, the FASB issued ASU No. 2016-01. Recognition cutd lvtleasurenrenl of Financial Assels unel Financial Liabilities. The new guidance nrakes targeted intprovemetrts to GAAP ilnpacting equiry ittvestments (other than those accounted for under the equiry method or consolidated). financial liabilities accoltnted fot' tunder the fair value election, and presentation and disclosure requirements for finattcial instrttnrents. alrollS other changes. The new guidance is effective for the nonpublic companies for annual reporling periods beginning after December 15,2018, with early adoption prohibited other than for ceftain provisiorts. Tlre Company is evaluating the inrpact that the new guidarrce would have on tlte financial statements and related d isc losures. In February 2016. the FASB issued ASU No. 2016-02, Leases (Topic 812) as amended in July 2018 by ASLJ No. 2018-10, Coclificution Inrproventenls to Topic 812, Leuses and ASU No. 2018-ll. Leases (Topic' 812). Turgetecl Intprot)entents. that replace existing lease guidance. The new standat'd is intended to provideenhanced transparency and compalabiliry by requiring lessees to record right-of-use assets and con'esponding lease liabilities on the consolidated balance sheets. The new guidance will continue to classily leases as either finattce or operating. rvith classification affecting the paftenr of expense recognitiott in the statentents of incotre. Tlrese ASU's are effective for fiscal yeals (and interim repofting periods within those years) beginning after December 15, 2019. The Company is currently evaluating the inrpact of the provisiotts of these ASUs and anticipates recog:rition of additional assets and corresponding liabilities relating to these leases on the consolidated balattce sheets, but does not expect the adjustment to be material assurnitrg no changes in lease activity. In June 2016, the FASB issued ASU No.20l6-13, Financial Instruments - Creclil Losses (Topic 326): Measurenrent of Credit Losses on Financial Inslrumenls. The arnendrnents in this ASU replace the incurred loss rnodel for recognition of credit losses with a nrethodology that reflects expected credit losses overtlte lif'e of the loan and lequires consideration of a broader range of reasonable and supportable inforrnation to calcr.rlate credit loss estimates. Tlre amendrnents are effective for nonpublic companies for fiscal years beginning after December 15,2020. The Corlpany is currently evaluatirlg the impact of the adoption of this standard rvould lrave on the financial statements and related disclosures. lrr August 2016. the FASB issued ASU No. 2016-15. Statement of Cash Flovvs (Topic 230). Classificatiort o.f' Certain Cash Receipts and Cash Paymenls. This update provides guidance on how to record eight specific caslr flow issues. and lrow the predominant principle should be applied when cash receipts and cash paynrents have nrore than one class of cash flows. This standar-d is effective for fiscal years begirrning after December 15.2018 and interim periods beginning after December 15, 2019. with early adoption permitted, Adoption will be applied retrospectively to all periods preserrted. The Company is currently evaluatirrg the irnpact this gLridance will have on the financial stateurents and related disclosures. lrr January 2017, the FASB issued ASU No. 2011-04, Intangibles - Goodwill cmtl Other (Topic 350); SinrplifvingtheTestforGooht'illlmpairment. Theatnerrdnrentsinthisguidancetoeliminatetherequirementtcr calculate the irnplied fair value of goodwill to measure goodwill irnpairrnent charge (Step 2). As a result. arr intpairnrent char-9e will equal the amount by which a reporling unit's carrying amount exceeds its fair value. not to exceed the amount of goodwill allocated to the repofting urrit. An entity still has the option to perfornr tlre qualitative assessrnent for a repofting unit to determine if the quantitative impairnrent test is necessary. 'fhe arnendrnent should be applied on a prospective basis. The guidance is effective for goodwill impailment tests in fiscal vears beginning after December 15,2021, for nonpLrblic companies. Early adoption is pernritted fbr perfonned -soodwill impairtnent tests after January 1,2017. The impact of this guidance for the Compan.v- will depend on the outcornes of future goodwill irnpairnrent tests. In March 2017. the FASB issued ASU 2017-08,Premium Amortization on Purchasecl Callqble Debt Securities. -fhe This ASU requires certain premiums on callable debt securities to be amorlized to the earliest call date. amoftizatiou period for callable debt securities purchased at a discount will not be impacted. Under curreltt CAAP, premiums on callable debt secLrrities are generally amoftized over the contractual life of the secLrrity. The standard will take effect for nonpublic entities for fiscal years beginning after December 15.2019. and ( l6) TEXAS INDEPENDENT BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DF,CF,MBF,R 3 I. 20I 8 AND )ot'7 interirn periods rvithin fiscal years beginning after December 15, 2020. The adoption of this ASU is not expected to have a significant inrpact on the Cornpany's financial statements and disclosures. In February 2018, the FASB issued ASU No.20l8-03, Technicql Corrections ancl Intprot'entenls to Fiuanc'ial In.stnmrents Ot'erall (subtopic 825-10): Recognition and Measuremenl of Financicrl Assets and Finurtcicrl Liabilities. which clarifies certain aspects of the guidance issued in ASU No.20l6-01. Arnong other itents. tlte arnendrnent clarifies that an errtity that uses the rneasurement alternative for equitl,securities without readily deterrninable fair values can change its measurerrent approach to fair value. Once the election is rnade. the measurement approach is irrevocable and the entity is required to apply the selected approach to that security and all identical or similar investments of the same issuer. Early adoption of ASU No.20l6-01 is not pernritted with the exception of ceftain provisions related to the presentatiorr of other cornprehensive income. This standard will be effective for the Company beginning in the first quafter of fiscal year 2019. The Conrpany is currently evaluating the impact this standard will have on the financial staternents and related disclosures. lrr August 2018, FASB issued ASU No.20l8-13, Fair Value Measto'entenl (Topic 820): Disclo.rure Franrev,nrk - Changes lo the Disclosure Requirentenls for Fair Value il[easurentenl. This update rnodifies the disclosLrre requirements on fair value rleasurement in Topic 820, Fair Vctlue Meosuremenl. Tlrese amendrnents in this update are effective for annual periods beginning after December 15,2019. and interim periods within those fiscal years. The amendments in this update may be early adopted arrd requires a prospective transitiorr approach for cefiain prescribed disclosure requirements. with all other amendments applied retrospectively. The Cornpany is currently evalLrating the impact of the adoption of this standard on the financial staternent-s arrd related disclosures. NOTE 2 - CASH AND DUE FROM BANKS Cash and due from Bank consists of the following as ol Decenrber: 20t 8 2017 (Dollars in thousands Noninterest bearing Cash and cash items s23,983 s 17,687 Texas Independent Bank, Dallas t00 l0t Frost Bank 8,083 t 4.1 83 Other banks 164 r6i Total rroninterest bearing 32,330 32. I 34 Interest bearing Federal Reserve Bank of Dallas 16,466 29.321 Texas Independent Bank. Dallas 637 ls3 Texas Capital Bank 25,053 r8.419 Other banks 30 t00 Total interest bearing 42,186 48,019 Totals s74,516 s80. r 5i The Bank is required to maintain average balances on hand or with the Federal Reserue Bank of Dallas. At Decenrber 3l . 201 8 and 201 7. these reserve balances anrounted to $-0- and $28,420.000, respectively. During 2018, cerlain demand deposit accounts lrave been reclassified to interest-bearing accounts fbr Federal Reserve Bank of Dallas requirement purposes as allowed by The Monetary Control Act of 1980 and Federal Reserve Regulation D. The reclassification for 2018 and 2017 arnounted to $551.841,000 and $-0-. respectively. NOTE 3 - INVESTMENTS The amoftized cost and fair value of available-for'-sale securities and held-to-rnaturity securities with gross Lrnrealized gains and losses. are as follows: 117) TEXAS INDEPENDENT BANCSHARES' INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DITCF,I\IBF,R 'll ,orRAND70l7 Gross Gross Anroftized Unrealized Unrealized Fair Cost Gains Losses Value (Dollars in thousands) December 31, 2018 Avai lab I e-for-sale securities U.S. goventment agencies $5,084 $(103) s4,981 Mortgage-backed sec urities 64,977 s86 (1,768) 6329s Equiry 6ll 6,822 7,433 Totals $70,672 s6,908 s(1,871) $75.709 Decenrber 31.2017 Avai lable-for-sale securities U.S. governmerrt agencies $s, I l2 $(40) $s.072 State and municipal securities 2.490 $s 2.495 Mortgage-backed sec urities 59.711 205 (628) 59,348 Equity 6ll 4,917 5.528 Totals $67,984 $s. I 27 s(668) 572.443 Cross Gross Amortized Unrealized Urrrealized Fair Cost Cains Losses Vah.re Dollars in thousands) December 31,2018 Held-to-rnaturity sec urities U.S. government agencies s5,000 $(24e) s4,751 State and rnunicipal securities 213,864 sl72 (4,434) 209,602 Mortgage-backed securities 66,291 126 1.507) 64.910 Totals $285,155 $298 $(6,190) s279,263 Decernber 31,2017 Held-to-rnaturity securities U.S. governlnent agencies $ I 0.000 $(2 r0) $9.790 State and rnunicipal securities 222,334 $s50 (2,752) 220.132 Mortgage-backed securities 8l ,963 346 (e8e) 80.320 Totals $3 r3.297 $896 $(3.9s r) $3 r0.242 Proceeds frorn the sales of available for sale securities were $-0- and $21.304,000 in 2018 and 2017. respectively. Gross realized gairts from the sale of available For sale securities were $-0- in 2018 and $117,000 in2011. Gross realized losses from the sale of available for sale securities were $-0- in 2018 and $(77,000) in 2017. Proceeds from the sale of held-to-rnaturity securities were $4.990,000 and $-0- in 2018 arrd 2017, respectively. Gross realized gains from the sale of held-to-maturity securities was $-0- for both 2018 and 2017. Gross realized losses fi'om the sale of held-to-maturity securities were $(10.000) for 2018 and $-0- for'2017. The securities sold were close enough to (within three months) their rnaturity date to substarrtially eliminate interest rate risk. At Decernber3l,20l8 and 2017- securities with carrying values of approxirnately $127.593.000 and $136.290.000, respectively, rvere pledged to secure public deposits and forother purposes required or pernritted by law. J'he amortized cost and estimated fair value of debt securities at December31,20l8, by contractual maturity. are ( l8) TEXAS INDBPENDENT BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 3I. r8AND20r7 shown below. Maturities of morlgage-backed securities and collateralized mortgage obligations will differ fi'orn 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. EqLriry securities are shown separately since they are not due at a single maturity date. Available-For-Sale Securities Held-To-Maturiw Securities Amortized Fair Arnortized Fair Cost Value Cost Value (Dol lars in thousands) Due in one year or less $ 12,578 s r2.532 Due in one to five years s5,084 s4,e8 r 72,0t0 7l .069 Due frorn five to ten years 103,598 100.973 Due after ten years 30,678 29,119 5.084 4,981 2 t 8.864 2 14.3s3 Morlgage-bac ked securities 64,977 63,29s 66.291 64.910 Equity 6ll 7.433 Totals $70,672 $75,709 $28s, r 55 s279.263 The following table summarizes securities with unrealized losses, aggregated by rnajor security fype and length of time irr a continuous unrealized loss position: 'l Less Than 12 lv{onths Morc J'har 12 Months otal Cross Cross Gross Esti nrated Unreal i zed Estinrated Unrealized Estinrated I lnrealized Fair Value Losses Fair Value Losses Fair Value I osses Dollars in thousands) Dcccntbcr 31.2018 z\r ai lahle-[or-Sale: U S govenrnrenl agcnc res s4.98 I s( r 03) s{.981 s( r 0J) Mortgagc-backed secufltrcs s l 3.5J5 s( r r0) t6,823 ( 1,628) 60Js8 ( 1.7(rll) lirtals s lJ.5J5 s( r {0) ss r .80,r s( 1,73 r ) s65,339 s(r.87r) [ {eld-to-Maturitl : U S govemmcnt agencles ${.75 I s(2{e) s4,751 s(2Ie) State and nrunicipal sccuntrcs s55.83 r $(969) I {0.000 (J.J6s) 195,83 I (1.{J{) Mortgage-backcd secunltcs J.025 (l l) 56.{78 ( l,4e6) 59,50J ( 1.s07) T otals s58.856 s(980) s201,229 $(s.2 l 0) s260.085 s(6. l e0) Decenrber 3 1.201 7 Available-lbr-Sale. [J S, govemrnent agencres $5.072 s(10) $5.072 $(ltt) Mongage-backed sccl.lfltles 35 1(t4 (241) $ I 6.820 $(r 85) 52.-524 (628) (r,820 Totals s40.776 $(283 ) $ | $(3 85 ) $57.-i96 $(66[t) I le Id-to-Maturitr : [J S govenrmenl aSenc res $4.987 $(t3) $.1.803 $( l e7) $9.7S0 :ii(2I0) Slatc and nrunicipal secrrnt rcs 123.627 ( 1.599) .16.8I (t.t5l) I 69.758 (:.751 ) Mortgage-backed secuntrcs 41.8_34 2-3.5 76 (7 42\ 67.1 l0 (91i9) fotals s I 72.418 $7.1.510 s(2.0e2 ) $216.958 5(_r.9i l) The Company had 6ll and 552 irrvestments in an unrealized loss positiorl at December3l, 2018 and 2017. respectively. The Cornpany believes these unrealized losses are temporary as (i) the Cornpany does not have the intettt to sell investment securities prior to recovery and (ii) it is more-likely-than-not that the Compan,v will not Itave to sell these securities prior to recovery. The unrealized losses noted are interest rate related due to the level of interest rates at December3l,20l8 and 2017. 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 concents on these securities. ( le) TEXAS INDEPENDENT BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DtrCtrN/RFR 1I 201 RANDzOIT NOTE 4 - LOANS RECEIVABLE A sumrnary of the balances of loan receivable were as follows at December 3 I (in thousands of dollars) 2018 Percent 2017 Percent Agriculture $4,503 0.70h $3. I 89 0.6% Real estate 482,465 78.70h 421.678 74.2% Commercial 115,089 18.8% l3 1.958 23.2% Consurner and otlrer 10,907 1.8Y" I 1,480 2.0% Overdrafts ls2 t0l Subtotal 613,1l6 100.0% 568,406 r00.0% Less: allowance for loan losses (9,303) (8.7s6) Loarrs receivable, net $603,813 $559,650 Nonaccrual and Past Due - Nonaccrual loans totaled $6,400.000 and $479.000 at Decernber3l,2018 and 2017. respectively. Had nonaccrual loans performed in accordance with their original contract terms. the Cornpan.v- would have recogrtized additional interest incorneof $189,000 and $48,000 in 2018 and 2017, respectivell,. There were no loans past due nrore than 90 days and accruing interest at December 31.2018 and 2017 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 fbllorvirrg table is a summary of amounts (in thousands of dollars) included in nonaccrual loans, segregated by class of loans as of December 3 I : 2018 2011 Real estate s5,616 s479 Commercial 784 Totals $6,400 s479 Past Due Loans - The follorving table represents and aged past due loans, segregated by class of loans (in thousands ofdollars): 30-89 90 davs Dal s or More Tota 'lirtal Past Past l)rlst l.oans Duc Due Duc Current Rccr-ivab lc Dcccmbcr 3l.20lE: Agriculture s{.503 st.s03 Real eslate $ rJ07 s t7{ $1.48 r .r80.98{ .182.{(rS Conrmercial lt 1I I t5.0{8 I 15.089 Consumer and other 2t 2t r 0,886 10.907 Overdralls t9 l9 133 r52 Totals SIJ8E $ l7.l $ I,562 s6 I I *s54 $613.r r6 Dccenrber I I. 20 I 7: Agriculture $1. I 8e $-l. t8e Real e.slate $296 $2e6 421.-.)82 +2 t.67u Conrntercial -15 l5 | _1 1.921 l_.1 | .9-s8 Consuntcr and other il5 ll-i I 1.365 I 1.180 Overdrafts l2 t2 89 t0l Totals ${i8 - $458 $567.948 .$568.106 The Conrpany did not have any loans past due greater than 90 days that were still accruing interest. (20) TEXAS INDEPENDENT BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 3 I. 20 I8 AN )017 Impaired Loans - The following table presents impaired loans (irr thousands of dollars). segregated by class ol loans Reoorded Reccrrdcd Unpaid Investment I nvestnren t Total Avcragc Principal With No Witlr Recorded Related Recorded Balance Allorvance Allou,arce I nvestnrcnt Allorvance I nvestnrenI December 31.2018: AgricullLrre sl SI SI S1 (t22 Real estate r 3.520 r3Jr2 s42 lJ,5J{ s29 6.761 Conrnrercial |,00t 2l(t 785 1.00 r t96 609 Consunrer and other 3 3 J J 35 Totals slt.525 s I J.529 S8JO $ r 4.5J9 $228 s I 2.027 December3l.20l7: Agriculture s2 $2 $2 $l Real estate 9.243 8.94 I s267 9.208 $r07 9.196 Conrmercial 218 2r8 2r8 175 Cclnsumer and othcr 67 60 7 61 7 174 fotals $9.530 $9.22 t s274 $9.495 $l14 $10.t+6 Troubled Debt Restructuring - A loan is accolurted for as a troubled debt restructuring (TDR) if the Conrpany. for economic or legal reasolls related to the borlower's financial difficulties, gl'ants a concession to the borror,r'er tlrat it would not otherwise consider. A TDR typically involves a modification of terms such as a reduction of the stated irrterest rate or fhce alnount of the loan, a redLrction of the accrued interest, or an extension of the rnaturity date(s) at a stated interest rate lower than the cunent market rate for a new loan with sinrilar risk. lnformation on TDR's durirrg the year ended Decernber 31, 2018 (in thousands of dollars) is as follows: DECEMBER 3I 2018 POST- PRE.MODIFICATION MODIFICATION OUTSTANDING OUTSTANDINC NUMBER OF RECORDED RECORDE,D CONTRACTS INVESTMENT INVESTMENT TDRs: Real estate s2,922 $2,922 Total $2,922 s2.922 At December3l,2018 and 2017, the Bank has approximately $4,275.000 and $2,903,000 in loans reclassified as TDRs. The troubled debt restricted loan showrl in the table was rnodified during 2018 rvith lower interest rate and extended terms. There were no loans during 2018 and 2017 lhat had been modified as troubled debt restructr.rrings. and then subsequently defaulted during 201 8. No loans were modified as TDRs during 201 7 Credit Risk Monitoring and Loan Grading - The Company employs several rreans 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 econotnic conditions. Loatrs 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: Pass (11 and 12) - Loans that have adequate sources of repayment, with little identifiable risk of collectiorr and confonn to Bank policy and applicable regulations. (2 t) TEXAS INDEPENDENT BANCSHARI S, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 3I. 2OI8 AN )017 . Pass Watch (01) - Loans with the potential for tuture deterioration which. if continued, rvould result in criticisrn and/or classification. . Special Mention (02) - Loans that have emerging weaknesses and are requested to be placed on the Conrpany's watch list to receive special attention. Loans of this qualiry would exhibit some deteriorating trends in rnargin, leverage. and perfonnance. o Substandard (03) - Loans that are inadequately protected by current sound net wofth, paying capacity of tlte borrower, or pledged collateral. These loans would typically have one or nrore well-defined weakuesses that could jeopardize the repayrnent of debt. o Doubtful (04) - Loans with inherent weaknesses which collection or liquidation in fi.rll is questiorrable. o 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 assetshould be charged off nor,v. even though parlialor f'ull recovery may be possible in the future. The classification judgment will rely upon the factual evidence available and the extent and nature of the valiable lactors. The followirrg table presents internal loan grading by class of loans as of Decernber 3l Rcal Consunter 'l Agriculture E:itate Commercial and Other Overdrafts otals Credit Quality - 2018: I I and 12 - Pass ${"s02 s{58, l 90 s90,006 s 0.896 5152 s563.7{6 0I - I'ass natch 8.353 20.843 E 29.204 02 - Special nrention 2.{02 J.2J9 5.6J I 0l - Substandard l J.s20 I.00t 3 r {.525 0,1 - Doubtful 05 - Loss Totals s1.50J s1E2,.r65 $ I 15.089 ____$!!I!L st52 __!olJ_t!_ Credit Qualiry* - 201 7: I I and 12 - Pass $1. t 87 $407.9 I 5 $ r23.908 $1r.397 $l0r s546.508 0l - Pass rvatch 2.153 t00 2.2s1 02 - Special mention 2.484 1.712 I(r l0.l-11 0l - Substandard 2 9.t26 2r8 67 9.,1I l 0.1 - Doubtful 05 - Loss Totals $3. l 89 $42 t,678 $ ll r .9s8 s I t.480 sI0t $568..106 Allowance for Loan Losses - The followingtables detailthe activity in the allor.vance for loan losses by portlolio segment (in thousands of dollars): Period-End r\rnounts Allocated to Loans Evaluared for lrnparrnlclt Begrnning Proviston lbl Endrng. Balance Loan Loss Chartse-offs Recoveries Balance Indirrduallj Collcctrrell DmembcrJl.20lS ,Agricrltrrre s{9 s7 s56 55(r Real estate 6,J60 1,32 t s989 s77 6,769 $29 6,7.t0 Commercral I.996 600 s0J I 2,09.t t96 |,898 Constrnrer and othel 318 EO fl ,1 3Et J J?8 Or erdralis J l l I olals $8.756 $2.008 sr,57l $l I2 s9.30J s22S $rJtas s1-1 $6 $'19 s'le '1 6,,i75 l6 s79l s6l 6.-360 s 107 6.15.r t,80 t 210 -rl 6 1.996 1.q96 ll{ 1.1 17 l8 ,t48 I 3ll 1 s8.556 s965 s850 $85 s8-756 s 108 s8.618 The Company's recorded investment in loans related to the balance in the allowance for loarr losses on the basis of the (22) TEXAS INDEPENDENT BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 3I. 20I8 AND 20I 7 Company's impairment methodology (in thousands of dollars) is as follows at December 3l 20 t8 201 7 Loans Evaluatcd for lmpaimrent Loans Evaluated lbr lnrpainrrent Indiriduall-v Collectivell lndiv rduallr Collectivclr Agriculture $I $4,502 $2 s-]. IItT Rcal estate 13,J54 469,t I I 9.208 1I 2..170 Commcrcial I,001 I r4,088 218 l3l.7J0 Consunrer and other 3 10,904 67 I l.ll.i Oveldr'alis r52 t0t Totals $ 14,359 s598,757 s9..195 5558.9 t r NOTE 5 - PREMISES AND EQUTPMENT Major classifications of these assets are summarized as follows (in thousands of dollars) at December 3l 2018 2017 Land $7,178 $6.9 r 8 BLrilding 27,109 25.977 Equipment 7,734 9.708 Constructiorr in progress 227 148 42,248 42.751 Less: accumulated depreciation (20,26s) (22.078) Totals 521,983 $20.673 Depreciation expense of $1,367,000 and $1,353,000 in 2018 and 2017, respectively. is included in occupancy and prern rses expense, net. NOTE 6 - NONMARKETABLE EQUTTY SECURITfES 2018 20t7 (Dollars in thousands ) Federal Reserve Bank of Dallas s1,058 $ 1.058 lndependent Bankers Financial Corporation 3,944 3.944 Federal Home Loan Bank 845 406 CBANC I,100 r.000 SBIC 2,512 1.773 Totals s9,459 $8.r81 NOTE 7 - OTHER REAL ESTATE OWNED An analysis of the activity in OREO was as follows (in thousands of dollars) at December 3l: 2018 2017 Balance. beginning of year s2,070 $3.449 Additions 1,815 3.s02 Cash settlements (ee6) (4.e?4) Write-downs (132) ( r63) Realized gain (loss) included in other noninterest incorne (r42) 206 Balance, end ofyear $2,615 $2.070 At December3l,20l8 and 2017,the Company had $229,000 and $169,000, respectively. in foreclosed residential real properties where physical possession has occurred and no significant properlies wherc formal tbreclosure procedures are in process. (23) TEXAS INDEPENDENT BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER il 20r8AND20l7 NOTE 8 - DEPOSITS The following table surnmarizes deposits by category (in thousands of dollars) at December 3l: 2018 2017 Norrinterest-bearing Demand $377,548 $383.552 Interest-bearing I nterest-bearing demand 187,566 t96.333 Money market 68,007 30.70 r Savings 191,033 190.257 Time deposits less than $250,000 81,867 86.999 Time deposits $250,000 and over 47,533 55.61 7 Total i rrterest-beari n g 576,006 5 59.907 Total deposits s953,554 $943.4se At Decernber 31,2018, the scheduled maturities of time deposits (in thousands of dollars) were as [ollows For the Year Ending Decernber 3 I Amount 2019 $ r05.519 2020 15.334 2021 3.973 2022 2.529 2023 2,045 Thereafter Total s r29.400 At December3l,20l8 and 2017. the Company had approximately $47.533,000 and $55.617,000, respectively. in tirne deposits $250,000 and over. At December31,2018, approximately $43.526.000 of time deposits $250.000 and over rnature rvithirr one year. lnterest expense on time deposits in denominations of $250.000 or rrore arnounted to $424,686 for 201 8. NOTE 9 - NOTES PAYABLE AND FEDERAL HOME LOAN BAAIK ADVANCES The Comparry has a $ 10,000,000 line of credit with Frost Bank which matures on February 28.2019. There were no advances on the line as olDecernber 31, 2018 and 2017. The line of credit bears interest at the prirne rate and is secured by the stock of the Bank. The line of credit agreement has a covenant that requires the Barrk to nraintain a ratio of resenves for loan losses to total loans of not less than 1.00% calcLrlated at the end of each fiscal quarter. At March 6.2019 (date of the audit report), the Company was in the process of renervirrg the line of credit. Federal Home Loan Bank advances as of December 3l (in thousands of dollars) are as follows: DESCRIPTION INTEREST RATE 2018 2017 I note in 2018 and -0- in 2017 with rnaturiry date of March29,2019 2.s3% $5,000 'fhis advance is collateralized by blanket coverage on all First Mortgage Real Estate loans. Federal Home Loan Bank Stock. and the demand account at Federal Home Loan Bank. (24) TEXAS INDEPENDENT BANCSHARES, INC. NOTE,S TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER ir 20r8AND2017 NOTE 10 - PROFIT SHARING PLAN 'fhe Fulltirne regularemployees of the Cornpany are covered by profit sharing plarrs. employer's contributiorr fbr each fiscal year is allocated among the ernployees in proporlion to the compensation paid eaclr employee for that fiscal year. Ernployees are vested in the plan at the rate of 20Yo per each Iull year of continuous etttploytnent. Contritutions totheplan totaled $1,556,861 and $1.366,934 during20l8 and 2017, respectively, which is included in profit sharing and other employee benefits in the accompanying consolidated statements of income. NOTE 1I - DEFERRED BENEFIT COMPENSATION The Cornpany sponsors a Deferred Cornpensation Plan arrd a Salary Continuation Plan (the "Plans") for the beneflt of'ceftain officers and directors of the Conrpany. The Plarrs are irrdirectly funded by pLrrchases of Bank-owned life insurance contracts. The berrefits payable under the Plans commence on the date of retirentent, or death if earlier and continue over defined periods. The beneflts payable are accrued monthly itr au alrouttt whereby tlte accrual at the date of participant's retirement rvill equal the present value of the future benefits payable. Assets. liabilities and expenses related to the Plans were summarized as follo',vs (in thousands of dollars) at Decernber 3l: 2018 2017 Accrued benefits in connection with the Plans (included as a cornponent of other liabilities) s3l5 $2r8 Expense recognized in conttection with the Plarrs (included as a cornponent oIsalaries and etnployee benefits) s97 $88 NOTE 12 - COMMITMENTS AND CONTINGENCIES Financial Instruments with Off-Balance.Sheet Risk - In the normal corlrse of business. the Company has outstanding commitments and contingent liabilities, such as commitments to extend credit and starrdby letters ol credit. rvhich are not included in the accomparrying financiaI statetrents. The Cornpany's exposure to credit loss in the event ol' nonperfonrance by the other party to the financial instruments for conrnritrnents to extend credit and standby letters of credit is represented by the contractual or notional anrourlt of those instruments. The Cornpany uses the sarne credit policies in making such comnritrnents as it does for instruments that are included in the consolidated balance sheets. As of December3l, financial instruments whose contract alrount represeuts credit lisks were as follorvs (irr thousands ofdollars): 2018 2017 Uufunded commitments under lines of credit s114,690 $91,074 Standby letters of credit 2 189 4.930 Totals sI16,879 $96.004 Cornnritments to extend credit are agreelnents to lerrd to a customer as long as there is no violatiorr of any condition established in the contract. Cornmitments generally have fixed expiration dates or other terrnination clauses and may require payment of a fee. Since many of the cornmitments are expected to expire without being drawn upon. the total comrnitlnent amounts do not necessarily represent future cash requirements. The Conrpanr' evaluates each customer's creditrvorlhiness on a case-by-case basis. The arnount of collateral obtained, if deerrred necessary by the Cornpany upon extension of credit. is based on rnanagernerrt's credit evaluation. Collateral held varies but may include accounts receivable. inventory. propefty and equipment. and income-producilrg commercial properlies. (25) TEXAS INDEPENDENT BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DF,CEMBER 3I. 20I8 AND 20I7 Standby letters of credit are conditional conrmitments issued by the Company to guarantee the performance of a customer to a third-party. Standby letters of credit generally have fixed expiration dates or other tetminatiott 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 suclr collateral, are essentially the same as those involved in making comtnitments to extend cred it. Concentrations of Credit Risk - Principally all of the Compan,v's loatrs, cotnlnitments to extend credit arrd starrdby letters of credit have been granted to custotlers in the Company's ntalket area. The concet:trations ol' credit by type of loan are set ibrth in Nole J. The distribution of commitnrents to extend credit approximates the distribution of loans outstanding, Standby letters of credit were granted primarily to colnrnercial borrorvers. Contingencies - The Cornpaul, is subject to claims and lawsuits which arise in the ordinary course of business. lt is the opinion of management thatthe disposition or ultirnate resolution of such clairns and lawsuits will not have a materially adverse efl'ect on the consolidated financial position of the Cornpany. NOTE 13 - TRf,ASURY STOCK At DecemberSl. 2018 and 2017. the Cornpany has acquired 81,910 and 81.270 shares. respectively, of its orvn stock. The stock is carried at a range of cost fronr $169.84 to $360.00 per share for stock acquired fiorn 2007 to 20r8. NOTE T4 - DIVIDENDS The Board of Directors of the Company may. subject to statutory limitations, declare qLrafterly. semiannually. or annually dividends of so much of the net profits of the Company as they may judge expedient. No dividends may' bedeclaredthatwouldinrpairthecapitaloftheCornpany. Dividendsintheamountof$,6.772,000and$6.221,000 rvere declared and paid during 201 8 and 201 7. respectively. NOTE 15 - STOCK-BASED COMPENSATION Stock Options - The Company's Employee Share Option Plan (the "Plan"), rvhich is stockholder approved. perrnits the granting of stock options to its ernployees fbr up to 100,000 shares of comnron stock. The fair value of each option award is estimated on the date of grant using a binornial option valuation model that uses the assurttptions noted in the followirrg table. Expected volatiliry is based on historical volatility of the Company's stock and other factors. The expected term of options granted is derived from the output of the option valuation model and represertts the period of time that optiorrs granted are expected to be outstanding. The risk- fi'ee rate for periods within the contractual lifb of the option is based on the U.S. treasury yield curve in effect at the tirne of grant. There were no stock options issued during 201 8 and 201 7. (26) TEXAS INDEPENDENT BANCSHARES, tNC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER it 20r8 AND 2017 A sumrnary of option activity under the Plan is presented as follorvs: Weighted- Average Shares Exercise Price December 31, 2018 Outstanding, beginning of Year 39,806 $137.25 Granted Exercised (1,141) $137.13 Forfeited or expired Outstanding. end of year 38,665 s137.25 Exercisable, end of year 38,665 s137.25 December 31.2017 Outstanding, beginning of year 48.906 $129.r4 Cranted Exercised (e. r 00) $e3.6e For{'eited or expired Outstanding. end of year 39.806 $ r 37.2s Exercisable, end of year 39,806 $ r37.25 All shares in the Plan rvere fully vested as ol December3l, 2018 and 20.l7. No compensatiott cost related to stock-based compensation arrangements granted under the Plan w'as recognized lor 20 I 8 and 201 7. The aggregate intrinsic value of options outstanding as of Decernber3l, 2018 arrd 2017 was approximatel-v $8.612.000 and S7,275.000, respectively. The Company received $48,000 and $853,000 from the exercise of stocl< options in 2018 and 2017. respectively. Restricted Stock Awards - The Cornpany periodically issues comrlon stock grants to key enrployees. Tlrese arvards of stock are measllred at their fair value at the date of grant and amorlized to e,xpense over the vesting periodofupto l0years.During20lT.500sharesweregrantedatafairvalueof$275pershare. Additionally. 150 shares vested in 2018 and 100 shares vested in20l7. Total unvested shares as of December3l,2018 were 2,050. Stock-based compensation expense for 2018 and 2017 was $64.000. As of Decernber 3ll,2018 and 2017. there was $348,000 and $412,000, respectively, of total unrecognized compensation cost related to nonvested shares granted. NOTE 16 - FAIR VALUES OF FINANCIAL INSTRUMENTS The following table sets forth by level, within the fair value hierarchy. the Comparry's assets at fair value (in thousands of dollars) as of: Fair Value Measurements Using Fair Level I Level2 Level 3 Value December 31, 2018 Recurring basis U.S. goventtrent agencies s4,981 $4,981 Morlgage-backed securities 63,295 63,295 Equity 7,433 7,433 Nonrecurring basis Goodwill sl2,1l6 l2,l l6 lmpaired loans 14,539 14,539 OREO 2,615 2,6I5 Totals $75,709 $29,270 s104,979 (2'7) TEXAS INDEPENDENT BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 3I. r8 AND 2017 Fa ir Level I Level 2 Level 3 Value Decentber 31.2017 Recurring basis U.S. government agenc ies $5,072 $5,072 State and municipal securities 2.495 2.495 Mortgage-backed securities s9.348 59.348 Equity 5.528 5.528 Nonrecurring basis Goodwill $ 10.674 10.614 lrnpaired loans 9,495 9.495 OREO 2,070 2,070 Totals $12,443 $22.239 $94,682 There have been no changes in the rnethodologies used at Decetnber 3 l. 201 8 and 201 7 There were no transfers beN'een levels during 201 8 and 2017 Sccurities - Where quoted market prices are available in an active market. securities are classified within Level I of the valuation lrierarchy. Level I securities include highly-liquid governrnent borrds, moltgage products and exchange-traded equities. If quoted market prices are not available. then lair values are estirnated by usin,e pricing rnodels. quoted prices of securities with similar characteristics or d iscounted cash flows. Level 2 secLrrities include ceftain collateralized nrorlgage obligation. ceftain debt obligations and ceftain rnunicipal arrd equity securities. ln ceftain cases where Level I or Level 2 inputs are not available. securities are classified within Level 3 of the hielarchy. Certain financial assets and financial liabilities are rneasured at fair value on a nonrecllrring basisl that is. the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments irr ceftain circurrstances. Financial assets and liabilities rneasured at fair value on a nonrecrrrring basis include the fbllowing: Goodwill - Fair rnarket value of goodwill is determined on a nonrecurring basis in order to detennirre il any impairment exists. ln order to estinrate the fair value of goodwill the Cornpanv uses inputs such as values of sirlilal entities. Impaired Loans - Certain impaired loans are repofted at lair value of the underlying collateral if repaytrent is expected solely fi'om the collateral. The inrpaired loans are reported al fair value through a specific valuation allorvance allocation of the allowance for possible loan losses. Collateralvalues are estimated using Level 2 inputs based on obsenvable market data or Level 3 inputs based on customized discounting criteria. Other Real Estate Owned - OREO acquired by foreclosure is recorded at the fair value of the properry,. but rrot greaterthan its loan amount, less any sellingcosts. as applicable, atthetime of foreclosure. If necessary, carrving arnounts 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 vah"red under Level 3 at the lorver of cost or fair value based on property appraisals less estimated costs. which include both observable and unobservable inputs, at the tirne of transfer and as appropriate thereafter. The following table presents estimated fair values of the Company's financial instrumerrts (in thousands of dollars) fbr Decernber 3l: (28) TEXAS INDEPENDENT BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DE,CE,MBER 1I 20r8AND2017 Canyin-e Fair Fair Value N4easurentents I Lcvcl .l Dcccmbr:r Jl.20lE Amount Valuc l-evel Level 2 Financial assets Cash ald cash equil'alenls s82.8 r 6 s82.8 I 6 $82.8 r 6 lntere-st bearing time deposits $20 I s20 r s20 I Available-lbr-sale securities s75.709 $75.709 s75.709 I s279.263 s279263 He I d-to-nr aturi r-'* sccurit i es s2E5. 55 Loans receivable. net ol' allowalce s60J.8 I J s57JJ20 s57JJ20 Nonmarketable eqttiry' securitics s9.{59 s9.{s9 s9..159 Accrued interest receivable s{,tt0l s{,801 s4.80 t Bank orvned Iife insurance s r 3.030 s I 3.0J0 s tJ.0J0 Financial liabilities Deposits s953.55{ s953.6J5 S95J.(rJS Irederal I lome Loan Bank advarce s-5,000 s5.000 s5.000 sr60 sl60 sl60 Accrued interest payable (ro, Notes pa!'able $292 s292 December 3 l. 20 I 7 l;irrancial assets Cash imd cash equrvalents $80.(ri-.1 $80.653 $80.65-l lnterest br-aring tinre dcposits $200 s200 $200 Alailahle-l'or-sale securities $72.-113 $72.1,13 $72.443 []eldto-rnaturitv securities $l l].297 s-r t0.212 $l I 0.242 Loans receivable. net of allorvance s559.650 $538.79-3 $5_18.791 Nonnrarketahle equitl securitics $8.1 ll l $n.r8r $8 l8l Accrucd interest rcccivable $.1.805 s1.805 $.r.805 Bank orlned life insLrrance $ I 2.(190 s I 2.690 $ I 2.690 Frnancral liabilities Deposits s9.r3..159 9943,-s9 t $e41.59 I Accrued interest pa1'ablc' $9e $99 $99 FASB ASC 825, Financial Instrume,?/s, requires disclosure of the fair value of financial assets and financial liabilities. including those financial assets and financial liabilities that are not measured and repofted at fair value on a recurring or nonrecuring basis. The methodologies for estimatiug the fair value of financial assets and financial liabilities that are n'leasured at fair value on a recun'irlg ol'norlrecurrilrg basis are discussed above. The rnethodologies for other financial assets and fir:ancial liabilities are discussed below: Cash and Cash Equivalents - The carrying amounts repofted in the consolidated balance sheets. for caslt and due from banks, and federal funds sold approximate their fhir value. lntcrest-Bearing Time Deposits in Other Banks - The carrying arnounts repofted in the consolidated balance sheets for interest bearing time deposits approxirnate their fair value. Loans Receivable, Net - For both fixed and variable rate loans in 2018 and 20l7.fair values are estimated usin-u discounted cash florv analysis and current interest rates cl'larged for the types of loans in the porlfolio. Deposits - The fair values estimated for transactional deposit accounts (interest and noninterest checking. savings and nroney market accounts) are considered to be their carrying amounts, Fair values for fixed rate certificates oI deposit are estirnated using a discounted cash flow calculation that applies interest rates currently being offered orr certificates to a schedule of the aggregate expected monthly rnaturities on time deposits. Borrowed Funds - The estimated fail value approximates carrying value for shoft-term borrowirrgs. The fair value for long-term fixed-rate borrowings is estirnated using quoted market prices. if available, or by discountirrg future cash florvs using interest rates for similar financial instruments. Commitments to Extend Credit and Standby Letters of Credit - The fair value of cornmitrnel'rts is estinrated using the fees currently charged to enter into similar agreements. taking into accouut the remaining tenns of the agreements and the present creditworthiness of tlre counterpafties. For fixed-rate loan comrnitrnents. fair value also considers the difference betrveen current levels of interest rates and the committed rates. The fair values of the guarantees and letters of credit are based ou fees currently chalged for sirnilar agreements or on the estimated costs (2e) TEXAS INDEPENDENT BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER3I.20IS AND 2011 to tenninate them or otherwise settle the obligations with the counterparties at the reporling date. Estirnatirrg the fair values of the comrnitments and lefters of credit is not practical rvhen considering the preceding factors. Accrued Interest Payable and Accrued Interest Receivable - The carryirtg amounts reported in the consolidated balance sheets for accrued interest payable and accrued interest receivable approximate their fair value. Bank-Owned Life Insurance - The carrying amounts repofted in tlte consolidated balance sheets for bank-owned life insurance approxirnate their fair value. NOTE 17 - RELATED PARTY TRANSACTIONS The Conrpany has entered into transactions with certain directors, executive officers. significant stockholders. and their affiliates. Such transactiorrs rvere made in the ordinary course of business orr substantially the same tenrs and conditions. includirrg interest rates and collateral. as those prevailing at the same time for comparable transactions with other customers, and did not, ln the opinion of management, involve more than normal credit risk or present other unfavorable features. The aggregate amount of loans were as follows (in thousands of dollars) at Decernber 3l 2018 2017 Outstanding at January I $22,969 $21.827 New loans 9 92 Transfers (2,874) 4,3s6 Repayments (3,847) 3.306 Loans outstanding at December 3l sl 7 $22,969 Deposits from related parties held by the Cornpany at Decernber3l,20l8 and 2017 amounted to $86.340.000 and $67,783,000, respectively. NOTE 18 - OPERATING LEASES The Conrpany and the Bank lease various branch locations and other facilities front other lessors generally over periods ranging up to I 0 years. At Decernber3l.20l8, the required future rninirnum non-cancellable rental paynrents are as lollows (in thousands of do llars): For the Year Ended December 31, Amount 2019 $127 2020 54 2021 l5 2022 8 2023 Total $204 Rental expense incurred under the operating leases was $277,000 and $280,000 for 20 I 8 and 20 I 7. The Cornparty and the Bank lease office space to tenants under non-cancellable operating leases with tenns of five to ten years. (30) TEXAS INDEPENDENT BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 11 20r8 AND 2017 The followilrg is a schedule by years of future minirnum rental inconre under the leases (in thousands of dollars) at Decertrber3l.20l8: For the Year Ended December 3I , Amount 2019 $ 192 2020 124 2021 2022 2023 Total $316 Rental income eamed underthe leases was $226,000 and $235,000 for 2018 and 2017. respectively NOTE 19 - REGULATORY MATTERS 'l-he Cornpany is subject to various regulatory capital requirenrertts adtttittistet'ed by the lederal banking agencles. Failure to meet rnirrirnum regulatory capital requirements can initiate cellain mandatoty. and possibll' additional discretionary actions by regulators that. if undeftaken. could have a direct Inatet'ial effect on the financial staternents. Under the regulatory capital adequacy guidelines and the regulatory fi'amework for prompt corrective action. the Cornpany must rneet specific capital guidelines that involve quantitative rreasures of the Company's assets. liabitities. and cefiain off-balance-sheet items as calculated urrder regulatory accounting practices. The Colnpany's capital amout'lts and classification under the prompt corrective actiott guidelines are also strbject to quaIitative jLrdgrnents by the regulators about conrponents. risk weightings, and otlter factot's. Quantitative n'leasures established by regulation to ensure capital adeqLracy require the Conrpany to tnaintain rninirnurn antounts and ratios (set forth in the table below) of total risk-based capital and Tier Icapital (as defirred in the regulations) to risk-weighted assets (as defirred in the regulatiorrs), and Tier I capital to adiusted total assets (as defined in the regulations). Management believes. as of December3l. 2018. that the Company' meets all capital adequacy requirements to which they are subject. As ol December 31, 2018, the rrost recent notification from the FDIC categorized the Cornpany as well-capitalized under the regulatory framervork for prompt corrective action. To rernain categorized as well-capitalized. the Company must maintain minimr.rm total risk-based, Tier I risk-based, and Tier I leverage ratios as disclosed in the table. Tlrere are uo conditions or events since the rnost recent notification that tlanagernent believes ltave changed the Conrpany's prompt corrective action category. ln July 2013. the Federal Reserve Bank published final rules fbr the adoptlon of the Basel ill regLrlatory capital lramework (tlre "Basel lll Capital Rules"). The Basel Ill Capital Rules, among other things, (i) introduce a new' capital measure called "Comrnon Equity Tier 1". (ii) specify 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 deductiorrs/adjustrnents to regulatory capital measrrres be made to Comrnon Equitl, Tier I and not to the other components of capital. and (iv) expand the scope of tlre deductions/adjustments as compared to existing regulations. The Basel I ll Capital ru les becanre effective for the Company on January I , 201 5 rvith cerlain transitiou prov isrons firlly phased in on January l,2019. The Company's actual and required capital amounts and ratios are also presented in the tables below (presented in thousands): (31) TEXAS INDEPENDENT BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31. l8 AND 20t7 Required Mininrurn Capital To Bc Well Reqr.rired Under Capitalized IJnder UASEL llt Phase-ln For Capital Pronrpt Correctile Actual Adcquacl' Purposes Action Provisions Anr0unt Ratio Anrount Ratio Anrount ,\s of Drccmbcr Jl. 2018 'lirtal Capital (to Risk Weighted Assets): Consol idated sr4sJ30 18.68% s76.8{2 >9.875% N/,\ l-/,\ Texas First Bank s r t 9,99t r5.95% s71,276 >9.815o/o s75.2 I 6 > t0.0% l ier I Capital 1to t{isk Weighted Assets): Consolidated s 132.962 17.090h s6 t,28 I >7.875% N/;\ r/,\ Telas First Bank sl r0,688 ll.72o/" $59.2J3 >7.815yo s60. I 7J > 8.0% Ctrnrnron Ticr t Capital (to l(isk-Weighted Asseis): Consol idated s r J2,962 11.09o/o s{9.609 x.375% N//\ N/,\ Texas I-irst Bank s I t 0.688 11.72o/" s{7.950 26.3750h s18.89 l > 6.5Y" Tier I Capital (to Average Assets): Consolidated $ I J2,962 12.00"/" s41.JJ8 >4.000% N/,\ N/.r -fexas First Bank sr 10.688 10.110/o s43.668 >4.000% s5J.585 > 5.0% As ofDecemberSl.20lT -lirtal Capital (to Risk Weighted Assets) Consolidated $ r 35.382 1845% $67.tt7 8 29.250o/o N/A N/A Texas First Bank $114.970 l6 0lo/n $66.1 I 2 >9.250% $7 t.796 > l0 0,)b Tier I Capital (to Risk Weighted Assets) Consol idated $ r24,4 r 3 I 6.950/o $53.202 >-7.250o/o N/A NIA 'fe,xas First Bank $ l 06.2 l4 t,4.79V. $52.053 >7.2500 $5 7.43 7 > 80% Conrmon Ticr I Capital (to Risk-Weighted Assets). Consol idated $ 121.4 I3 16.95% $42, I 9s >5.7_50% N/A N'\ Tcxas First Bank $ I 06.2 r4 l4 79o/n $4 r .281 >5.750% $46,668 > 6 5,'4r Trer I Capital ((o Average Assets): Consolidated $ I 2.1.4 t3 lt 79% s42.224 )4 000o,'o N,A Texa-s First Bank $106.2r4 t0 22v; $4 r.572 >.+ 000% $5 l.e6-i z 5 0oo The above risk-weighted capital ratios for capital adequacy purposes includes a capital conservation buffer of 1.875% and 1.25Yo as of December 31, 2018 and 2017, respectively. The capital conservation buffer will be phased in over four years beginning in 2016 to 2.50yo. Flnancial institutions with a buffer greater than .6250/o (2016) are not subjectto lirnits on capital distributions or discretionaly bonus payments that would otherwise be lirnited by these regulations. NOTE 20 - COMPONENTS OF OTHER COMPREHENSIYE INCOME The following table presents the changes in each component of accumulated other comprehensive incorne Accurnulated Available- Other for-Sale Colnprehensive Securities Income (Loss) Balance at January 1.2017 $3,04e s3.049 Other comprehensive income before rec lassi fi cation 1.204 t.204 Amounts reclassified from accumulated other comprehensive income (40) (40) Amortization of basis at Subchapter S conversion ll6 lt6 Balance at December 31,2017 4,329 4.329 Other comprehensive income before reclassification 568 568 Arnounts reclassified frorn accumulated other colnprehensive income l0 t0 Amortization of basis at Subchapter S conversion 130 r30 Balance at December 3 l, 20 I 8 $5,037 $5,037 (32) TEXAS INDEPENDENT BANCSHARES, TNC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DF,CF,NTBF,R 1r ,0lRAND70l7 Accunrulated other comprehensive income consists of the following (in thousands of dollars): 2018 2017 Ava i lable-for-sale securities Unrealized gains s6,908 $s. I 27 Unrealized losses (1,871) (668) SLrbchapter S conversion fl30) Totals s5,037 $4.329 NOTE 2I - INTANGIBLES, CORE DEPOSITS AND OTHER Intangibles, core deposits and otlrer consists of the following (in thousands of dollars) 2018 2011 Core deposit intangibles $1,709 $ I .70e Fixed asset adjustment - Merger 82 82 Custorner list 1,521 340 Norr-conrpete agl'eeltlent 157 J-1 3,469 2,164 Less: accurnulated depreciation (L,774) ( 1.461) Totals $1,695 s6e7 Effective at the close of business April 1,2018, the Rust-Ewing acquired certain assets. accounts and/or policies o[ an insurance agency. Per the purchase agreement. Rust-Erving ntade a dorvn payment of $2,251.000 and agreed to pay the seller a percentage of the total cornmission revenue generated by the Houstott branclr offlce during the twentv-four months imnrediately following closing which was estimated at $463.000 lor a total purchase price of $2,714,000. The following table reflects the fair value of the assets purchased and liabilities assumed at the purchase date. Fair Value Customer relationship value $1.r80 Noncompete agreements 93 Goodwill I,44t $2^1t4 The $463,000 piece of the purchase price is to be paid nronthly over a 24 rnonth period. The balance at December 31, 2018, amounted to $292,000 and is included in other liabilities on the consolidated balance sheets. NOTE 22 - SUBSEQUENT EVENTS On February 14, 2019, Texas Independent Bancshares. Inc. entered into a Definitive Agreernent to purchase Preferred Bancshares. lnc. and its wholly owned subsidiary. Preferred Bank. Applications are being nrade r.r,ith regulator)'agencies and expect to receive approval in the summer of 2019. In preparing the financial statements. the Company has evaluated all sLrbsequent events and transactions for potential recognition and disclosure through March 6. 2019. the date on which the financial staternents rvele available for issuance. (33) TEXAS INDEPENDENT BANCSHARES' INC. SCHEDULE I - CONSOLIDATING BALANCE SHEET INFORMATION DECEMBER 3I, 2018 (Dollars in th rrsnndq) Texas Independent Rust. Erving. 'fexas Bancshares. Inc Watt. and Parent) First Bank Haney. luc Elinrinations Consol idated r\SSF,TS C'ash and cash equivalents Ca-sh and due lrom banks $ il. t72 $32.315 s 1.672 s( I 2-82e) s-'12.-r30 lntercsl heat'ing deposits rvith banks 42.171 131 (122) 42. I 86 Federal lunds sold 8.300 8-10() J'otal cash and sash equivalents |,172 82.786 1.809 ( r2.95 r) [i2.8 r6 Interest-hearing time deposits in other banks 201 201 lnvestments Available-lor'-sale securities 7.433 68.276 75.709 Held-to-maturitl securities 285. I 55 285. I 55 -lotal investments 7.133 153.431 3 60.86{ I-oans rcceivable. uet 603.8 t 3 601.8 l-.1 Accrued interest receivable 4.801 .1.80I Plcrtrises and equipmcnt. net 4;792 11.51 I 2.680 2 t.983 Nonnrarketable equitl securities t. t00 8.359 9..1_59 Coodw'ill 4.938 i.600 1.578 t2. t l6 Intangibles. core deposits. and othet. net 280 1.4 t5 1.695 Ban k-owned lifc insurance 66'7 12.363 r3.030 Other real estate ouned 2.615 2.61-5 Other assets 39 1.43 I 1.365 2.83 5 lnvestment in consolidated subsidiaries 122.0t2 ( r22.0 r2) I OI'AL ASSETS $ 1 52.1 53 s 1.089.990 $9.048 S(r31.e61) $l.l 16.228 LIABILI'I IES AND STOCKHOT,DERS' EQUITY 1-iabi I ities Deposits N on inteLest-bealing $390.377 s( r 2.829) $3 77.548 I nterest-bearing 576. r 28 (r22) -i76.006 Total deposits 966.505 ( t2.e5l ) 953.5_s4 Federal Horne Loan Bank advances s.000 5.000 Accrued interest payable 160 160 Other Iiabilities s34l 3.54 t s t.820 5.70.1 Total liabilities 341 975.206 r.820 ( 12.951 ) 964.418 Stockholders'equit-v Common stock 585 750 t2 (762) 585 Additional paid-in capital t.270 34.5 t7 2.000 (36.5 I 7) 1.270 Retained eamings 164.t63 8 r.302 5.21 6 (86.5 I 8) l(r4. 163 Accumulated other comprehensive incorne (loss) 5.03 7 ( r.785 ) 1.785 5.0-l7 Treasury stock. at cost ( 19.245) ( I 9.215 ) Total stockholders' equity r5l.8 t0 I 14.784 7.228 (122.0t2) l5 1.8 t0 TOTAL LIABILITIES AND SI'OCKHOLDERS' EQUITY $ r 52.1 53 $ 1.089.990 s9.048 $(134.963) $r-116.22{l See independenl auditors' report (34) TEXAS INDEPENDENT BANCSHARES, INC. SCHEDULE II. CONSOLIDATING STATEMENT OF INCOME INFORMATION FOR THE YEAR ENDED DECEMBER 3I, 20I8 (Dollars in tho 'fexas lndependent Rust. Ewing. Balcshares. lnc Texas Watt. ard (Parent) First Bark Haney. Inc Eliminations Consolidatcd Interest income Loans. including lees s34.79 r s3.1.79 t Debt securities Taxable 4.t75 4.t75 Tax-exempt 4.217 4.2t'7 Interest-bearing deposits $2 683 $e $( l) 693 Federal funds sold 53 53 Dividend income 2t7 211 I'otal interest income 2 44.1 36 9 (t) .14. l.16 lnteresl expense Deposit.s 2.567 (l) 2.566 Federal lunds purchased t4 l4 Federal Home Loan Bank bonowings 146 t.16 Notes payable Total interest expense 2.727 (l) 2.'726 Net interest income 2 41.409 9 4 t.420 Provision for loan losses 2.008 2.008 Net interest income after provision for loan losses 2 39.401 9 39.412 Noninterest income Fees and service charges 6.940 6.940 Cain on sale of premises and equipment 6 5 il Gain (loss) on sale ofother real estate owned (167) 25 (142) Loss on sale ofsecurities (10) ( l0) Insurance commissions ll6 9.547 ( il6) 9.547 Other noninterest incorne 239 463 (r22) 580 Total noninterest income r88 7.424 9.552 (238) 16.926 Noninterest expenses Salaties and related expenses 306 r 2.1 07 5.949 il r6) t8.216 Prolit sharing and other employee benefits 396 4.317 966 5.679 Occupancv and premise expense, net 27'7 3.805 476 (122) 4.436 Other operating expenses 198 8.747 788 9.733 J'otal noninterest expenses 1.t77 28.976 8.1 79 (238) 38.094 I ncome before distributions (981) I 7.849 1.382 18.2U Dividencls and equity in undistributed eamings of subsidiary t9.23t 19.231 INCOME NET $ 18.244 s r7.849 $ r.382 $( 1e.23 r ) s 18.2.1.{ See independent quditors' report. (35) TEXAS INDEPENDENT BANCSHARES, INC. SCHEDULE III - CONSOLIDATTNG BALANCE SHEET INFORMATION DECEMBER 3 I, 20 I 7 (Dollars in thousands) fexas I ndependent Rust. Erving. 'I-exas Bancshares. lnc. Watt. and (Parent) First Bank Haney. lnc- El in: i nations Consolidated N SSETS Ca.sh and cash equivalents Cash and due tiom banks $6.80 r $12.120 $ r.549 $(8.316) s-12. ti.l Interest bearing deposits with banks I02 47.80 I 883 (76't) 4tt.0 t9 Federal funds sold 500 500 fotal cash and cash equivalents 6.903 80.42 t 2.432 (9. r 03) 80.65--l lntercst-bearing time deposits in other banks 200 200 I n vcstnrents Available-for-sale securities 5.528 66.915 72.443 lleld-to-maturitr securities 3t3.297 3 t3.297 -l'otal in!'estnlents 5.528 380.212 -3 85.710 Loans receivable. net 559.650 559.650 Accrued interest receivable 4.805 4.805 Prenrises and equipnrent. net 4.903 t3.980 l.'790 2Q.613 Nonmarketahle equity seculities t.000 7. t81 8.t8t Coodwill 4.93 8 5.600 r36 t0.67.1 lntangibles. core deposits. and other. net 365 332 69'7 Bank-owned life insurance 632 12.058 12.690 Other real estate o\,r'ned 2.Q70 2.()70 Other assets 799 1.266 2.065 Investment in consolidated subsidiaries | 16.565 ( I r6.565) .I-OTAL ASSETS $ 1 40.469 $ 1 .067. r4 r s6. r 56 $( r 25.668) $ 1.088.0ett LIABILITIES AND STOCKHOLDERS' EQI.,I ITY Liabilities Deposits N on interest-bearing s39 r .888 $(8.336) s3 81.5 52 I nteres!bearing 560.674 (767) 5 5 9.907 '[btal deposits 952.562 (9.103) 943.,159 Accrued interest pay.,able 99 99 Other liabilities s365 2.96t $l il0 .l-.136 'fotal liabilities 365 955.622 l.ll0 (9.r03) 941.99,1 SLockholdels'equit-v Common stock 585 750 t2 (762) 5 tt5 Additional paid-in capital 87{) 34.5 t7 (34.s I 7) 8'79 Retained eamings t52.765 76.840 5.034 (8 r.874) t52.765 Accumu lated other comprehensive income (loss) 4.329 ( 588) 588 .1.329 Treasurl' stock. at cost ( r 8.454) (r8.451) -[ otal stockholdcrs' equitl' 140.104 IIl-5t9 5.046 ( I I 6.565) I.10. l0l TOTAL LIABILITIES AND STOCKHOLDERS' EQTJITY s140.169 Sr,067.r4r $6. I 56 S( 125.668) s 1.088.09tt See independenl auditors' report (36) TEXAS INDEPENDENT BANCSHARES, INC. SCHEDULE IV - CONSOLIDATING STATEMENT OF INCOME INFORMATION FOR THE YEAR ENDED DECEMBER 3I, 20I7 (Dollars in th ) Texas lndependent Rust. Eu,ing Bancshares. lnc Texas Wan, and (Parent) First Bank Haney. lnc Eliminations Consolidated Intcrest income Loans. including fees s30.826 $30.826 Deht securities Tasable 3.920 3.920 'fax-exempt 3.942 3.9.12 lnterest-bearing deposits $3 428 S9 s(4) 436 I-ederal lunds sold 33 3.3 Dividend income 403 401 Jotal interest income 3 39.552 9 (4) 39.560 lnterest expense Deposits 1.679 (4) 1.675 Federal f'unds purchased l0 l0 Notes pa1'able 2 2 Total interest expense 2 t.689 (4) t.687 Net intercst income (expense) 37.863 9 37.87_l Provision lor loan losses 965 965 Net interest income after provision lor loan losses 16.898 9 36.908 Noninterest income Fees and service charges 6.191 6.t9t Gain on sale of prernises and equipment 3l 3l Cain on sale of other real estate owned 206 206 Gain on sale of securities 40 .10 lnsurance commissions 124 8.464 2; 8.464 Other noninterest income 628 484 4 22 994 Total noninteresl income 783 6,921 8.468 (24 6 15.926 Noninterest expenses Salaries and related expenses 269 t2.06'l 5.234 (t24'.) 17.446 Prolit sharing and other employee benefits 386 3.82'7 785 Occupancy and premise expense. net 259 3,874 440 (t22) Other operating expenses 54t 8,540 4t7 Total noninterest cxpenses 455 28.308 6.876 (246) -r6.393 lncome belore distributions (67 t) t5.51 I I.60t 16.441 Dividends and equity in undistributed eamings of subsidiary' l7 |2 (17.r r2) NET INCOME $ r6.44 r $t5.51I sr.60l $(r7.r r2) $r6.44r See independent auditors' report (37)