8-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 8-K

CURRENT REPORT

Pursuant to Section 13 or 15(d) of the Exchange Act of 1934

Date of Report (Date of earliest event reported) March 19, 2018

SIMMONS FIRST NATIONAL CORPORATION

(Exact name of registrant as specified in its charter)

Arkansas	000-06253	71-0407808
(State or other jurisdiction of incorporation)	(Commission File Number)	(I.R.S. Employer Identification No.)

501 Main Street, Pine Bluff, Arkansas	71601
(Address of principal executive offices)	(Zip Code)

(870) 541-1000

(Registrant's telephone number, including area code)

Not Applicable

(Former name or former address, if changed since last report.)

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):

¨ Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

¨ Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

¨ Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

¨  Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (17 CFR §230.405) or Rule 12b-2 of the Securities Exchange Act of 1934 (17 CFR §240.12b-2). Emerging growth company ¨

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

Item 8.01 Other Events.

As previously reported, on October 19, 2017, Simmons First National Corporation (“Simmons”) completed its mergers with Southwest Bancorp, Inc. (“OKSB”) and First Texas BHC, Inc. (“First Texas”). Simmons was the surviving corporation in each mergers, which are referred to individually as the “OKSB Merger” and the “First Texas Merger,” respectively, and collectively as the “mergers.” To effect the OKSB Merger, Simmons issued approximately 7,250,000 shares of Simmons’ common stock and paid $95,000,000 in cash. To effect the First Texas Merger, Simmons issued 6,500,000 shares of Simmons’ common stock and paid $70,000,000 in cash. The mergers were described in the Joint Proxy Statement/Prospectus of Simmons, OKSB, and First Texas (the “Joint Proxy Statement/Prospectus”), filed with the U.S. Securities and Exchange Commission (the “SEC”) on September 12, 2017.

Simmons is filing this Current Report in order to provide historical unaudited financial information with respect to OKSB and First Texas as of and for the period ended September 30, 2017, and certain unaudited pro forma financial information giving effect to the transactions as though they had been completed on the dates set forth in such information.

Item 9.01  Financial Statements and Exhibits.

(a) Financial statements of business acquired.

(i)	The audited consolidated statements of financial condition of OKSB as of December 31, 2016 and 2015, and the related audited consolidated statements of operations, comprehensive income, cash flows and shareholders’ equity for each of the three years ended December 31, 2016, and the related notes and report of independent auditors thereto, are incorporated by reference to OKSB’s Annual Report on Form 10-K for the year ended December 31, 2016 (File No. 001-34110), which was filed with the SEC on March 9, 2017.
(ii)	The unaudited consolidated statements of financial condition of OKSB as of September 30, 2017 and 2016, and related unaudited consolidated statements of operations, comprehensive income, cash flows and shareholders’ equity for the nine months ended September 30, 2017 and 2016, and related notes thereto, are included as Exhibit 99.1 and incorporated by reference herein.
(iii)	The audited consolidated balance sheets of First Texas as of December 31, 2016 and 2015, and the related audited consolidated statements of income, comprehensive income, changes in shareholders’ equity and cash flows for each of the three years ended December 31, 2016, and the related notes and report of independent auditors thereto are included as Exhibit 99.2 and incorporated by reference herein.
(iv)	The unaudited condensed consolidated balance sheets of First Texas as of September 30, 2017 and 2016, and related unaudited condensed consolidated statements of income, comprehensive income, changes in shareholders’ equity and cash flows for the nine months ended September 30, 2017 and 2016, and related notes thereto, are included as Exhibit 99.3 and incorporated by reference herein.

(b) Pro forma financial information.

(i) The unaudited pro forma combined consolidated balance sheet of Simmons as of September 30, 2017, and the unaudited pro forma combined consolidated statements of income for the nine months ended September 30, 2017 and the year ended December 31, 2016 are included as Exhibit 99.4 and incorporated by reference herein.

(c) Shell Company Transactions.

(i) Not applicable.

(d) Exhibits

Exhibit 15.1	Awareness Letter of Payne & Smith, LLC with respect to the interim financial statements of First Texas BHC, Inc.
Exhibit 23.1	Consent of BKD with respect to the audited financial statements of Southwest Bancorp, Inc.
Exhibit 23.2	Consent of Ernst & Young LLP with respect to the audited financial statements of Southwest Bancorp, Inc.
Exhibit 23.3	Consent of Payne & Smith, LLC with respect to the audited financial statements of First Texas BHC, Inc.
Exhibit 99.1	Unaudited Condensed Consolidated Financial Statements of Southwest Bancorp, Inc. as of and for the nine months ended September 30, 2017 and September 30, 2016
Exhibit 99.2	Audited Consolidated Financial Statements of First Texas BHC, Inc. as of and for the years ended December 31, 2016 and 2015
Exhibit 99.3	Unaudited Condensed Consolidated Financial Statements of First Texas BHC, Inc. as of and for the nine months ended September 30, 2017 and September 30, 2016
Exhibit 99.4	Unaudited Pro Forma Combined Consolidated Financial Statements of Simmons First National Corporation

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

	SIMMONS FIRST NATIONAL CORPORATION
	/s/  Robert A. Fehlman
Date: March 19, 2018	Robert A. Fehlman, Senior Executive Vice President, Chief Financial Officer and Treasurer

EX-15.1

Exhibit 15.1

 

Independent Auditors Awareness Letter

The Board of Directors

Simmons First National Corporation

Pine Bluff, Arkansas

Ladies and Gentlemen:

We have reviewed, in accordance with auditing standards generally accepted in the United States of America applicable to reviews of interim financial information, the unaudited interim financial information of First Texas BHC, Inc. and Subsidiaries for the nine-month periods ended September 30, 2017 and September 30, 2016, as indicated in our report dated December 20, 2017; because we did not perform an audit, we expressed no opinion on that information.

We are aware that our report referred to above, is included in the Current Report on Form 8-K of Simmons First National Corporation filed March 19, 2018.

We also are aware that the aforementioned report, pursuant to Rule 436(c) under the Securities Act of 1933, is not considered a part of the Registration Statement prepared or certified by an accountant or a report prepared or certified by an accountant within the meaning of Sections 7 and 11 of that Act.

/s/ Payne & Smith, LLC

Dallas, Texas

March 19, 2018

EX-23.1

Exhibit 23.1

Consent of Independent Registered

Public Accounting Firm

We consent to the incorporation by reference in this Current Report on Form 8-K filed March 19, 2018, of our report dated March 9, 2017, on our audits of the consolidated financial statements of Southwest Bancorp (the Company) as of December 31, 2016 and 2015 and for the two-year period ended December 31, 2016, which is included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016. We also consent to the incorporation by reference of our report dated March 9, 2017, on our audit of the internal control over financial reporting of the Company as of December 31, 2016, which report is included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016. These reports are incorporated by reference in the Company's Registration Statements on Form S-8 (File Nos. 333-134240, 333-134241, 333-134276, 333-134301, 333-134356, 333-138629, 333-186253, 333-186254, 333-197708 and 333-206160).

/s/ BKD, LLP

Oklahoma City, Oklahoma

March 19, 2018

EX-23.2

Exhibit 23.2

Consent of Independent Registered Public Accounting Firm

We consent to the use of our report dated March 10, 2015, with respect to the consolidated financial statements of Southwest Bancorp, Inc. incorporated by reference in this Current Report (Form 8-K) and in the Registration Statements (Form S-8 Nos. 333-134240, 333-134241, 333-134276, 333-134301, 333-134356, 333-138629, 333-186253, 333-186254, 333-197708 and 333-206160) of Simmons First National Corporation.

/s/ Ernst & Young LLP

Dallas, Texas

March 19, 2018

EX-23.3

Exhibit 23.3

 

Consent of Independent Auditors

The Board of Directors

Simmons First National Corporation

Pine Bluff, Arkansas

Ladies and Gentlemen:

We consent to the use, in this Current Report on Form 8-K of Simmons First National Corporation filed March 19, 2018, of our report dated March 13, 2017 on our audits of the consolidated financial statements of First Texas BHC, Inc. and Subsidiaries as of December 31, 2016 and 2015 and for each of the three years in the period ended December 31, 2016, which is contained therein and the incorporation by reference of such report into the Company's Registration Statements (Form S-8 Nos. 333-134240, 333-134241, 333-134276, 333-134301, 333-134356, 333-138629, 333-186253, 333-186254, 333-197708 and 333-206160). We also consent to the references to our firm under the caption “Experts” in the prospectus included in the Registration Statement.

/s/ Payne & Smith, LLC

Dallas, Texas

March 19, 2018

EX-99.1

Exhibit 99.1

SOUTHWEST BANCORP, INC.

Consolidated Statements of Financial Condition

	September 30,			December 31,
	2017			2016
(Dollars in thousands)	(unaudited)
Assets:
Cash and due from banks	$	33,464		$	36,831
Interest-bearing deposits		53,994			38,819
Cash and cash equivalents		87,458			75,650
Securities held to maturity (fair values of $10,576 and $10,677, respectively)		10,351			10,443
Securities available for sale (amortized cost of $369,984 and $427,113, respectively)		369,484			426,218
Loans held for sale		5,658			4,386
Loans receivable		2,024,891			1,872,746
Less: Allowance for loan losses		(26,943	)		(27,546	)
Net loans receivable		1,997,948			1,845,200
Accrued interest receivable		7,122			6,194
Non-hedge derivative asset		2,863			1,235
Premises and equipment, net		21,335			22,808
Other real estate		6,284			350
Goodwill		13,545			13,545
Other intangible assets, net		5,749			5,790
Bank owned life insurance		28,661			28,575
Other assets		64,584			34,998
Total assets	$	2,621,042		$	2,475,392
Liabilities:
Deposits:
Noninterest-bearing demand	$	569,147		$	551,709
Interest-bearing demand		173,967			152,656
Money market accounts		623,559			567,058
Savings accounts		60,302			56,410
Time deposits of $100,000 or more		356,516			360,307
Other time deposits		264,016			257,878
Total deposits		2,047,507			1,946,018
Accrued interest payable		1,332			1,132
Non-hedge derivative liability		2,863			1,235
Other liabilities		9,788			10,171
Other borrowings		213,448			183,814
Subordinated debentures		46,393			46,393
Total liabilities		2,321,331			2,188,763
Shareholders' equity:
Common stock - $1 par value; 40,000,000 shares authorized; 21,260,147 and 21,230,714 shares issued, respectively		21,260			21,231
Additional paid in capital		124,126			123,112
Retained earnings		196,929			184,840
Accumulated other comprehensive loss		(427	)		(907	)
Treasury stock, at cost; 2,574,903 and 2,555,987 shares, respectively		(42,177	)		(41,647	)
Total shareholders' equity		299,711			286,629
Total liabilities & shareholders' equity	$	2,621,042		$	2,475,392

The accompanying notes are an integral part of these statements.

1 

SOUTHWEST BANCORP, INC.

Unaudited Consolidated Statements of Operations

	For the three months					For the nine months
	ended September 30,					ended September 30,
(Dollars in thousands, except earnings per share data)	2017		2016			2017			2016
Interest income:
Interest and fees on loans	$	23,439	$	20,541		$	66,945		$	60,602
Investment securities:
U.S. government and agency obligations		280		252			819			850
Mortgage-backed securities		1,020		837			3,227			2,952
State and political subdivisions		331		345			1,009			1,043
Other securities		360		285			1,023			801
Other interest-earning assets		119		50			305			154
Total interest income		25,549		22,310			73,328			66,402
Interest expense:
Interest-bearing demand		92		58			272			185
Money market accounts		520		361			1,807			1,011
Savings accounts		19		19			57			56
Time deposits of $100,000 or more		722		543			2,046			1,358
Other time deposits		1,108		561			2,243			1,667
Other borrowings		699		374			1,787			1,025
Subordinated debentures		618		589			1,812			1,760
Total interest expense		3,778		2,505			10,024			7,062
Net interest income		21,771		19,805			63,304			59,340
Provision for loan losses		2,380		1,713			5,885			6,098
Net interest income after provision for loan losses		19,391		18,092			57,419			53,242
Noninterest income:
Service charges and fees		2,767		2,681			8,248			7,786
Gain on sales of mortgage loans, net		679		775			1,926			1,898
Gain on sales/calls of investment securities, net		318		3			769			294
Other noninterest income		731		1,096			2,953			1,863
Total noninterest income		4,495		4,555			13,896			11,841
Noninterest expense:
Salaries and employee benefits		9,630		9,794			29,205			28,723
Occupancy		2,473		3,103			7,164			8,443
Data processing		389		582			1,257			1,482
FDIC and other insurance		272		341			818			1,141
Other real estate, net		107		(233	)		160			(212	)
Provision (credit) for unfunded loan commitments		15		146			(343	)		98
General and administrative		2,504		2,423			7,587			7,745
Total noninterest expense		15,390		16,156			45,848			47,420
Income before taxes		8,496		6,491			25,467			17,663
Taxes on income		3,033		2,236			8,907			6,127
Net income	$	5,463	$	4,255		$	16,560		$	11,536
Basic earnings per common share	$	0.29	$	0.23		$	0.88		$	0.61
Diluted earnings per common share		0.29		0.23			0.88			0.60
Common dividends declared per share		0.00		0.08			0.16			0.24

The accompanying notes are an integral part of these statements.

2 

SOUTHWEST BANCORP, INC.

Unaudited Consolidated Statements of Comprehensive Income

	For the three months						For the nine months
	ended September 30,						ended September 30,
(Dollars in thousands)	2017			2016			2017			2016
Net income	$	5,463		$	4,255		$	16,560		$	11,536
Other comprehensive income:
Unrealized holding gain (loss) on available for sale securities		(41	)		(1,071	)		713			3,733
Reclassification adjustment for net gains arising during the period		(318	)		(3	)		(318	)		(294	)
Change in fair value of derivative used for cash flow hedge		123			262			408			473
Other comprehensive income (loss), before tax		(236	)		(812	)		803			3,912
Tax benefit (expense) related to items of other comprehensive income (loss)		101			337			(323	)		(1,594	)
Other comprehensive income (loss), net of tax		(135	)		(475	)		480			2,318
Comprehensive income	$	5,328		$	3,780		$	17,040		$	13,854

The accompanying notes are an integral part of these statements.

3 

SOUTHWEST BANCORP, INC.

Unaudited Consolidated Statements of Cash Flows

	For the nine months
	ended September 30,
(Dollars in thousands)	2017			2016
Operating activities:
Net income	$	16,560		$	11,536
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		5,885			6,098
Deferred tax expense		632			(726	)
Asset depreciation		1,832			2,140
Securities premium amortization, net of discount accretion		2,965			2,628
Amortization of intangibles		612			1,626
Restricted stock amortization expense		353			607
Net gain on sales/calls of investment securities		(769	)		(294	)
Net gain on sales of mortgage loans		(1,926	)		(1,898	)
Net loss on sales of premises/equipment		7			99
Net loss (gain) on sales of other real estate		22			(275	)
Proceeds from sales of held for sale loans		87,047			92,395
Held for sale loans originated for resale		(86,789	)		(91,131	)
Net changes in assets and liabilities:
Accrued interest receivable		(928	)		(72	)
Bank owned life insurance		(86	)		(677	)
Other assets		(29,399	)		(5,517	)
Accrued interest payable		200			102
Other liabilities		1,987			1,854
Net cash provided by operating activities		(1,795	)		18,495
Investing activities:
Proceeds from sales of available for sale securities		27,825			43,593
Proceeds from principal repayments, calls, and maturities:
Held to maturity securities		-			1,650
Available for sale securities		68,801			63,226
Purchases of held to maturity securities		-			(444	)
Purchases of available for sale securities		(42,370	)		(122,731	)
Net purchases of FHLB stock		(2,925	)		(2,479	)
Loans originated, net of principal repayments		(164,872	)		(104,185	)
Purchases of premises and equipment		(390	)		(1,844	)
Proceeds from sales of premises and equipment		24			176
Proceeds from sales of other real estate		337			925
Net cash used in investing activities		(113,570	)		(122,113	)
Financing activities:
Net increase in deposits		101,489			63,819
Net increase in other borrowings		29,634			63,044
Net proceeds from issuance of common stock		1,043			714
Purchases of treasury stock		(530	)		(22,233	)
Redemption of trust preferred securities		-			(5,155	)
Common stock dividends paid		(4,462	)		(4,602	)
Preferred stock dividends paid		(1	)		(1	)
Net cash provided by financing activities		127,173			95,586
Net increase (decrease) in cash and cash equivalents		11,808			(8,032	)
Cash and cash equivalents:
Beginning of period		75,650			78,129
End of period	$	87,458		$	70,097

The accompanying notes are an integral part of these statements.

4 

SOUTHWEST BANCORP, INC.

Unaudited Consolidated Statements of Shareholders’ Equity

											Accumulated
						Additional					Other						Total
	Common Stock					Paid-in		Retained			Comprehensive			Treasury			Shareholders'
(Dollars in thousands)	Shares			Amount		Capital		Earnings			Income Gain/(Loss)			Stock			Equity
Balance, December 31, 2015		20,006,802		$	21,138	$	121,966	$	173,210		$	(1,290	)	$	(18,926	)	$	296,098
Dividends declared:
Preferred		-			-		-		(1	)		-			-			(1	)
Common, $0.24 per share		-			-		-		(4,612	)		-			-			(4,612	)
Net common stock issued under employee plans and related tax expense		85,867			86		628		-			-			-			714
Other comprehensive income, net of tax		-			-		-		-			2,318			-			2,318
Treasury shares purchased		(1,407,284	)		-		-		-			-			(22,233	)		(22,233	)
Net income		-			-		-		11,536			-			-			11,536
Balance, September 30, 2016		18,685,385		$	21,224	$	122,594	$	180,133		$	1,028		$	(41,159	)	$	283,820
Balance, December 31, 2016		18,674,727		$	21,231	$	123,112	$	184,840		$	(907	)	$	(41,647	)	$	286,629
Dividends declared:
Preferred		-			-		-		(1	)		-			-			(1	)
Common, $0.24 per share		-			-		-		(4,470	)		-			-			(4,470	)
Net common stock issued under employee plans and related tax expense		29,433			29		1,014		-			-			-			1,043
Other comprehensive income, net of tax		-			-		-		-			480			-			480
Treasury shares purchased		(18,916	)		-		-		-			-			(530	)		(530	)
Net income		-			-		-		16,560			-			-			16,560
Balance, September 30, 2017		18,685,244		$	21,260	$	124,126	$	196,929		$	(427	)	$	(42,177	)	$	299,711

The accompanying notes are an integral part of these statements.

5 

SOUTHWEST BANCORP, INC.

Notes to Unaudited Consolidated Financial Statements

NOTE 1: SIGNIFICANT ACCOUNTING AND REPORTING POLICIES

The accompanying unaudited consolidated financial statements were prepared in accordance with instructions for Form 10-Q and, therefore, do not include all information and notes necessary for a complete presentation of financial position, results of operations, shareholders’ equity, cash flows, and comprehensive income in conformity with accounting principles generally accepted in the United States. However, the unaudited consolidated financial statements include all adjustments which, in the opinion of management, are necessary for a fair presentation. Those adjustments consist of normal recurring adjustments. The results of operations for the three and nine months ended September 30, 2017and the cash flows for the nine months ended September 30, 2017, should not be considered indicative of the results to be expected for the full year. These unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Southwest Bancorp, Inc. Annual Report on Form 10-K for the year ended December 31, 2016.

The accompanying unaudited consolidated financial statements include the accounts of Southwest Bancorp, Inc. (“we”, “our”, “us”, “Southwest”), and our consolidated subsidiaries, including Bank SNB, an Oklahoma state banking corporation (“Bank SNB”), our banking subsidiary, and the consolidated subsidiaries of Bank SNB. All significant intercompany transactions and balances have been eliminated in consolidation.

In accordance with Accounting Standards Codification (“ASC”) 855, Subsequent Events, we have evaluated subsequent events for potential recognition and disclosure through the date the consolidated financial statements included in this Quarterly Report on Form 10-Q were issued.

NOTE 2: INVESTMENT SECURITIES

A summary of the amortized cost and fair values of investment securities at September 30, 2017 and December 31, 2016 follows:

	Amortized		Gross Unrealized					Fair
(Dollars in thousands)	Cost		Gains		Losses			Value
At September 30, 2017
Held to Maturity:
Obligations of state and political subdivisions	$	10,351	$	226	$	(1	)	$	10,576
Total	$	10,351	$	226	$	(1	)	$	10,576
Available for Sale:
Federal agency securities	$	57,244	$	295	$	(50	)	$	57,489
Obligations of state and political subdivisions		43,136		586		(19	)		43,703
Residential mortgage-backed securities		263,631		323		(1,818	)		262,136
Asset-backed securities		3,963		-		(9	)		3,954
Corporate debt		2,010		234		(42	)		2,202
Total	$	369,984	$	1,438	$	(1,938	)	$	369,484
At December 31, 2016
Held to Maturity:
Obligations of state and political subdivisions	$	10,443	$	242	$	(8	)	$	10,677
Total	$	10,443	$	242	$	(8	)	$	10,677
Available for Sale:
Federal agency securities	$	69,691	$	201	$	(198	)	$	69,694
Obligations of state and political subdivisions		46,105		461		(191	)		46,375
Residential mortgage-backed securities		282,035		573		(1,966	)		280,642
Asset-backed securities		9,265		-		(88	)		9,177
Corporate debt		20,017		385		(72	)		20,330
Total	$	427,113	$	1,620	$	(2,515	)	$	426,218

Residential mortgage-backed securities consist of agency securities underwritten and guaranteed by Government National Mortgage Association, Federal Home Loan Mortgage Corporation, and Federal National Mortgage Association. Other securities consist of corporate stock.

6 

Securities with limited marketability, such as Federal Reserve Bank stock, Federal Home Loan Bank (“FHLB”) stock, and certain other investments, are carried at cost and included in other assets on the consolidated statements of financial condition. Total investments carried at cost were $17.6 million at September 30, 2017 and $14.6 million at December 31, 2016. There are no identified events or changes in circumstances that may have a significant adverse effect on the investments carried at cost.

A comparison of the amortized cost and approximate fair value of our investment securities by maturity date at September 30, 2017 follows:

	Available for Sale				Held to Maturity
	Amortized		Fair		Amortized		Fair
(Dollars in thousands)	Cost		Value		Cost		Value
One year or less	$	20,023	$	19,966	$	371	$	370
More than one year through five years		271,439		271,123		9,980		10,206
More than five years through ten years		43,379		43,073		-		-
More than ten years		35,143		35,322		-		-
Total	$	369,984	$	369,484	$	10,351	$	10,576

The foregoing analysis assumes that our residential mortgage-backed securities mature during the period in which they are estimated to be prepaid and are based on expected maturities. Expected maturities differ from contractual maturities because borrowers of the underlying mortgages may have the right to call or prepay obligations with or without prepayment penalties. No other prepayment or repricing assumptions have been applied to our investment securities for this analysis.

Gain or loss on sale of investments is based upon the specific identification method. The table below shows the proceeds, gross realized gains and gross realized losses recognized on the investment portfolio for the three and nine months ended September 30, 2017 and September 30, 2016. A portion of the proceeds from sales recognized during the nine months ended September 30, 2017 resulted from the sale of a private equity investment carried at cost and recorded in other assets. Proceeds from the sales during the three and nine months ended September 30, 2016 resulted from a slight restructuring of our investment portfolio.

	For the three months				For the nine months
	ended September 30,				ended September 30,
(Dollars in thousands)	2017		2016		2017		2016
Proceeds from sales	$	28,274	$	2,063	$	28,875	$	43,593
Gross realized gains		318		3		769		348
Gross realized losses		-		-		-		(54	)

7 

The following table shows securities with gross unrealized losses and their fair values by the length of time that the individual securities had been in a continuous unrealized loss position at September 30, 2017 and December 31, 2016. Securities whose market values exceed cost are excluded from this table.

					Continuous Unrealized
			Amortized Cost of		Loss Existing for:						Fair Value of
	Number of		Securities with		Less than			More than			Securities with
(Dollars in thousands)	Securities		Unrealized Losses		12 Months			12 Months			Unrealized Losses
At September 30, 2017
Held to Maturity:
Obligations of state and political subdivisions		5	$	441	$	(0	)	$	(1	)	$	440
		5	$	441	$	(0	)	$	(1	)	$	440
Available for Sale:
Federal agency securities		11	$	30,133	$	(35	)	$	(15	)	$	30,083
Obligations of state and political subdivisions		9		5,758		(12	)		(7	)		5,739
Residential mortgage-backed securities		105		218,311		(1,011	)		(807	)		216,493
Asset-backed securities		1		3,963		-			(9	)		3,954
Corporate debt		1		2,000		-			(42	)		1,958
Total		127	$	260,165	$	(1,058	)	$	(880	)	$	258,227
At December 31, 2016
Held to Maturity:
Obligations of state and political subdivisions		7	$	1,987	$	(8	)	$	-		$	1,979
		7	$	1,987	$	(8	)	$	-		$	1,979
Available for Sale:
Federal agency securities		13	$	34,734	$	(111	)	$	(87	)	$	34,536
Obligations of state and political subdivisions		36		18,283		(145	)		(46	)		18,092
Residential mortgage-backed securities		89		225,986		(1,618	)		(348	)		224,020
Asset-backed securities		3		9,265		-			(88	)		9,177
Corporate debt		2		5,005		-			(72	)		4,933
Total		143	$	293,273	$	(1,874	)	$	(641	)	$	290,758

We evaluate all securities on an individual basis for other-than-temporary impairment on at least a quarterly basis. Consideration is given to the length of time and the extent to which the fair value has been less than cost, the financial condition and near-term prospects of the issuer, and our intent and ability to retain our investment in the issuer for a period of time sufficient to allow for an anticipated recovery in fair value.

We have the ability and intent to hold the securities classified as held to maturity until they mature, at which time we expect to receive full value for the securities. Furthermore, as of September 30, 2017, management does not have the intent to sell any of the securities classified as available for sale in the table above and believes that it is not likely that we will have to sell any such securities before a recovery of cost. The declines in fair value were attributable to recent increases in market interest rates over the yields available at the time the underlying securities were purchased or increases in spreads over market interest rates. Management does not believe any of the securities are impaired due to credit quality. Accordingly, as of September 30, 2017, management believes the impairment of these investments is not deemed to be other-than-temporary.

As required by law, available for sale investment securities are pledged to secure public and trust deposits, sweep agreements, and borrowings from the FHLB. Securities with an amortized cost of $207.7 million and $199.0 million were pledged to meet such requirements at September 30, 2017 and December 31, 2016, respectively. Any amount over-pledged can be released at any time.

8 

NOTE 3: LOANS AND ALLOWANCE FOR LOAN LOSSES

We extend commercial and consumer credit primarily to customers in the states of Oklahoma, Texas, Kansas, and Colorado. Our commercial lending operations are concentrated in Oklahoma City, Tulsa, Dallas, San Antonio, Wichita, and other metropolitan markets in Oklahoma, Texas, Kansas, and Colorado. As a result, the collectability of our loan portfolio can be affected by changes in the economic conditions in those states and markets. Please see “Note 9: Operating Segments” in the Notes to Unaudited Consolidated Financial Statements for more detail regarding loans by market. At September 30, 2017 and December 31, 2016, substantially all of our loans were collateralized with real estate, inventory, accounts receivable, and/or other assets or were guaranteed by agencies of the United States government.

Our loan classifications were as follows:

(Dollars in thousands)	At September 30, 2017			At December 31, 2016
Real estate mortgage:
Commercial	$	1,024,561		$	882,071
One-to-four family residential		252,794			199,123
Real estate construction:
Commercial		173,077			199,113
One-to-four family residential		12,591			20,946
Commercial		549,147			556,248
Installment and consumer		18,379			19,631
		2,030,549			1,877,132
Less: Allowance for loan losses		(26,943	)		(27,546	)
Total loans, net		2,003,606			1,849,586
Less: Loans held for sale (included above)		(5,658	)		(4,386	)
Net loans receivable	$	1,997,948		$	1,845,200

Concentrations of Credit. At September 30, 2017, $692.7 million, or 34%, and $424.0 million, or 21%, of our loans consisted of loans to individuals and businesses in the real estate and healthcare industries, respectively. We do not have any other concentrations of loans to individuals or businesses involved in a single industry totaling 10% or more of total loans.

Loans Held for Sale. We had loans held for sale of $5.7 million and $4.4 million at September 30, 2017 and December 31, 2016, respectively. The loans currently classified as held for sale, primarily residential mortgage loans, are carried at the lower of cost or market value. A substantial portion of our one-to-four family residential loans and loan servicing rights are sold to one buyer. These mortgage loans are generally sold within a one-month period from loan closing at amounts determined by the investor commitment based upon the pricing of the loan. These loans are available for sale in the secondary market.

Loan Servicing. We earn fees for servicing real estate mortgages and other loans owned by others. The fees are generally calculated on the outstanding principal balance of the loans serviced and are recorded as noninterest income when earned. The unpaid principal balance of real estate mortgage loans serviced for others totaled $467.5 million and $460.1 million at September 30, 2017 and December 31, 2016, respectively. Loan servicing rights are capitalized based on estimated fair value at the point of origination. The servicing rights are amortized over the period of estimated net servicing income.

Acquired Loans. On October 9, 2015, we completed the acquisition of First Commercial Bancshares (“Bancshares”) by merging Bancshares with and into us (the “Merger”). In connection with the Merger, First Commercial Bank was merged with and into Bank SNB, with Bank SNB being the surviving bank. We evaluated $200.0 million of the loans purchased in conjunction with the merger in accordance with the provisions of FASB ASC Topic 310-20, Nonrefundable Fees and Other Costs, and those loans were recorded with a $4.5 million discount. As a result, the fair value discount on these loans is being accreted into interest income over the weighted average life of the loans using a constant yield method. The remaining $7.8 million of loans evaluated were considered purchased credit impaired loans within the provisions of FASB ASC Topic 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality, and were recorded with a $3.3 million discount. These purchased credit impaired loans will recognize interest income through accretion of the difference between the carrying amount of the loans and the expected cash flows.

9 

Changes in the carrying amounts and accretable yields for the ACS 310-30 loans that were acquired were as follows for the three and nine months ended September 30, 2017 and September 30, 2016:

	For the three months ended September 30,
	2017						2016
				Carrying						Carrying
	Accretable			amount			Accretable			amount
(Dollars in thousands)	Yield			of loans			Yield			of loans
Balance at beginning of period	$	476		$	3,518		$	683		$	6.806
Payments received		-			(1,251	)		-			(1,931	)
Net charge-offs		-			(620	)		-			-
Accretion		(237	)		574			(26	)		-
Balance at end of period	$	239		$	2,221		$	657		$	4,875

	For the nine months ended September 30,
	2017						2016
				Carrying						Carrying
	Accretable			amount			Accretable			amount
(Dollars in thousands)	Yield			of loans			Yield			of loans
Balance at beginning of period	$	630		$	4,632		$	807		$	7,914
Payments received		-			(2,638	)		-			(2,721	)
Net charge-offs		(2	)		(1,243	)		(11	)		(318	)
Net reclassifications to / from nonaccretable amount		-			-			-			-
Accretion		(389	)		1,470			(139	)		-
Balance at end of period	$	239		$	2,221		$	657		$	4,875

Nonperforming / Past Due Loans. We identify past due loans based on contractual terms on a loan-by-loan basis and generally place loans, except for consumer loans, on nonaccrual when any portion of the principal or interest is ninety days past due and collateral is insufficient to discharge the debt in full. Interest accrual may also be discontinued earlier if, in management’s opinion, collection is unlikely. Generally, past due consumer installment loans are not placed on nonaccrual but are charged-off when they are four months past due. Accrued interest is written off when a loan is placed on nonaccrual status. Subsequent interest income is recorded when cash receipts are received from the borrower and collectability of the principal amount is reasonably assured.

Under generally accepted accounting principles and instructions to reports of condition and income of banking regulators, a nonaccrual loan may be returned to accrual status: (i) when none of its principal and interest is due and unpaid, repayment is expected, and there has been a sustained period (at least six months) of repayment performance; (ii) when the loan is well-secured, there is a sustained period of performance and repayment within a reasonable period is reasonably assured; or (iii) when the loan otherwise becomes well-secured and in the process of collection. Loans that have been restructured because of weakened financial positions of the borrowers also may be returned to accrual status if repayment is reasonably assured under the revised terms and there has been a sustained period of repayment performance.

Management strives to carefully monitor credit quality and to identify loans that may become nonperforming. At any time, however, there are loans included in the portfolio that will result in losses to us that have not been identified as nonperforming or potential problem loans. Because the loan portfolio contains a significant number of commercial (including energy banking credits) and commercial real estate loans with relatively large balances, the unexpected deterioration of one or a few such loans may cause a significant increase in nonperforming assets and may lead to a material increase in charge-offs and the provision for loan losses in future periods.

10 

The following table shows the recorded investment in loans on nonaccrual status:

(Dollars in thousands)	At September 30, 2017		At December 31, 2016
Real estate mortgage:
Commercial	$	537	$	6,471
One-to-four family residential		2,327		2,766
Real estate construction:
Commercial		-		522
One-to-four family residential		-		448
Commercial		7,996		5,949
Other consumer		16		111
Total nonaccrual loans	$	10,876	$	16,267

During the first nine months of 2017, $0.2 million of interest income was received on nonaccruing loans. If interest on all nonaccrual loans had been accrued for the nine months ended September 30, 2017, additional interest income of $0.5 million would have been recorded.

			90 days +								Recorded loans
	30-89 days		past due and		Total past				Total		> 90 days and
(Dollars in thousands)	past due		nonaccrual		due		Current		loans		accruing
At September 30, 2017
Real estate mortgage:
Commercial	$	355	$	537	$	892	$	1,023,669	$	1,024,561	$	-
One-to-four family residential		1,494		2,386		3,880		248,914		252,794		59
Real estate construction:
Commercial		-		-		-		173,077		173,077		-
One-to-four family residential		-		-		-		12,591		12,591		-
Commercial		1,428		7,997		9,425		539,722		549,147		1
Other		109		16		125		18,254		18,379		-
Total	$	3,386	$	10,936	$	14,322	$	2,016,227	$	2,030,549	$	60
At December 31, 2016
Real estate mortgage:
Commercial	$	24	$	6,472	$	6,496	$	875,575	$	882,071	$	-
One-to-four family residential		631		2,903		3,534		195,589		199,123		138
Real estate construction:
Commercial		-		522		522		198,591		199,113		-
One-to-four family residential		-		448		448		20,498		20,946		-
Commercial		2,530		6,142		8,672		547,576		556,248		193
Other		359		123		482		19,149		19,631		12
Total	$	3,544	$	16,610	$	20,154	$	1,856,978	$	1,877,132	$	343

Impaired Loans. A loan is considered to be impaired when, based on current information and events, it is probable that we will be unable to collect all amounts due according to the contractual terms of the loan agreement. Each loan deemed to be impaired (loans on nonaccrual status and greater than $100,000, and all troubled debt restructurings) is evaluated on an individual basis using the discounted present value of expected cash flows based on the loan’s initial effective interest rate, the fair value of collateral, or the market value of the loan. Smaller balance and homogeneous loans, including mortgage and consumer loans, are collectively evaluated for impairment.

11 

Interest payments on impaired loans are applied to principal until collectability of the principal amount is reasonably assured, and, at that time, interest is recognized on a cash basis. Impaired loans, or portions thereof, are charged-off when deemed uncollectible.

Impaired loans as of September 30, 2017 and December 31, 2016 are shown in the following table:

	With No Specific Allowance				With A Specific Allowance
			Unpaid				Unpaid
	Recorded		Principal		Recorded		Principal		Related
(Dollars in thousands)	Investment		Balance		Investment		Balance		Allowance
At September 30, 2017
Commercial real estate	$	774	$	1,101	$	297	$	348	$	149
One-to-four family residential		2,344		2,581		-		-		-
Real estate construction		-		-		-		-		-
Commercial		443		1,649		7,553		10,283		1,237
Other		16		22		-		-		-
Total	$	3,577	$	5,353	$	7,850	$	10,631	$	1,386
At December 31, 2016
Commercial real estate	$	1,536	$	3,057	$	6,053	$	6,529	$	2,219
One-to-four family residential		1,188		1,535		1,593		1,698		63
Real estate construction		762		926		207		245		40
Commercial		1,032		2,861		4,963		7,480		1,346
Other		111		115		-		-		-
Total	$	4,629	$	8,494	$	12,816	$	15,952	$	3,668

The average recorded investment of loans classified as impaired and the interest income recognized on those loans for the nine months ended September 30, 2017 and September 30, 2016 are shown in the following table:

	As of and for the nine months ended September 30,
	2017				2016
	Average				Average
	Recorded		Interest		Recorded		Interest
(Dollars in thousands)	Investment		Income		Investment		Income
Commercial real estate	$	2,206	$	113	$	12,101	$	688
One-to-four family residential		2,852		36		3,655		13
Real estate construction		64		34		1,161		12
Commercial		7,298		98		13,280		93
Other		22		-		64		1
Total	$	12,442	$	281	$	30,261	$	807

Troubled Debt Restructurings. Our loan portfolio also includes certain loans that have been modified in troubled debt restructurings, where economic concessions have been granted to borrowers who have experienced financial difficulties. These concessions typically result from loss mitigation activities and can include reductions in the interest rate, payment extensions, forgiveness of principal, forbearance, or other actions. Troubled debt restructurings are classified as impaired at the time of restructuring and are then further classified as nonperforming, potential problem, or performing restructured, as applicable. Loans modified in troubled debt restructurings may be returned to performing status after considering the borrowers’ sustained repayment for a reasonable period of at least six months.

When we modify loans in a troubled debt restructuring, an evaluation of any possible impairment is performed similar to the evaluation done with respect to other impaired loans based on the present value of expected future cash flows, discounted at the contractual interest rate of the original loan agreement, or use of the current fair value of the collateral, less selling costs for collateral dependent loans. If it is determined that the value of the modified loan is less than the recorded investment in the loan (net of previous charge-offs, deferred loan fees or costs, and unamortized premium or discount), an impairment is recognized through an allowance estimate or a charge-off to the allowance.

12 

Troubled debt restructured loans outstanding as of September 30, 2017 and December 31, 2016 were as follows:

	At September 30, 2017				At December 31, 2016
(Dollars in thousands)	Accruing		Nonaccrual		Accruing		Nonaccrual
Commercial real estate	$	534	$	98	$	1,118	$	475
One-to-four family residential		17		-		15		46
Commercial		-		7,186		45		3,323
Total	$	551	$	7,284	$	1,178	$	3,844

At September 30, 2017 and December 31, 2016, we had no significant commitments to lend additional funds to debtors whose loan terms had been modified in a troubled debt restructuring.

There were no loan modified as troubled debt restructurings that occurred during the three months ended September 30, 2017 nor for the three months ended September 30, 2016. There were three commercial loans modified as troubled debt restructurings that occurred during the nine months ended September 30, 2017 and one commercial real estate loan and one commercial loan modified as a troubled debt restructuring for the nine months ended September 30, 2016. Loans modified as troubled debt restructurings that occurred during the three and nine months ended September 30, 2017 and September 30, 2016 are shown in the following table

	For the nine months ended September 30,
	2017				2016
	Number of		Recorded		Number of		Recorded
(Dollars in thousands)	Modifications		Investment		Modifications		Investment
Commercial real estate		-	$	-		1	$	164
Commercial		3		4,114		1		25
Total		3	$	4,114		2	$	189

The modifications of loans identified as troubled debt restructurings primarily related to payment reductions, payment extensions, and/or reductions in the interest rate. The financial impact of troubled debt restructurings is not significant.

There were no loans modified as a troubled debt restructuring that subsequently defaulted during the three or nine months ended September 30, 2017 or September 30, 2016. Default, for this purpose, is deemed to occur when a loan is 90 days or more past due or transferred to nonaccrual and is within twelve months of restructuring.

Credit Quality Indicators. To assess the credit quality of loans, we categorize loans into risk categories based on relevant information about the ability of the borrowers to service their debts such as current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. This analysis is performed on a quarterly basis. We use the following definitions for risk ratings:

Special mention – Loans classified as special mention have potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for these loans or of the institution’s credit position at some future date.

Substandard – Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligors or of the collateral pledged, if any. Loans so classified have one or more well-defined weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that we will sustain some loss if the deficiencies are not corrected. These loans are considered potential problem or nonperforming loans depending on the accrual status of the loans.

Doubtful – Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristics that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. These loans are considered nonperforming.

13 

Loans not meeting the criteria above that are analyzed as part of the above described process are considered to be pass rated loans. As of September 30, 2017 and December 31, 2016, based on the most recent analysis performed as of those dates, the risk category of loans by class was as follows:

	Commercial		1-4 Family		Real Estate
(Dollars in thousands)	Real Estate		Residential		Construction		Commercial		Other		Total
At September 30, 2017
Grade:
Pass	$	988,933	$	248,044	$	174,079	$	497,428	$	18,363	$	1,926,847
Special Mention		27,259		1,104		10,611		26,458		-		65,432
Substandard		8,369		3,646		978		25,101		16		38,110
Doubtful		-		-		-		160		-		160
Total	$	1,024,561	$	252,794	$	185,668	$	549,147	$	18,379	$	2,030,549
At December 31, 2016
Grade:
Pass	$	857,290	$	192,395	$	210,780	$	498,039	$	19,518	$	1,778,022
Special Mention		4,479		1,983		7,720		24,639		-		38,821
Substandard		20,302		4,745		1,559		33,175		113		59,894
Doubtful		-		-		-		395		-		395
Total	$	882,071	$	199,123	$	220,059	$	556,248	$	19,631	$	1,877,132

Allowance for Loan Losses. The allowance for loan losses is a reserve established through the provision for loan losses charged to operations. Loan amounts which are determined to be uncollectible are charged against this allowance, and recoveries, if any, are added to the allowance. The appropriate amount of the allowance is based on periodic review and evaluation of the loan portfolio and quarterly assessments of the probable losses inherent in the loan portfolio. The amount of the loan loss provision for a period is based solely upon the amount needed to cause the allowance to reach the level deemed appropriate after the effects of net charge-offs for the period.

Management believes the level of the allowance is appropriate to absorb probable losses inherent in the loan portfolio. The allowance for loan losses is determined in accordance with regulatory guidelines and generally accepted accounting principles and is comprised of two primary components, specific and general. There is no one factor, or group of factors, that produces the amount of an appropriate allowance for loan losses, as the methodology for assessing the allowance for loan losses makes use of evaluations of individual impaired loans along with other factors and analysis of loan categories. This assessment is highly qualitative and relies upon judgments and estimates by management.

The specific allowance is recorded based on the result of an evaluation consistent with ASC 310.10.35, Receivables: Subsequent Measurement, for each impaired loan. Collateral dependent loans are evaluated for impairment based upon the fair value of the collateral. The amount and level of the impairment allowance is ultimately determined by management’s estimate of the amount of expected future cash flows or, if the loan is collateral dependent, on the value of collateral, which may vary from period to period depending on changes in the financial condition of the borrower or changes in the estimated value of the collateral. Charge-offs against the allowance for impaired loans are made when and to the extent loans are deemed uncollectible. Any portion of a collateral dependent impaired loan in excess of the fair value of the collateral that is determined to be uncollectible is charged off.

The general component of the allowance is calculated based on ASC 450, Contingencies. Loans not evaluated for specific allowance are segmented into loan pools by type of loan. Commercial real estate pools are further segmented by market type for non-owner occupied and owner occupied collateral. Our primary markets are Oklahoma, Texas, Kansas, and Colorado. Estimated allowances are based on historical loss trends with adjustments factored in based on qualitative risk factors both internal and external to us. The historical loss trend is determined by loan pool and segmentation and is based on the actual loss history experienced by us over the most recent three years. The qualitative risk factors include, but are not limited to, economic and business conditions, changes in lending staff, lending policies and procedures, quality of loan review, changes in the nature and volume of the portfolios, loss and recovery trends, asset quality trends, and legal and regulatory considerations.

14 

Independent appraisals on real estate collateral securing loans are obtained at origination. New appraisals are obtained periodically and following discovery of factors that may significantly affect the value of the collateral. Appraisals typically are received within 30 days of request. Results of appraisals on nonperforming and potential problem loans are reviewed promptly upon receipt and considered in the determination of the allowance for loan losses. We are not aware of any significant time lapses in the process that have resulted, or would result in, a significant delay in determination of a credit weakness, the identification of a loan as nonperforming, or the measurement of an impairment.

The following tables show the balance in the allowance for loan losses and the recorded investment in loans for the dates indicated by portfolio classification disaggregated on the basis of impairment evaluation method.

	Commercial			1-4 Family			Real Estate
(Dollars in thousands)	Real Estate			Residential			Construction			Commercial			Other			Total
At September 30, 2017
Balance at beginning of fiscal year	$	12,507		$	1,163		$	3,502		$	10,058		$	316		$	27,546
Loans charged-off		(2,375	)		(7	)		(2	)		(4,612	)		(266	)		(7,262	)
Recoveries		233			85			5			380			71			774
Provision for loan losses		2,717			244			(1,136	)		3,868			192			5,885
Balance at end of period	$	13,082		$	1,485		$	2,369		$	9,694		$	313		$	26,943
Allowance for loan losses ending balance:
Individually evaluated for impairment	$	-		$	-		$	-		$	1,237		$	-		$	1,237
Collectively evaluated for impairment		12,933			1,485			2,369			8,457			313			25,557
Acquired with deteriorated credit quality		149			-			-			-			-			149
Total ending allowance balance	$	13,082		$	1,485		$	2,369		$	9,694		$	313		$	26,943
Loans receivable ending balance:
Individually evaluated for impairment	$	534		$	1,755		$	-		$	7,652		$	-		$	9,941
Collectively evaluated for impairment		1,023,142			249,921			185,618			541,327			18,379			2,018,387
Acquired with deteriorated credit quality		885			1,118			50			168			-			2,221
Total ending loans balance	$	1,024,561		$	252,794		$	185,668		$	549,147		$	18,379		$	2,030,549

	Commercial			1-4 Family			Real Estate
(Dollars in thousands)	Real Estate			Residential			Construction		Commercial			Other			Total
At September 30, 2016
Balance at beginning of fiscal year	$	12,716		$	700		$	2,533	$	9,965		$	192		$	26,106
Loans charged-off		(193	)		(134	)		-		(4,109	)		(453	)		(4,889	)
Recoveries		316			60			-		683			78			1,137
Provision for loan losses		(698	)		492			798		5,023			483			6,098
Balance at end of period	$	12,141		$	1,118		$	3,331	$	11,562		$	300		$	28,452
Allowance for loan losses ending balances:
Individually evaluated for impairment	$	1,741		$	88		$	-	$	2,800		$	-		$	4,629
Collectively evaluated for impairment		10,400			1,030			3,291		8,762			300			23,783
Acquired with deteriorated credit quality		-			-			40		-			-			40
Total ending allowance balance	$	12,141		$	1,118		$	3,331	$	11,562		$	300		$	28,452
Loans receivable ending balance:
Individually evaluated for impairment	$	7,743		$	1,794		$	390	$	11,701		$	-		$	21,628
Collectively evaluated for impairment		883,551			190,620			205,526		554,382			19,530			1,853,609
Acquired with deteriorated credit quality		2,513			1,264			755		320			23			4,875
Total ending loans balance	$	893,807		$	193,678		$	206,671	$	566,403		$	19,553		$	1,880,112

15 

NOTE 4: FAIR VALUE MEASUREMENTS

Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. In estimating fair value, we utilize valuation techniques that are consistent with the market approach, the income approach, and/or the cost approach. Such valuation techniques are consistently applied. Inputs to valuation techniques include the assumptions that market participants would use in pricing an asset or liability.

ASC 820, Fair Value Measurements and Disclosure, establishes a fair value hierarchy for valuation inputs that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The fair value hierarchy is as follows:

Level 1 Quoted prices in active markets for identical instruments.

Level 2 Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3 Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

The estimated fair value amounts have been determined by us using available market information and appropriate valuation methodologies. However, considerable judgment is required to interpret market data to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amount we could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies could have a material effect on our estimated fair value amounts. There were no significant changes in valuation methods used to estimate fair value during the nine months ended September 30, 2017.

A description of the valuation methodologies used for instruments measured at fair value on a recurring basis is as follows:

Available for sale securities – The fair value of U.S. Government and federal agency securities, equity securities, and residential mortgage-backed securities is estimated based on quoted market prices or dealer quotes. The fair value of other investments such as obligations of state and political subdivisions is estimated based on quoted market prices. We obtain fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information, and bond’s terms and conditions, among other things. We review the prices supplied by our independent pricing service, as well as their underlying pricing methodologies, for reasonableness and to ensure such prices are aligned with traditional pricing matrices.

Derivative instruments – We utilize an interest rate swap agreement to convert one of our variable-rate subordinated debentures to a fixed rate. This has been designated as a cash flow hedge. We also offer an interest rate swap program that permits qualified customers to manage interest rate risk on variable rate loans with Bank SNB. Derivative contracts are executed between our customers and Bank SNB. Offsetting contracts are executed by Bank SNB and approved counterparties. The counterparty contracts are identical to customer contracts, except for a fixed pricing spread or fee paid to us and collateral requirements. The fair value of the interest rate swap agreements are obtained from dealer quotes.

16 

The following table summarizes financial assets and liabilities measured at fair value on a recurring basis as of September 30, 2017 and December 31, 2016:

				Fair Value Measurement at Reporting Date Using
				Quoted Prices in		Significant
				Active Markets		Other			Significant
				for Identical		Observable			Unobservable
				Assets		Inputs			Inputs
(Dollars in thousands)	Total			(Level 1)		(Level 2)			(Level 3)
At September 30, 2017
Available for sale securities:
Federal agency securities	$	57,489		$	-	$	57,489		$	-
Obligations of state and political subdivisions		43,703			-		43,703			-
Residential mortgage-backed securities		262,136			-		262,136			-
Asset-backed securities		3,954			-		3,954			-
Corporate debt		2,202			244		1,958			-
Derivative asset		2,863			-		2,863			-
Derivative liability		(3,110	)		-		(3,110	)		-
Total	$	369,237		$	244	$	368,993		$	-
At December 31, 2016
Available for sale securities:
Federal agency securities	$	69,694		$	-	$	69,694		$	-
Obligations of state and political subdivisions		46,375			-		46,375			-
Residential mortgage-backed securities		280,642			-		280,642			-
Asset-backed securities		9,177			-		9,177			-
Corporate debt		20,330			213		20,117			-
Derivative asset		1,235			-		1,235			-
Derivative liability		(1,890	)		-		(1,890	)		-
Total	$	425,563		$	213	$	425,350		$	-

Certain financial assets are measured at fair value on a nonrecurring basis; that is, the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment). These assets are recorded at the lower of cost or fair value. Valuation methodologies for assets measured on a nonrecurring basis are as follows:

Impaired loans – Certain impaired loans are reported at the fair value of the underlying collateral if repayment is expected solely from collateral. Collateral values are estimated using inputs based on third-party appraisals. Certain other impaired loans are analyzed and reported through a specific valuation allowance based upon the net present value of cash flows.

Loans held for sale – Real estate mortgage loans held for sale are carried at the lower of cost or market, which is determined on an individual loan basis. The fair value of loans held for sale is based on existing investor commitments.

Other real estate – Other real estate fair value is based on third-party appraisals for significant properties less the estimated costs to sell the asset.

Mortgage loan servicing rights – There is no active trading market for loan servicing rights. The fair value of loan servicing rights is estimated by calculating the present value of net servicing revenue over the anticipated life of each loan. A cash flow model is used to determine fair value. Key assumptions and estimates, including projected prepayment speeds and assumed servicing costs, earnings on escrow deposits, ancillary income, and discount rates, used by this model are based on current market sources. A separate third party model is used to estimate prepayment speeds based on interest rates, housing turnover rates, estimated loan curtailment, anticipated defaults, and other relevant factors. The prepayment model is updated for changes in market conditions.

Core deposit premiums – The fair value of core deposit premiums are based on third-party appraisals.

17 

Goodwill – Fair value of goodwill is based on the fair value of each of our reporting units to which goodwill is allocated compared with their respective carrying value.

Assets that were measured at fair value on a nonrecurring basis as of September 30, 2017 and December 31, 2016 are summarized below.

			Fair Value Measurements Using
			Quoted Prices in				Significant
			Active Markets for		Significant Other		Unobservable
			Identical Assets		Observable Inputs		Inputs
(Dollars in thousands)	Total		(Level 1)		(Level 2)		(Level 3)
At September 30, 2017
Impaired loans at fair value :
Commercial real estate	$	297	$	-	$	-	$	297
Commercial		7,652		-		-		7,652
Loans held for sale:
One-to-four family residential		5,658		-		5,658		-
Total	$	13,310	$	-	$	5,658	$	7,949
At December 31, 2016
Impaired loans at fair value :
Commercial real estate	$	6,053	$	-	$	-	$	6,053
One-to-four family residential		1,593		-		-		1,593
Real estate construction		207		-		-		207
Commercial		5,357		-		-		5,357
Loans held for sale:
One-to-four family residential		4,386		-		4,386		-
Total	$	17,596	$	-	$	4,386	$	13,210

For the nine months ended September 30, 2017, impaired loans measured at fair value with a carrying amount of $9.5 million were written down to a fair value of $7.9 million, resulting in a life-to-date impairment of $1.6 million. For the year ended December 31, 2016, impaired loans measured at fair value with a carrying amount of $19.7 million were written down to a fair value of $13.2 million at December 31, 2016, resulting in a life-to-date impairment charge of $6.5 million.

No impairment was recognized for other real estate during the nine months ended September 30, 2017 or the year ended December 31, 2016.

As of September 30, 2017, mortgage servicing rights had a fair value of $4.3 million, which exceeded the book value of $3.8 million. Because the fair value exceeded the book value, there was no impairment charge at September 30, 2017. As of December 31, 2016, the mortgage servicing rights had a fair value of $4.2 million, which exceeded the book value of $3.5 million. Because the fair value exceeded the book value, there was no impairment charge at December 31, 2016.

No impairment of core deposit premiums or goodwill was recognized during the nine months ended September 30, 2017 or the year ended December 31, 2016.

ASC 825, Financial Instruments, requires an entity to provide disclosures about fair value of financial instruments, including those that are not measured and reported at fair value on a recurring or nonrecurring basis. The methodologies used in estimating the fair value of financial instruments that are measured on a recurring or nonrecurring basis are discussed above. The methodologies for the other financial instruments are discussed below:

Cash and cash equivalents – For cash and cash equivalents, the carrying amount is a reasonable estimate of fair value.

Securities held to maturity – The investment securities held to maturity are carried at cost. The fair value of the held to maturity securities is estimated based on quoted market prices or dealer quotes.

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Loans, net of allowance – Fair values are estimated for certain homogenous categories of loans adjusted for differences in loan characteristics. Our loans have been aggregated by categories consisting of commercial, real estate, and other consumer. The fair value of loans is estimated by discounting the cash flows using risks inherent in the loan category and interest rates currently offered for loans with similar terms and credit risks.

Accrued interest receivable – The carrying amount is a reasonable estimate of fair value for accrued interest receivable.

Investments included in other assets – The estimated fair value of investments included in other assets, which primarily consists of investments carried at cost, approximates their carrying values.

Deposits – The fair value of demand deposits, savings accounts, and certain money market deposits is the amount payable on demand at the statement of financial condition date. The fair value of fixed maturity certificates of deposit is estimated using the rates currently offered for deposits of similar remaining maturities.

Accrued interest payable and other liabilities – The estimated fair value of accrued interest payable and other liabilities, which primarily includes trade accounts payable, approximates their carrying values.

Other borrowings – Included in other borrowings are FHLB advances and securities sold under agreements to repurchase. The fair value for fixed rate FHLB advances is based upon discounted cash flow analysis using interest rates currently being offered for similar instruments. The fair values of other borrowings are the amounts payable at the statement of financial condition date, as the carrying amount is a reasonable estimate of fair value due to the short-term maturity rates.

Subordinated debentures – Our two subordinated debentures have floating rates that reset quarterly. The fair value of the floating rate subordinated debentures approximates carrying value at September 30, 2017.

The carrying values and estimated fair values of our financial instruments segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value were as follows:

	At September 30, 2017				At December 31, 2016
	Carrying		Fair		Carrying		Fair
(Dollars in thousands)	Values		Values		Values		Values
Financial assets:
Level 2 inputs:
Cash and cash equivalents	$	87,458	$	87,458	$	75,650	$	75,650
Securities held to maturity		10,351		10,576		10,443		10,677
Accrued interest receivable		7,122		7,122		6,194		6,194
Mortgage loan servicing rights		3,795		4,304		3,491		4,159
Bank-owned life insurance		28,661		28,661		28,575		28,575
Investments included in other assets		17,612		17,612		14,627		14,627
Level 3 inputs:
Total loans, net of allowance		2,003,606		1,995,320		1,849,586		1,839,960
Financial liabilities:
Level 2 inputs:
Deposits		2,047,507		1,998,437		1,946,018		1,897,927
Accrued interest payable		1,332		1,332		1,132		1,132
Other liabilities		9,541		9,541		9,516		9,516
Other borrowings		213,448		213,489		183,814		183,926
Subordinated debentures		46,393		46,393		46,393		46,393

19 

NOTE 5: DERIVATIVE INSTRUMENTS

We utilize derivatives instruments to manage exposure to various types of interest rate risk for us and our customers within our policy guidelines. All derivative instruments are carried at fair value and credit risk is considered in determining fair value.

Derivative contracts involve the risk of dealing with institutional derivative counterparties and their ability to meet contractual terms. Institutional counterparties must have an investment grade credit rating and be approved by our asset/liability management committee. Our credit exposure on interest rate swaps is limited to the net favorable value and interest payments of all swaps with each counterparty. Access to collateral in the event of default is reasonably assured. Therefore, credit exposure may be reduced by the amount of collateral pledged by the counterparty.

Customer Risk Management Interest Rate Swaps

Our qualified customers have the opportunity to participate in our interest rate swap program for the purpose of managing interest rate risk on their variable rate loans with us. If we enter into such agreements with customers, then offsetting agreements are executed between us and approved dealer counterparties to minimize our market risk from changes in interest rates. The counterparty contracts are identical to customer contracts, except for a fixed pricing spread or fee paid to us by the dealer counterparty and the collateral requirements. These interest rate swaps carry varying degrees of credit, interest rate and market or liquidity risks. The fair value of derivative instruments is recognized as either assets or liabilities in the consolidated statements of financial condition.

We have entered into nineteen customer interest rate swap agreements that effectively convert the loan interest rate from floating rate based on LIBOR or prime rate to a fixed rate for the customer. As of September 30, 2017, these loans had an outstanding balance of $198.2 million. We have entered into offsetting agreements with dealer counterparties. The following table summarizes the fair values of derivative contracts recorded as “non-hedge derivative assets” and “non-hedge derivative liabilities” in the consolidated statements of financial condition:

	As of September 30, 2017				At December 31, 2016
(Dollars in thousands)	Notional		Fair Value		Notional		Fair Value
Non-hedge derivative assets	$	198,167	$	2,863	$	123,953	$	1,235
Non-hedge derivative liabilities		198,167		2,863		123,953		1,235

The margin rates to us in connection with these instruments are a contractual percentage over the one-month LIBOR or a minimal percentage under the prime rate. From time to time, it may be necessary to post collateral with our dealer counterparties to secure the market values of these contracts. As of September 30, 2017, we had posted $1.4 million in collateral with our dealer counterparties. These interest rate swaps are not designated as hedging instruments.

Interest Rate Swap

We have an interest rate swap agreement with a total notional amount of $25.0 million. The interest rate swap agreement was designated as a hedging instrument in cash flow hedges with the objective of protecting the overall cash flow from our quarterly interest payments on the SBI Capital Trust II preferred securities throughout the seven-year period beginning February 11, 2011 and ending April 7, 2018 from the risk of variability of those payments resulting from changes in the three-month London Interbank Offered Rate (“LIBOR”). Under the swap agreement, we pay a fixed interest rate of 6.15% and receive a variable interest rate of three-month LIBOR plus a margin of 2.85% on a total notional amount of $25.0 million, with quarterly settlements. The rate received by us as of September 30, 2017 was 4.15%.

The estimated fair value of the interest rate swap contract outstanding as of September 30, 2017 and December 31, 2016 resulted in a pre-tax loss of $0.2 million and $0.7 million, respectively, and was included in other liabilities in the consolidated statements of financial condition. We obtained the counterparty valuation to validate the interest rate derivative contract as of September 30, 2017 and December 31, 2016.

The effective portion of our gain or loss due to changes in the fair value of the interest rate swap contract, a $0.2 million loss and a $0.3 million loss for the nine months ended September 30, 2017 and September 30, 2016, respectively, is included in other comprehensive income, net of tax, while the ineffective portion (indicated by the excess of the cumulative change in the fair value of the derivative over that which is necessary to offset the cumulative change in expected future cash flows on the hedge transaction) is included in other noninterest income or other noninterest expense. No ineffectiveness related to the interest rate derivative was recognized during either reporting period.

20 

Net cash outflows as a result of the interest rate swap contract were $0.4 million and $0.5 million for the nine months ended September 30, 2017 and September 30, 2016, respectively, and were included in interest expense on subordinated debentures.

We posted cash collateral with our counterparty related to the interest rate swap contract in excess of the required $0.4 million and $0.7 million at September 30, 2017 and December 31, 2016, respectively.

There are no credit-risk-related contingent features associated with our derivative contract.

NOTE 6: TAXES ON INCOME

Net deferred tax assets totaled $12.2 million at September 30, 2017 and $13.2 million at December 31, 2016. Net deferred tax assets are included in other assets and no valuation allowance is considered necessary.

We or one of our subsidiaries file income tax returns in the U.S. federal jurisdiction and various state jurisdictions. We are no longer subject to U.S. federal or state tax examinations for years before 2013.

NOTE 7: SHAREHOLDERS’ EQUITY

Stock Repurchase Program

On May 25, 2016, the Board authorized our fourth stock repurchase program since August 2014. The program authorizes the repurchase of up to another 5.0%, or approximately 921,000 shares, of our outstanding common stock and became effective February 23, 2017, which was the original expiration date of the third program. During the first nine months of 2017, we have made no repurchases. During 2016, we repurchased 1,398,026 shares for a total of $22.1 million, and since August 2014, we have repurchased a total of 2,519,584 shares for a total of $40.8 million. Repurchases under the program are available at the discretion of management based upon market, business, legal, and other factors. Our ability to repurchase our common stock is limited during the time that our planned merger with Simmons First National Corporation is pending.

NOTE 8: EARNINGS PER SHARE

Earnings per common share is computed using the two-class method prescribed by ASC 260, Earnings Per Share. Using the two-class method, basic earnings per common share is computed based upon net income divided by the weighted average number of common shares outstanding during each period, which excludes outstanding unvested restricted stock. Diluted earnings per share is computed using the weighted average number of common shares determined for the basic earnings per common share computation plus the dilutive effect of stock compensation using the treasury stock method.

The following table shows the computation of basic and diluted earnings per common share:

	For the three months						For the nine months
	ended September 30,						ended September 30,
(Dollars in thousands, except earnings per share data)	2017			2016			2017			2016
Numerator:
Net income	$	5,463		$	4,255		$	16,560		$	11,536
Earnings allocated to participating securities		(96	)		(82	)		(345	)		(208	)
Numerator for earnings per common share	$	5,367		$	4,173		$	16,215		$	11,328
Denominator:
Denominator for basic earnings per common share		18,355,647			18,288,927			18,357,372			18,716,697
Dilutive effect of stock compensation		157,818			256,687			159,846			195,090
Denominator for diluted earnings per common share		18,513,465			18,545,614			18,517,218			18,911,787
Earnings per common share:
Basic	$	0.29		$	0.23		$	0.88		$	0.61
Diluted	$	0.29		$	0.23		$	0.88		$	0.60

21 

NOTE 9: OPERATING SEGMENTS

We operate four principal segments: Oklahoma Banking, Texas Banking, Kansas Banking, and Other Operations. The Oklahoma Banking segment provides deposit and lending services, including residential mortgage lending services to customers. Due to its size and our management structure, our Colorado banking operations are included within the Oklahoma Banking segment. The Texas Banking segment and the Kansas Banking segment provide deposit and lending services. Other Operations includes our funds management unit and corporate investments.

The primary purpose of the funds management unit is to manage our overall internal liquidity needs and interest rate risk. Each segment borrows funds from or provides funds to the funds management unit as needed to support its operations. The value of funds provided to and the cost of funds borrowed from the funds management unit by each segment are internally priced at rates that approximate market rates for funds with similar duration. The yield used in the funds transfer pricing curve is a blend of rates based on the volume usage of retail and brokered certificates of deposit and FHLB advances.

The accounting policies of each reportable segment are the same as ours. Expenses for consolidated back-office operations are allocated to operating segments based on estimated uses of those services. General overhead expenses such as executive administration, accounting, and audit are allocated based on the direct expense and/or deposit and loan volumes of the operating segment. Income tax expense for the operating segments is calculated at statutory rates. The Other Operations segment records the tax expense or benefit necessary to reconcile to the consolidated financial statements. The following table summarizes financial results by operating segment:

	For the three months ended September 30, 2017
	Oklahoma		Texas		Kansas		Other		Total
(Dollars in thousands)	Banking		Banking		Banking		Operations		Company
Net interest income	$	13,156	$	6,182	$	1,574	$	859	$	21,771
Provision for loan losses		2,117		218		44		1		2,380
Noninterest income		2,702		782		281		730		4,495
Noninterest expenses		10,053		2,892		1,366		1,079		15,390
Income before taxes		3,688		3,854		445		509		8,496
Taxes on income		1,327		1,370		160		176		3,033
Net income	$	2,361	$	2,484	$	285	$	333	$	5,463

	For the nine months ended September 30, 2017
	Oklahoma		Texas		Kansas			Other		Total
(Dollars in thousands)	Banking		Banking		Banking			Operations*		Company
Net interest income	$	39,299	$	18,467	$	4,746		$	792	$	63,304
Provision (credit) for loan losses		4,963		1,063		(142	)		1		5,885
Noninterest income		9,108		1,704		873			2,211		13,896
Noninterest expenses		29,485		9,308		4,087			2,968		45,848
Income before taxes		13,959		9,800		1,674			34		25,467
Taxes on income		4,882		3,428		585			12		8,907
Net income	$	9,077	$	6,372	$	1,089		$	22	$	16,560
Total loans at period end	$	1,222,011	$	670,435	$	138,103		$	-	$	2,030,549
Total assets at period end		1,261,427		666,869		136,953			555,793		2,621,042
Total deposits at period end		1,373,000		206,216		162,934			305,357		2,047,507

22 

	For the three months ended September 30, 2016
	Oklahoma		Texas		Kansas			Other			Total
(Dollars in thousands)	Banking		Banking		Banking			Operations			Company
Net interest income	$	12,405	$	5,541	$	1,574		$	285		$	19,805
Provision (credit) for loan losses		1,531		282		(99	)		(1	)		1,713
Noninterest income		3,515		340		294			406			4,555
Noninterest expenses		10,539		3,616		1,183			818			16,156
Income (loss) before taxes		3,850		1,983		784			(126	)		6,491
Taxes on income (loss)		1,322		684		273			(43	)		2,236
Net income (loss)	$	2,528	$	1,299	$	511		$	(83	)	$	4,255

	For the nine months ended September 30, 2016
	Oklahoma		Texas		Kansas		Other			Total
(Dollars in thousands)	Banking		Banking		Banking		Operations*			Company
Net interest income (loss)	$	37,682	$	16,747	$	5,040	$	(129	)	$	59,340
Provision for loan losses		1,581		2,527		1,987		3			6,098
Noninterest income		8,367		932		912		1,630			11,841
Noninterest expenses		30,378		10,603		3,947		2,492			47,420
Income (loss) before taxes		14,090		4,549		18		(994	)		17,663
Taxes on income (loss)		4,888		1,578		6		(345	)		6,127
Net income (loss)	$	9,202	$	2,971	$	12	$	(649	)	$	11,536
Total loans at period end	$	1,117,716	$	605,682	$	156,714	$	-		$	1,880,112
Total assets at period end		1,161,386		602,028		155,556		549,072			2,468,042
Total deposits at period end		1,319,571		187,234		144,856		296,263			1,947,924

NOTE 10: COMMITMENTS AND CONTINGENCIES

Financial Instruments with Off-Balance-Sheet Risk

In the normal course of business, we make use of a number of different financial instruments to help meet the financial needs of our customers. In accordance with U.S. generally accepted accounting principles, these transactions are not presented in the accompanying consolidated financial statements and are referred to as off-balance sheet instruments. These transactions and activities include commitments to extend lines of commercial and real estate mortgage credit and standby and commercial letters of credit.

A loan commitment is a binding contract to lend up to a maximum amount for a specified period of time provided there is no violation of any financial, economic, or other terms of the contract. A standby letter of credit obligates us to honor a financial commitment to a third party should our customer fail to perform. Many loan commitments and most standby letters of credit expire unfunded, and, therefore, total commitments do not represent our future funding obligations. Loan commitments and letters of credit are made under normal credit terms, including interest rates and collateral prevailing at the time, and usually require the payment of a fee by the customer. Commercial letters of credit are commitments generally issued to finance the movement of goods between buyers and sellers. Our exposure to credit loss, assuming commitments are funded, in the event of nonperformance by the other party to the financial instrument is represented by the contractual amount of those instruments. We do not anticipate any material losses as a result of the commitments.

As of September 30, 2017 and December 31, 2016, our loan commitments were $462.4 million and $429.4 million, respectively. As of September 30, 2017 and December 31, 2016, our standby letters of credit obligations were $6.0 million and $7.2 million, respectively.

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Customer Risk Management Interest Rate Swap

On September 9, 2014, we entered into an agreement to provide one of our commercial borrowers a customer interest rate swap that effectively converts the loan interest rate from a floating rate based on LIBOR to a fixed rate for the customer. As of September 30, 2017, the floating rate loan had an outstanding balance of $13.9 million. The option to execute the swap is conditional on the borrower’s compliance with the loan and swap agreements, and will be subject to the terms of the International Swaps and Derivatives Association Master Agreement. The fixed pay amount will be based on the market rates at the time of execution, and it is our intention to simultaneously execute an offsetting trade with an approved swap dealer counterparty with identical terms.

As of September 30, 2017 and December 31, 2016, we had eight risk participation agreements and seven risk participation agreements, respectively, with financial institution counterparties for interest rate swaps related to loans in which we are a participant. The risk participation agreements provide credit protection to the financial institution should the borrower fail to perform on its interest rate derivative contract with the financial institution. As of September 30, 2017 and December 31, 2016, the current notional amount for these transactions were $51.9 million and $34.7 million, respectively.

Legal Action

On March 18, 2011, an action entitled Ubaldi, et al. v SLM Corporation (“Sallie Mae”), et al., Case No. 3:11-cv-01320 EDL (the “Ubaldi Case”) was filed in the U.S. District Court for the Northern District of California as a putative class action with respect to certain loans that the plaintiffs claim were made by Sallie Mae. The loans in question were made by various banks, including Bank SNB, and sold to Sallie Mae. Plaintiffs claim that Sallie Mae entered into arrangements with chartered banks in order to evade California law and that Sallie Mae is the de facto lender on the loans in question and, as the lender on such loan, Sallie Mae charged interest and late fees that violates California usury law and the California Business and Professions Code. Sallie Mae has denied all claims asserted against it and has stated that it intends to vigorously defend the action. On March 26, 2014, the Court denied the plaintiffs’ request to certify the class; however, the Court permitted the plaintiffs to amend the filing to redefine the class. Plaintiffs filed a renewed motion on June 23, 2014. On December 19, 2014, the Court issued a decision on the renewed motion, certifying a class with respect to claims of improper late fees, but denying class certification with respect to plaintiffs’ usury claims. Plaintiffs thereafter filed a motion seeking leave to amend their complaint to add additional parties, which Sallie Mae opposed, and, on March 24, 2015, the Court denied the plaintiffs’ motion. On June 5, 2015, the law firm Cohen Milstein Sellers & Toll based in Washington, D.C. entered its appearance as co-counsel on behalf of plaintiffs.

Bank SNB is not specifically named in the action. However, in the first quarter of 2014, Sallie Mae provided Bank SNB with a notice of claims that have been asserted against Sallie Mae in the Ubaldi Case (the “Notice”). Sallie Mae asserts in the Notice that Bank SNB may have indemnification and/or repurchase obligations pursuant to the ExportSS Agreement dated July 1, 2002 between Sallie Mae and Bank SNB, pursuant to which the loans in question were made by Bank SNB. Bank SNB has substantial defenses with respect to any claim for indemnification or repurchase ultimately made by Sallie Mae, if any, and intends to vigorously defend against any such claims.

Due to the uncertainty regarding (i) the size and scope of the class, (ii) whether a class will ultimately be certified, (iii) the particular class members, (iv) the interest rate on loans made by Bank SNB charged to particular class members, (v) the late fees charged to particular class members, (vi) the time period that will ultimately be at issue if a class is certified in the Ubaldi Case, (vii) the theories, if any, under which the plaintiffs might prevail, (viii) whether Sallie Mae will make a claim against us for indemnification or repurchase, and (ix) the likelihood that Sallie Mae would prevail if it makes such a claim, we cannot estimate the amount or the range of losses that may arise as a result of the Ubaldi Case.

In the normal course of business, we are at all times subject to various pending and threatened legal actions. The relief or damages sought in some of these actions may be substantial. After reviewing pending and threatened actions with counsel, management currently does not expect that the outcome of such actions will have a material adverse effect on our financial position; however, we are not able to predict whether the outcome of such actions may or may not have a material adverse effect on results of operations in a particular future period as the timing and amount of any resolution of such actions and relationship to the future results of operations are not known.

NOTE 11: SUBSEQUENT EVENT

We previously announced a definitive agreement and plan of merger with and into Simmons First National Corporation (NASDAQ-GS: SFNC). On October 19, 2017, the merger was completed pursuant to the terms of the Agreement and Plan of Merger dated December 14, 2016. The merger was described in the Joint Proxy Statement/Prospectus filed with the SEC on September 12, 2017.

24 

In the merger, each outstanding share of Southwest common stock was cancelled and converted into the right to receive 0.3903 shares of the SFNC’s common stock and $5.11 in cash. SFNC issued 7,250,000 shares of its common stock and paid $95,000,000 in cash to effect the merger. Additionally, upon consummation of the merger, SFNC assumed subordinated debt issued by Southwest in an aggregate principal amount of $46.4 million. The merger was approved by stockholders of Southwest on October 17, 2017 and by stockholders of SFNC on October 18, 2017.

NOTE 12: NEW AUTHORITATIVE ACCOUNTING GUIDANCE

In February 2016, the FASB issued ASU 2016-02, Leases. This ASU requires lessees to put most leases on their balance sheets but recognize expenses in the income statement in a manner similar to current accounting treatment. This ASU changes the guidance on sale-leaseback transactions, initial direct costs and lease execution costs, and, for lessors, modifies the classification criteria and the accounting for sales-type and direct financing leases. The guidance becomes effective for us on January 1, 2019. Entities are required to use a modified retrospective approach for leases that exist or are entered into after the beginning of the earliest comparative period in the financial statements. We are evaluating the impact of this ASU on our financial statements and disclosures.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. This ASU replaces the incurred loss impairment methodology in current GAAP with a methodology that estimates credit losses on most financial instruments measured at amortized cost, such as loans, receivables, and held-to-maturity securities, using the current expected credit loss (CECL) model. Under this model, entities will estimate credit losses over the financial instrument’s entire contractual term from the date of initial recognition of that instrument. The ASU also requires incremental disclosures on how the entity developed its estimates. This guidance becomes effective for us on January 1, 2020. We are evaluating the impact of this ASU on our financial statements and disclosures.

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230), which is intended to reduce diversity in practice in how certain transactions are classified in the statement of cash flows. The new guidance specifically addresses eight classification issues: debt prepayment or debt extinguishment costs; settlement of zero-coupon bonds; contingent consideration payments made after a business combination; proceeds from the settlement of insurance claims; proceeds from the settlement of corporate-owned life insurance (COLI) policies, including bank-owned life insurance (BOLI) policies; distributions received from equity method investments; beneficial interests in securitization transactions; and separately identifiable cash flows and application of the predominance principle. This guidance becomes effective for us on January 1, 2018. We are evaluating the impact of the ASU on our financial statements and disclosures.

In October 2016, the FASB issued ASU 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other than Inventory. The ASU requires companies to recognize the income tax consequences of an intercompany asset transfer when the transfer occurs. The amendments in this ASU do not change accounting for the pre-tax effects of intra-entity asset transfers under Topic 810, Consolidation, and do not apply to intra-entity inventory transfers. The economic consequences of intra-entity asset sales—other than inventory—will be recognized in the period in which the transaction occurs and no longer deferred. A reporting entity’s effective tax rate likely will be affected due to the immediate recognition of the seller’s taxes and buyer’s deferred taxes, particularly when the transaction has no effect on consolidated pre-tax income. This guidance becomes effective for us on January 1, 2018. We are evaluating the impact of this ASU on our financial statement disclosures.

In January 2017, the FASB issued Accounting Standards Update (“ASU”) 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business. The main objective of this new standard is to help financial statement preparers evaluate whether a set of transferred assets and activities (either acquired or disposed of) is a business. Accounting for a business combination differs significantly from that of an asset acquisition. Because the definition of a business affects acquisitions, disposals, goodwill, and consolidation, the revised definition of a business is generally expected to reduce the number of transactions that qualify as a business combination. This guidance requires an entity to evaluate if substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets. The set is not a business if this screen is met. If this screen is not met, however, the entity then evaluates whether the set meets the requirement that a business include, at a minimum, an input and a substantive process that together significantly contribute to the ability to create outputs. This guidance becomes effective for us on January 1, 2018, and we are evaluating the impact of this ASU on our financial statements and disclosures.

In January 2017, the FASB issued ASU 2017-04, Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. The new guidance will simplify financial reporting because it eliminates the need to determine the fair value of individual assets and liabilities of a reporting unit to measure the goodwill impairment. This ASU simplifies how all entities assess goodwill for impairment by eliminating Step 2 from the goodwill impairment test. Entities will still perform their annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. If the fair value exceeds the carrying amount, no impairment should be recorded. If a reporting unit’s carrying amount exceeds its fair value, an entity will record an impairment charged based on that difference. Impairment losses on goodwill cannot be reversed once recognized. This guidance becomes effective for us on January 1, 2020, and we are evaluating the impact of this ASU on our financial statements and disclosures.

25 

In February 2017, the FASB issued ASU 2017-05, Other Income—Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20): Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets. This ASU primarily defines in-substance nonfinancial assets and provides guidance for partial sales of nonfinancial assets. It also eliminates rules specifically addressing sales of real estate, removes exceptions to the financial asset derecognition model, and clarifies the accounting for contributions of nonfinancial assets to joint ventures. This guidance becomes effective for us on January 1, 2019, and we are evaluating the impact of this ASU on our financial statements and disclosures.

In March 2017, the FASB issued ASU 2017-08, Receivables—Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities, which is intended to enhance the accounting for the amortization of premiums for purchased callable debt securities. This ASU amends the amortization period for certain callable debt securities held at a premium by more closely aligning the amortization period of premiums and discounts to expectations incorporated in market pricing on the underlying securities. Previously, the premiums on callable debt securities generally were required to be amortized based on the maturity date. Under this update, the premiums on certain callable debt securities held at a premium are to be amortized based on the earliest call date. This update is effective for fiscal years beginning after December 15, 2018. Early adoption is permitted. The Company has elected to early adopt this update effective January 1, 2017, which did not have a material impact on our financial statements and disclosures.

In May 2017, the FASB issued ASU 2017-09, Compensation—Stock Compensation (Topic 718): Scope of Modification Accounting. This ASU provides relief to entities that make non-substantive changes to their share-based payment awards. It provides guidance that will allow companies to make certain changes to awards without applying modification accounting. Under the new guidance, an entity will not apply modification accounting to a share-based payment award if the award’s fair value, vesting conditions, and classification as an equity or liability instrument are the same immediately before and after the change. This guidance becomes effective for us on January 1, 2018, and we are evaluating the impact of this ASU on our financial statements and disclosures.

26 

EX-99.2

Exhibit 99.2​

First Texas BHC, Inc. and Subsidiaries

Consolidated Financial Statements

Independent Auditor’s Report

The Board of Directors
First Texas BHC, Inc. and Subsidiaries
Fort Worth, Texas

Report on the Consolidated Financial Statements

We have audited the accompanying consolidated financial statements of First Texas BHC, Inc. and Subsidiaries (Company), which comprise the consolidated balance sheets as of December 31, 2016 and 2015 and the related consolidated statements of income, comprehensive income, changes in shareholders’ equity and cash flows for each of the years in the three year period ended December 31, 2016 and the related notes to the consolidated financial statements.

Management’s Responsibility for the Consolidated Financial Statements

Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.

Auditor’s Responsibility

Our responsibility is to express an opinion on these financial statements based upon our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the consolidated 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 consolidated financial statements in order to design audit procedures that are appropriate in the circumstances. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

Opinion

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of First Texas BHC, Inc. and Subsidiaries as of December 31, 2016 and 2015, and the results of their operations and their cash flows for each of the years in the three year period ended December 31, 2016, in conformity with accounting principles generally accepted in the United States of America.

Dallas, Texas

March 13, 2017

2

Consolidated Balance Sheets
December 31, 2016 and 2015
(Dollar amounts in thousands, except per share data)

​	2016			2015
ASSETS	​			​
Cash and cash equivalents	​	$	189,920	​	$	108,839
Securities available for sale, at fair value	​		63,296	​	​	70,749
Other equity investments	​		12,857	​	​	8,773
Loans held for sale	​		4,836	​	​	8,903
Loans, net	​		1,774,521	​	​	1,471,915
Premises and equipment, net	​		25,679	​	​	27,024
Cash surrender value of life insurance policies	​		6,790	​	​	6,495
Goodwill	​		37,227	​	​	37,227
Core deposit intangibles, net	​		32	​	​	88
Deferred tax asset, net	​		6,169	​	​	5,233
Accrued interest receivable	​		4,195	​	​	3,450
Other assets	​		3,485	​	​	3,475
Total assets	​	$	2,129,007	​	$	1,752,171
LIABILITIES AND SHAREHOLDERS’ EQUITY	​			​
Deposits:	​			​
Noninterest bearing	​	$	452,898	​	$	389,284
Interest bearing	​		1,200,483	​	​	967,036
Total deposits	​	​	1,653,381	​		1,356,320
Other borrowings	​		159,990	​	​	69,975
Repurchase agreements	​		50,000	​	​	50,000
Junior subordinated debentures	​		8,248	​	​	8,248
Subordinated debt – non-convertible	​		21,969	​	​	21,954
Other liabilities	​		8,576	​	​	9,076
Total liabilities	​	​	1,902,164	​		1,515,573
Commitments and contingencies	​		—	​	​	—
Shareholders’ equity:	​			​
Series C cumulative perpetual preferred shares, $1 par value, $1,000 per share liquidation value; 29,822 shares authorized, no shares issued and outstanding at December 31, 2016 and 29,822 shares issued and outstanding at December 31, 2015	​		—	​	​	29,822
Common stock, $1 par value; 10,000,000 shares authorized; 7,774,033 shares issued and 7,755,170 shares and 7,723,226 shares issued and outstanding at December 31, 2015	​		7,774	​	​	7,723
Surplus	​		169,225	​	​	166,801
Retained earnings	​		53,117	​	​	34,520
Treasury stock	​		(830)	​	​	—
Other equity components	​		(2,019)	​	​	(1,952)
Accumulated other comprehensive loss, net of tax benefit of  $228 and $170 at December 31, 2016 and 2015, respectively	​		(424)	​	​	(316)
Total shareholders’ equity	​	​	226,843	​		236,598
Total liabilities and shareholders’ equity	​	$	2,129,007	​	$	1,752,171

3

Consolidated Statements of Income
Years Ended December 31,
(Dollar amounts in thousands, except per share data)

​	2016			2015			2014
Interest income:	​			​			​
Loans, including fees	​	$	77,971	​	$	67,771	​	$	61,357
Securities	​		1,134	​	​	1,235	​	​	1,392
Federal funds sold and other	​		649	​	​	497	​	​	369
Total interest income	​		79,754	​	​	69,503	​	​	63,118
Interest expense:	​			​			​
Deposits	​		7,472	​	​	6,168	​	​	5,002
Other borrowings	​		4,379	​	​	4,151	​	​	4,577
Total interest expense	​		11,851	​	​	10,319	​	​	9,579
Net interest income	​		67,903	​	​	59,184	​	​	53,539
Provision for loan losses	​		2,109	​	​	1,634	​	​	2,205
Net interest income after provision for loan losses	​		65,794	​	​	57,550	​	​	51,334
Noninterest income:	​			​			​
Service charges	​		1,688	​	​	1,563	​	​	1,459
Other fee income	​		3,921	​	​	3,409	​	​	2,781
Net gain on sale of loans	​		2,970	​	​	2,912	​	​	1,939
Other	​		5,147	​	​	5,211	​	​	4,250
Total noninterest income	​		13,726	​	​	13,095	​	​	10,429
Noninterest expense:	​			​			​
Salaries and employee benefits	​		33,536	​	​	30,519	​	​	27,881
Occupancy	​		3,828	​	​	3,743	​	​	3,724
Equipment	​		2,045	​	​	2,087	​	​	2,166
Professional fees	​		2,280	​	​	1,925	​	​	2,483
Communications	​		643	​	​	630	​	​	644
Data processing	​		2,794	​	​	2,529	​	​	2,187
Core deposit intangible amortization	​		55	​	​	55	​	​	786
Business development	​		1,316	​	​	1,276	​	​	1,191
Supplies	​		185	​	​	189	​	​	205
Other	​		4,169	​	​	4,012	​	​	3,335
Total noninterest expense	​		50,851	​	​	46,965	​	​	44,602
Income before income taxes	​		28,669	​	​	23,680	​	​	17,161
Income tax expense	​		10,050	​	​	8,469	​	​	6,195
Net income	​		18,619	​	​	15,211	​	​	10,966
Preferred stock dividends	​		(22)	​	​	(298)	​	​	(299)
Net income available to common shareholders	​	$	18,597	​	$	14,913	​	$	10,667
Earnings per share:	​			​			​
Basic	​	$	2.40	​	$	2.16	​	$	1.85
Diluted	​	$	2.18	​	$	1.89	​	$	1.53

4

Consolidated Statements of Comprehensive Income
Years Ended December 31,
(Dollar amounts in thousands, except per share data)

​	2016			2015			2014
Net income	​	$	18,619	​	$	15,211	​	$	10,966
Other comprehensive income (loss), net of tax, on securities available for sale:	​			​			​
Change in net unrealized gain (loss), net of tax benefit (expense) of  $58, $1 and ($626), for the years ended December 31, 2016, 2015 and 2014, respectively	​		(108)	​	​	(2)	​	​	1,203
Other comprehensive income (loss), net of tax	​		(108)	​	​	(2)	​	​	1,203
Total comprehensive income, net of tax	​	$	18,511	​	$	15,209	​	$	12,169

5

Consolidated Statements of Changes in Shareholders’ Equity
Years Ended December 31,
(Dollar amounts in thousands, except per share data)

​

Preferred Stock

Common Stock

Surplus

Retained Earnings

Accumulated Other Comprehensive Loss

Treasury Stock

Other Equity Components

Total Shareholders’ Equity

Balance January 1, 2014

​

$

29,822

​

$

5,525

​

$

103,894

​

$

8,940

​

$

(1,517)

​

$

—

​

$

—

​

$

146,664

Net income

​

​

—

​

​

—

​

​

—

​

​

10,966

​

​

—

​

​

—

​

​

—

​

​

10,966

Other comprehensive income

​

​

—

​

​

—

​

​

—

​

​

—

​

​

1,203

​

​

—

​

​

—

​

​

1,203

Issuance of common stock (996,578 shares)

​

​

—

​

​

996

​

​

28,381

​

​

—

​

​

—

​

​

—

​

​

—

​

​

29,377

Preferred stock dividends

​

​

—

​

​

—

​

​

—

​

​

(299)

​

​

—

​

​

—

​

​

—

​

​

(299)

Loan to ESOP

​

​

—

​

​

—

​

​

4

​

​

—

​

​

—

​

​

—

​

​

(1,131)

​

​

(1,127)

Loans secured by common stock

​

​

—

​

​

—

​

​

1

​

​

—

​

​

—

​

​

—

​

​

(823)

​

​

(822)

Stock-based compensation expense recognized in earnings

​

​

—

​

​

—

​

​

575

​

​

—

​

​

—

​

​

—

​

​

—

​

​

575

Balance December 31, 2014

​

​

29,822

​

​

6,521

​

​

132,855

​

​

19,607

​

​

(314)

​

​

—

​

​

(1,954)

​

​

186,537

Net income

​

​

—

​

​

—

​

​

—

​

​

15,211

​

​

—

​

​

—

​

​

—

​

​

15,211

Other comprehensive loss

​

​

—

​

​

—

​

​

—

​

​

—

​

​

(2)

​

​

—

​

​

—

​

​

(2)

Issuance of common stock (1,201,989 shares)

​

​

—

​

​

1,202

​

​

32,801

​

​

—

​

​

—

​

​

—

​

​

—

​

​

34,003

Preferred stock dividends

​

​

—

​

​

—

​

​

—

​

​

(298)

​

​

—

​

​

—

​

​

—

​

​

(298)

Loan to ESOP

​

​

—

​

​

—

​

​

34

​

​

—

​

​

—

​

​

—

​

​

94

​

​

128

Loans secured by common stock

​

​

—

​

​

—

​

​

3

​

​

—

​

​

—

​

​

—

​

​

(92)

​

​

(89)

Stock-based compensation expense recognized in earnings

​

​

—

​

​

—

​

​

1,108

​

​

—

​

​

—

​

​

—

​

​

—

​

​

1,108

Balance December 31, 2015

​

​

29,822

​

​

7,723

​

​

166,801

​

​

34,520

​

​

(316)

​

​

—

​

​

(1,952)

​

​

236,598

Net income

​

​

—

​

​

—

​

​

—

​

​

18,619

​

​

—

​

​

—

​

​

—

​

​

18,619

Other comprehensive loss

​

​

—

​

​

—

​

​

—

​

​

—

​

​

(108)

​

​

—

​

​

—

​

​

(108)

Redemption of preferred stock (29,822 shares)

​

​

(29,822)

​

​

—

​

​

—

​

​

—

​

​

—

​

​

—

​

​

—

​

​

(29,822)

Issuance of common stock (50,807 shares)

​

​

—

​

​

51

​

​

1,626

​

​

—

​

​

—

​

​

—

​

​

—

​

​

1,677

Purchase of treasury stock (26,263 shares)

​

​

—

​

​

—

​

​

—

​

​

—

​

​

—

​

​

(1,086)

​

​

—

​

​

(1,086)

Sale of treasury stock (7,400 shares)

​

​

—

​

​

—

​

​

—

​

​

—

​

​

—

​

​

256

​

​

—

​

​

256

Preferred stock dividends

​

​

—

​

​

—

​

​

—

​

​

(22)

​

​

—

​

​

—

​

​

—

​

​

(22)

Loan to ESOP

​

​

—

​

​

—

​

​

32

​

​

—

​

​

—

​

​

—

​

​

109

​

​

141

Loans secured by common stock

​

​

—

​

​

—

​

​

4

​

​

—

​

​

—

​

​

—

​

​

(176)

​

​

(172)

Payments for vested stock options

​

​

—

​

​

—

​

​

(544)

​

​

—

​

​

—

​

​

—

​

​

—

​

​

(544)

Stock-based compensation expense recognized in earnings

​

​

—

​

​

—

​

​

1,306

​

​

—

​

​

—

​

​

—

​

​

—

​

​

1,306

Balance December 31, 2016

​

$

—

​

$

7,774

​

$

169,225

​

$

53,117

​

$

(424)

​

$

(830)

​

$

(2,019)

​

$

226,843

6

Consolidated Statements of Cash Flows
Years Ended December 31,
(Dollar amounts in thousands, except per share data)

​	2016			2015			2014
Cash flows from operating activities:	​			​			​
Net income	​	$	18,619	​	$	15,211	​	$	10,966
Adjustments to reconcile net income to net cash flows provided by operating activities:	​			​			​
Depreciation and amortization	​		2,202	​	​	2,315	​	​	3,027
Net amortization on securities	​		312	​	​	334	​	​	392
Amortization of debt issuance costs	​		30	​	​	21	​	​	—
Provision for loan losses	​		2,109	​	​	1,634	​	​	2,205
Stock-based compensation expense	​		1,306	​	​	1,108	​	​	575
Writedown of other real estate owned	​		544	​	​	—	​	​	7
Net (gain) loss on sale of other real estate owned	​		(253)	​	​	28	​	​	(103)
Net increase in cash surrender value of life insurance	​		(85)	​	​	(29)	​	​	(133)
Net gain on sale of loans	​		(2,970)	​	​	(2,912)	​	​	(1,939)
Net loss on disposal of premises and equipment	​		9	​	​	2	​	​	11
Deferred tax benefit	​		(878)	​	​	(335)	​	​	(152)
Originations of loans held for sale	​		(147,158)	​	​	(114,650)	​	​	(90,158)
Proceeds from loans held for sale	​		151,225	​	​	112,510	​	​	91,363
(Increase) decrease in other assets	​		(4,472)	​	​	321	​	​	(1,871)
(Decrease) increase in other liabilities	​		(866)	​	​	943	​	​	(218)
Net cash provided by operating activities	​	​	19,674	​		16,501	​		13,972
Cash flows from investing activities:	​			​			​
Securities available for sale:	​			​			​
Purchases	​		(20,833)	​	​	(12,976)	​	​	(5,612)
Maturities, calls and principal repayments	​		27,808	​	​	14,815	​	​	10,938
Net change in loans	​		(304,118)	​	​	(122,711)	​	​	(247,628)
Proceeds from sale of other real estate owned	​		2,082	​	​	602	​	​	1,123
Proceeds from sale of premises and equipment	​		1	​	​	—	​	​	1
Purchases of premises and equipment	​		(812)	​	​	(826)	​	​	(4,034)
Purchases of life insurance policies	​		(210)	​	​	(262)	​	​	(253)
Net cash used in investing activities	​	​	(296,082)	​		(121,358)	​		(245,465)
Cash flows from financing activities:	​			​			​
Net increase in deposits	​		297,061	​	​	103,682	​	​	267,914
(Decrease) increase in federal funds purchased	​		(5,000)	​	​	5,000	​	​	—
Advances (payments) on FHLB advances	​		85,000	​	​	(15,000)	​	​	9,999
Advance on line of credit	​		10,000	​	​	—	​	​	—
Debt issuance costs included in other borrowings	​		—	​	​	(30)	​	​	—
Net (payment on) proceeds from subordinated debt	​		—	​	​	(1,501)	​	​	4,675
Dividends on preferred stock	​		(22)	​	​	(298)	​	​	(299)
(Increase) decrease in ESOP loan	​		141	​	​	128	​	​	(1,127)
Increase in loans secured by common stock	​		(172)	​	​	(89)	​	​	(822)
Payments for vested stock options	​		(544)	​	​	—	​	​	—
Redemption of preferred stock	​		(29,822)	​	​	—	​	​	—
Purchase of treasury stock	​		(1,086)	​	​	—	​	​	—
Sale of treasury stock	​		256	​	​	—	​	​	—
Issuance of common stock	​		1,677	​	​	21,804	​	​	29,377
Net cash provided by financing activities	​	​	357,489	​		113,696	​		309,717
Net increase in cash and cash equivalents	​		81,081	​	​	8,839	​	​	78,224
Cash and cash equivalents at beginning of year	​		108,839	​	​	100,000	​	​	21,776
Cash and cash equivalents at end of year	​	$	189,920	​	$	108,839	​	$	100,000

7

Notes to Consolidated Financial Statements

1.   Business and Summary of Significant Accounting Policies

Pending Acquisition of First Texas BHC, Inc. by Simmons First National Corporation

On January 23, 2017, First Texas BHC, Inc. (First Texas) entered into an agreement and plan of merger (merger agreement) with Simmons First National Corporation (Simmons).

Under the terms of the agreement Simmons will acquire all of the outstanding common stock of First Texas for approximately $462,000,000 (based on Simmons common stock closing price as of January 20, 2017). More specifically, First Texas shareholders and other equity right holders will receive, in the aggregate, 6,500,000 shares of Simmons common stock and $70,000,000 in cash, all subject to certain conditions and potential adjustments. The transaction is expected to close during the fourth quarter of 2017.

The merger agreement contains both customary and specific representations, warranties, and covenants for each of the parties. Also the merger agreement contains certain termination rights for both Simmons and First Texas and further provides that a termination fee of  $18,000,000 will be payable by First Texas to Simmons upon termination of the agreement under certain specified circumstances.

The completion of the acquisition is subject to various customary closing and other conditions, including but not limited to, the approval of the merger agreement by each party’s shareholders and the receipt of required regulatory approvals.

The foregoing limited description of the transaction and merger agreement does not purport to be complete and is qualified in its entirety by reference to the merger agreement.

Basis of Presentation

The accompanying consolidated financial statements include the accounts of First Texas BHC, Inc. (Parent) (a Texas Corporation), and its wholly-owned subsidiaries, SWB Recovery Corp. and Southwest Bank (Bank) and the Bank’s wholly-owned subsidiary, Harob, (collectively referred to as the Company). In 2015, the Bank’s wholly-owned subsidiary BMC Mortgage Services, Inc. (BMC) was terminated. The Parent owns the outstanding common stock of First Texas BHC Statutory Trust II (Trust II), which was formed for the purpose of issuing company-obligated, mandatorily-redeemable preferred securities. See Note 11 for further discussion of Trust II.

The accounting and reporting policies of the Company conform to accounting principles generally accepted in the United States of America and the prevailing practices within the banking industry. The Subsidiary entities are included in the accompanying financial statements from their dates of acquisition. All significant intercompany accounts and transactions have been eliminated in consolidation.

Nature of Operations

The Company is principally engaged in traditional community banking activities provided through its banking offices in Fort Worth, Dallas, Saginaw, Mansfield, Burleson, Grapevine, and Arlington. Community banking activities include the Company’s commercial and retail lending, deposit gathering, investment, and treasury management activities. Mortgage banking activities are provided through offices in Fort Worth, Dallas, and Austin.

Use of Estimates

The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect certain reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses for the reporting period. Actual results could differ from those estimates. The allowance for possible loan losses, valuation of other real estate owned and goodwill, the fair value of stock-based compensation awards, and the fair values of financial instruments are particularly subject to change.

8

Subsequent Events

The Company has evaluated subsequent events through March 13, 2017, the date on which the consolidated financial statements were available to be issued.

Cash and Cash Equivalents

For the purposes of reporting cash flows, cash and cash equivalents include cash on hand, deposits with other financial institutions, and federal funds sold. All highly liquid investments with an initial maturity of less than ninety days are considered to be cash equivalents. Cash flows from loans and deposits are reported net. The Company maintains deposits with other financial institutions. Furthermore, federal funds sold are essentially uncollateralized loans to other financial institutions. Management regularly evaluates the credit risk associated with the counterparties to these transactions and believes that the Company is not exposed to any significant credit risks on cash and cash equivalents.

The Company was not required to have funds on hand or on deposit at December 31, 2016 and 2015 with the Federal Reserve Bank to meet regulatory reserve and clearing requirements. Deposits with the Federal Reserve Bank earned interest in the amount of approximately $250,000, $157,000 and $48,000 for the years ending December 31, 2016, 2015 and 2014, respectively.

Securities

Securities are classified as held to maturity and carried at amortized cost when management has the positive intent and ability to hold them to maturity. Securities are classified as available for sale when they may be used as part of the Company’s asset/liability strategy and may be sold prior to maturity in response to changes in interest rate risk, prepayment risk, or other similar economic factors. Securities available for sale are carried at fair value, with unrealized holding gains and losses, net of tax, reported in other comprehensive income. Management determines the appropriate classification of securities at the time of purchase. As of December 31, 2016 and 2015, all securities were classified as available for sale.

The amortization of premiums and accretion of discounts, computed by the interest method over their contractual lives, are recognized in interest income. Gains and losses on sales are based on the amortized cost of the security sold.

Declines in the fair value of individual securities below their cost that are considered other than temporary result in write downs of the individual securities to their fair value. The related write downs, if any, are included in earnings as realized losses.

Other equity investments such as stock in the Federal Home Loan Bank, Federal Reserve Bank, and Independent Bankers Financial Corporation are carried at cost.

Loans Held for Sale

Loans originated or purchased and intended for sale in the secondary market are carried at the lower of aggregate cost or fair value, as determined by aggregate outstanding commitments from investors or current investor yield requirements. Gains or losses on sales of mortgage loans are recognized based on the difference between the selling price and the carrying value of the related mortgage loans.

Loans

Loans are reported at the principal balance outstanding, less the allowance for loan losses, net of unamortized premium, net deferred loan fees, net deferred loan costs, and net nonaccrual interest paid. Interest is accrued daily on the outstanding balances. Loan origination and commitment fees, as well as certain direct origination costs, are deferred and amortized as a yield adjustment over the lives of the related loans. Further information regarding the Company’s accounting policy related to past due loans, nonaccrual loans, impaired loans, and troubled-debt restructuring is presented in Note 5 — Loans and Allowance for Loan Losses.

Allowance for Loan Losses

The allowance for loan losses is a reserve established through a provision for loan losses charged to expense, which represents management’s best estimate of probable losses that have been incurred within the

9

existing portfolio of loans. The allowance, in the judgment of management, is necessary to reserve for estimated losses inherent in the loan portfolio. For further information regarding the Company’s policies and methodology used to estimate the allowance for loan losses is presented in Note 5 — Loans and Allowance for Loan Losses.

Loan Servicing and Sales

In the normal course of business, the Company sells the guaranteed portion of certain loans originated with the partial guarantee of the Small Business Administration (SBA) or U.S. Department of Agriculture (USDA). At the time of these sales, the Company retains servicing rights and interest-only strips on those loans. Gain or loss on sale of the receivables depends in part on the previous carrying amount of the financial assets involved in the transfer, allocated between the assets sold and the retained interests based on their relative fair values at the date of transfer. To obtain fair values, quoted market prices are used if available. However, quotes are generally not available for retained interests, so the Company generally estimates fair value based on the present value of future expected cash flows. Future expected cash flows are estimated by management based on key assumptions such as credit losses, prepayment speeds, forward yield curves, and discount rates commensurate with the risks involved.

The related servicing rights represent the estimated present values of future cash flows related to rights to service SBA and USDA loans for other investors. Loan servicing rights are amortized against loan servicing fee income on an accelerated basis in proportion to, and over the period of, estimated net future loan servicing fee income. Service fee income is recognized as the related loan payments are collected. At December 31, 2016 and 2015, the Company had capitalized loan servicing rights of approximately $274,000 and $365,000, respectively, included in other assets in the accompanying financial statements.

Capitalized interest-only strip receivables represent contractual rights to receive the rate differential between the interest rate sold to investors and the rate retained by the Company. Capitalized interest-only strip receivables are amortized against interest income as an adjustment to yield in proportion to, and over the period of, estimated net future loan servicing fee income. At December 31, 2016 and 2015, the Company had capitalized interest-only strip receivables of approximately $183,000 and $279,000, respectively, included in other assets in the accompanying financial statements.

Deferred gain on sale of loans represents the relative value of the loan sale proceeds of the retained, unguaranteed portion of the loan retained, net of amounts capitalized and the gain immediately recognized. Deferred gain is recognized into income in proportion to, and over the period of, estimated net future loan servicing fee income. At December 31, 2016 and 2015, the Company had deferred gains of approximately $684,000 and $917,000, respectively, included in other liabilities in the accompanying financial statements.

Management periodically evaluates both servicing rights and interest-only strip receivables for impairment, and, if necessary, writes such assets down to their estimated fair values. At December 31, 2016 and 2015, management has determined that the carrying amounts of servicing assets and interest-only strip receivables approximate their estimated fair values.

Premises and Equipment

Land is carried at cost. Building and improvements and furniture and equipment are stated at cost less accumulated depreciation, computed on a straight-line basis over the estimated useful lives of the assets ranging from 3 to 40 years. Leasehold improvements are generally depreciated over the term of the respective leases. The related cost and accumulated depreciation are removed from the accounts at the time an asset is sold or retired, and any resulting gain or loss is recognized in income. Maintenance and repairs are charged to operating expenses as incurred.

Other Real Estate Owned

Other real estate owned is initially recorded at fair value less the estimated costs to sell the asset. Write downs of carrying value required at the time of foreclosure are recorded as a charge to the allowance for loan losses. Costs related to the development of such real estate are capitalized, whereas those related to

10

holding the property are expensed. Foreclosed property is subject to periodic reevaluation based upon estimates of fair value. In determining the valuation of other real estate owned, management obtains independent appraisals for significant properties. Valuation adjustments are provided, as necessary, by charges to operations.

Goodwill

Goodwill represents the excess of the cost of business acquired over the fair value of the net assets acquired. Goodwill is assessed, at least annually, for impairment, as well as when events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. The Company bases its evaluation on such impairment factors as the nature of the assets, the future economic benefit of the assets, any historical or future profitability measurements, and other market conditions or factors that may be present.

Intangibles and Other Long-Lived Assets

Intangible assets are acquired assets that lack physical substance but can be distinguished from goodwill because of contractual or other legal rights or because the asset is capable of being sold or exchanged either on its own or in combination with a related contract, asset, or liability. The Company’s intangible assets relate to core deposits. Intangible assets with definite useful lives are amortized on a straight-line basis over their estimated useful life. Intangible assets, premises and equipment and other long-lived assets are tested for impairment whenever events or changes in circumstances indicate the carrying amount of the assets may not be recoverable from future cash flows. If impaired, the assets are recorded at fair value and an impairment loss is recognized.

Stock-Based Compensation

The Company accounts for stock-based employee compensation plans in accordance with accounting rules, which require companies to expense the fair value of employee stock options and other forms of stock-based employee compensation in the financial statements over the period that an employee provides service in exchange for the award. Under these rules, the Company measures compensation cost related to stock options based on the grant-date fair value of the award using the Black-Scholes option-pricing model and recognizes it ratably, less estimated forfeitures, over the vesting term of the award.

Income Taxes

Income tax expense is the total of the current year income tax due or refundable and the change in deferred tax assets and liabilities (excluding deferred tax assets and liabilities related to components of other comprehensive income). Deferred tax assets and liabilities are the expected future tax amounts for the temporary differences between carrying amounts and the tax bases of assets and liabilities, computed using enacted tax rates. A valuation allowance, if needed, reduces deferred tax assets to the expected amount most likely to be realized. Realization of deferred tax assets is dependent upon the generation of a sufficient level of future taxable income and recoverable taxes paid in prior years. Although realization is not assured, management believes it is more-likely-than-not that all of the deferred tax assets will be realized.

The Company files a consolidated income tax return with its subsidiaries. Federal income tax expense or benefit has been allocated to subsidiaries on a separate return basis. The open tax years are 2013 through 2016. When and if applicable, potential interest and penalty costs are accrued as incurred, with expenses recognized in other noninterest expense in the statements of consolidated income.

For the years ended December 31, 2016, 2015 and 2014, management has determined there are no uncertain tax positions.

Comprehensive Income

Accounting principles generally require that recognized revenue, expenses, gains and losses be included in net income. Although certain changes in assets and liabilities, such as unrealized gains and losses on available for sale securities, are not reported as a separate component in the consolidated statement of

11

income, such items are components of comprehensive income. Gains and losses on available for sale securities are reclassified to net income as the gains or losses are realized upon sale of the securities. Other than temporary impairment charges are reclassified to net income at the time of the charge.

Fair Values of Financial Instruments

ASC Topic 820, Fair Value Measurements and Disclosures, defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and requires certain disclosures about fair value measurements (see Note 18 — Fair Values Disclosures and Note — 19 Fair Value Measurements). In general, fair values of financial instruments are based upon quoted market prices, where available. If such quoted market prices are not available, a fair value is based upon models that primarily use, as inputs, observable market-based parameters. Valuation adjustments may be made to ensure that financial instruments are recorded at fair value. These adjustments may include amounts to reflect counterparty credit quality and the Company’s creditworthiness, among other things, as well as unobservable parameters. Any such validation adjustments are applied consistently over time.

Transfers of Financial Assets

Transfers of financial assets are accounted for as sales when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (i) the assets have been isolated from the Company, (ii) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and (iii) the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity.

Dividend Restriction

Banking regulations require the maintenance of certain capital and net income levels that may limit the amount of dividends that may be paid. Approval by regulatory authorities is required if the effect of dividends declared would cause the regulatory capital of the Bank to fall below specified minimum levels. Regulatory capital requirements are more fully disclosed in Note 21 — Regulatory Matters.

Treasury Stock

Treasury stock is recorded at cost. At December 31, 2016, the Company had 18,863 shares held in treasury. The Company had no shares held in treasury at December 31, 2015.

Operating Segments

While the chief decision makers monitor the revenue streams of the various products and services, operations are managed and financial performance is evaluated on a Company wide basis. Operating segments are aggregated into one as operating results for all segments are similar. Accordingly, all of the financial services operations are considered by management to be aggregated into one reportable operating segment.

Reclassifications

Certain reclassifications have been made to the prior year’s consolidated financial statements to conform to the current year’s presentation. Such reclassifications had no effect on net income or shareholders’ equity.

2.   Recent Accounting Pronouncements

In January 2016, the FASB issued Accounting Standards Update 2016-1, Financial Instruments —  Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. The update addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. The amendments are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. The amendment relates to equity securities without readily determinable fair values and will be applied prospectively to equity investments that exist as of the date of

12

adoption of the amendments. Earlier application is permitted under certain circumstances. The amendment will be applied by means of a cumulative effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption. This statement is not expected to have a material impact on the Company’s consolidated financial statements.

In February 2016, the FASB issued Accounting Standards Update 2016-2, Leases (Topic 842). The amendment to the Leases topic of the Accounting Standards Codification was to revise certain aspects of recognition, measurement, presentation, and disclosure of leasing transactions. The amendment will be effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Earlier application is permitted. This statement is not expected to have a material impact on the Company’s consolidated financial statements.

In March 2016, the FASB issued Accounting Standards Update 2016-5, Derivatives and Hedging (Topic 815): Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships. The amendment clarifies that a change in the counterparty to a derivative instrument that has been designated as the hedging instrument under ASC Topic 815 does not, in and of itself, require dedesignation of that hedging relationship provided that all other hedge accounting criteria continue to be met. The amendment will be effective for reporting periods beginning after December 15, 2016. Earlier application is permitted. This statement is not expected to have a material impact on the Company’s consolidated financial statements.

In March 2016, the FASB issued Accounting Standards Update 2016-7, Investments — Equity Method and Joint Ventures (Topic 323): Simplifying the Transition to the Equity Method of Accounting. The amendments affect all entities that have an investment that becomes qualified for the equity method of accounting as a result of an increase in the level of ownership interest or degree of influence. The update simplifies the transition to the equity method of accounting by eliminating retroactive adjustment of the investment when an investment qualifies for use of the equity method, among other things. The amendment will be effective for reporting periods beginning after December 15, 2016. Earlier application is permitted. This statement is not expected to have a material impact on the Company’s consolidated financial statements.

In March 2016, the FASB issued Accounting Standards Update2016-09, Compensation — Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. Under the update, all excess tax benefits and tax deficiencies related to share-based payment awards should be recognized as income tax expense or benefit in the income statement during the period in which they occur. Previously, such amounts were recorded in the pool of excess tax benefits included in additional paid-in capital, if such pool was available. Because excess tax benefits are no longer recognized in additional paid-in capital, the assumed proceeds from applying the treasury stock method when computing earnings per share should exclude the amount of excess tax benefits that would have previously been recognized in additional paid-in capital. Additionally, excess tax benefits should be classified along with other income tax cash flows as an operating activity rather than a financing activity, as was previously the case. ASU 2016-09 also provides that an entity can make an entity-wide accounting policy election to either estimate the number of awards that are expected to vest (current GAAP) or account for forfeitures when they occur. ASU 2016-09 changes the threshold to qualify for equity classification (rather than as a liability) to permit withholding up to the maximum statutory tax rates (rather than the minimum as was previously the case) in the applicable jurisdictions. The amendment will be effective for reporting periods beginning after December 15, 2016. Earlier application is permitted. This statement is not expected to have a material impact on the Company’s consolidated financial statements.

In June, 2016, the FASB issued Accounting Standards Update2016-13, Financial Instruments — Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The update requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts and requires enhanced disclosures related to the significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an organization’s portfolio. In addition, ASU 2016-13 amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. The amendment will be effective for reporting periods beginning after December 15, 2020. The Company is evaluating the impact this amendment will have on the Company’s consolidated financial statements.

13

In August, 2016, the FASB issued Accounting Standards Update2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. The update addresses eight specific cash flow issues with the objective of reducing the diversity in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The amendment will be effective for reporting periods beginning after December 15, 2017. Early adoption is permitted. This statement is not expected to have a material impact on the Company’s consolidated financial statements.

In October, 2016, the FASB issued Accounting Standards Update2016-17, Consolidation (Topic 810): Interests Held through Related Parties That Are under Common Control. This update amends the consolidation guidance on how a reporting entity that is the single decision maker of a variable interest entity (VIE) should treat indirect interests in the entity held through related parties that are under common control with the reporting entity when determining whether it is the primary beneficiary of that VIE. The amendment will be effective for reporting periods beginning after December 15, 2016. This statement is not expected to have a material impact on the Company’s consolidated financial statements.

In November, 2016, the FASB issued Accounting Standards Update2016-18, Statement of Cash Flows (Topic 230): Restricted Cash. The amendments in this update require that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning of period and end of period total amounts shown on the statement of cash flows. The amendment will be effective for reporting periods beginning after December 15, 2017. Early adoption is permitted. This statement is not expected to have a material impact on the Company’s consolidated financial statements.

3.   Statement of Cash Flows

The Company has chosen to report its cash flows by the indirect method. Supplemental information on cash flows and non-cash transactions for the years ended December 31, 2016, 2015 and 2014 is presented as follows (in thousands):

​	2016			2015			2014
Cash transactions:	​			​			​
Income taxes paid	​	$	11,640	​	$	8,750	​	$	5,550
Interest expense paid	​	$	11,777	​	$	10,481	​	$	9,453
Noncash transactions:	​			​			​
Real estate acquired in foreclosure or in settlement of loans	​	$	2,373	​	$	—	​	$	1,657
Subordinated debt converted to common stock	​	$	—	​	$	12,199	​	$	—
Debt issuance costs transferred to other borrowings	​	$	—	​	$	137	​	$	—

14

4.   Securities Available for Sale

Securities available for sale consisted of the following at December 31, 2016 and 2015 (in thousands):

​

Amortized Cost

Gross Unrealized Gains

Gross Unrealized Losses

Estimated Fair Value

Securities Available for Sale

​

​

​

​

December 31, 2016:

​

​

​

​

U.S. government securities

​

$

2,618

​

$

—

​

$

12

​

$

2,606

U.S. government agency

​

​

29,864

​

​

3

​

​

323

​

​

29,544

Mortgage-backed securities

​

​

28,730

​

​

117

​

​

183

​

​

28,664

Trust preferred securities

​

​

938

​

​

—

​

​

230

​

​

708

CRA Qualified Investment Fund

​

​

1,798

​

​

—

​

​

24

​

​

1,774

​

​

$

63,948

​

$

120

​

$

772

​

$

63,296

December 31, 2015:

​

​

​

​

U.S. government agency

​

$

32,795

​

$

—

​

$

267

​

$

32,528

Mortgage-backed securities

​

​

35,748

​

​

211

​

​

205

​

​

35,754

Trust preferred securities

​

​

934

​

​

—

​

​

230

​

​

704

CRA Qualified Investment Fund

​

​

1,758

​

​

5

​

​

—

​

​

1,763

​

​

$

71,235

​

$

216

​

$

702

​

$

70,749

Securities with a fair value of approximately $59,523,000 and $63,773,000 at December 31, 2016 and 2015, respectively, were sold under agreements to repurchase or were pledged to secure public fund deposits, long term borrowings, or lines of credit, as required or permitted by law.

Unrealized losses and fair value, aggregated by length of time that individual securities have been in a continuous unrealized loss position, as of December 31, 2016 and 2015, are summarized as follows (in thousands):

​

Continuous Unrealized Losses Existing for Less than 12 months

Continuous Unrealized Losses Existing for Greater than 12 months

Total

Securities Available for Sale

Fair Value

Unrealized Losses

Fair Value

Unrealized Losses

Fair Value

Unrealized Losses

December 31, 2016:

​

​

​

​

​

​

U.S. government securities

​

$

2,606

​

$

12

​

$

—

​

$

—

​

$

2,606

​

$

12

U.S. government agency

​

​

24,541

​

​

323

​

​

—

​

​

—

​

​

24,541

​

​

323

Mortgage-backed securities

​

​

21,561

​

​

183

​

​

—

​

​

—

​

​

21,561

​

​

183

Trust preferred securities

​

​

—

​

​

—

​

​

708

​

​

230

​

​

708

​

​

230

CRA Qualified Investment Fund

​

​

1,774

​

​

24

​

​

—

​

​

—

​

​

1,774

​

​

24

​

​

$

50,482

​

$

542

​

$

708

​

$

230

​

$

51,190

​

$

772

December 31, 2015:

​

​

​

​

​

​

U.S. government agency

​

$

22,669

​

$

126

​

$

9,859

​

$

141

​

$

32,528

​

$

267

Mortgage-backed securities

​

​

21,623

​

​

205

​

​

—

​

​

—

​

​

21,623

​

​

205

Trust preferred securities

​

​

—

​

​

—

​

​

704

​

​

230

​

​

704

​

​

230

CRA Qualified Investment Fund

​

​

—

​

​

—

​

​

—

​

​

—

​

​

—

​

​

—

​

​

$

44,292

​

$

331

​

$

10,563

​

$

371

​

$

54,855

​

$

702

15

Unrealized losses relate principally to current interest rates for similar types of securities. In analyzing an issuer’s financial condition, management considers whether the securities are issued by the federal government or its agencies, whether downgrades by bond rating agencies have occurred, and the results of reviews of the issuer’s financial condition. The Company does not intend to sell these securities and it is more-likely-than-not that the Company will not be required to sell prior to recovery.

Management evaluates securities for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. Consideration is given to (i) the length of time and the extent to which the fair value has been less than cost, (ii) the financial condition and near-term prospects of the issuer, and (iii) the intent and ability of the Company to sell or whether it would be more-likely-than-not required to sell its investments in the issuer for a period of time sufficient to allow for any anticipated recovery. As of December 31, 2016 and 2015, no investment securities were other-than-temporarily impaired.

The amortized cost and estimated fair value of securities at December 31, 2016, by contractual maturity, are shown below. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations. Mortgage-backed securities are shown separately since they are not due at a single maturity date (in thousands):

​	Available For Sale
​	Amortized Cost			Fair Value
Due less than one year	​	$	—	​	$	—
Due one through five years	​	​	17,618	​	​	17,574
Due over five through ten years	​	​	14,864	​	​	14,576
Due after ten years	​	​	938	​	​	708
​	​	​	33,420	​	​	32,858
CRA Qualified Investment Fund	​	​	1,798	​	​	1,774
Mortgage-backed securities	​	​	28,730	​	​	28,664
​	​	$	63,948	​	$	63,296

5.   Loans and Allowance for Loan Losses

Risk By Loan Category

To determine an appropriate allowance for loan losses, management separates loans into separate categories based on similar risk characteristics. These categories and their risk characteristics are described below:

Construction and Land Development — This category consists of loans secured by vacant land, which includes developed commercial land, undeveloped commercial land, rural land, single family residential lots, lot development loans, and interim construction for both 1 – 4 family and commercial developments. These loans are closely monitored by on-site inspections and are considered to have higher risks than other real estate loans due to their ultimate repayment being sensitive to interest rate changes, government regulation of real property, general economic conditions and the availability of long-term financing.

Commercial Real Estate — This category consists of loans secured by both owner-occupied and non-owner occupied commercial real estate properties and represents the largest category of the Company’s total loan portfolio. A majority of the loans in this category are secured by non-owner occupied commercial properties. The remainder of this segment is secured by owner occupied properties. The non-owner occupied portion of this category presents a higher risk profile given the reliance on third-party rental income and the successful operation of the property to service the regular payment, but overall credit risk is low. A substantial majority of these loans have adequate secondary sources of repayment through financially strong guarantors that are well known to the Company. Commercial real estate loans may be more adversely affected by conditions in the real estate markets or in the general economy. The properties securing the Company’s portfolio are diverse in terms of type and geographic location. Loan losses in this category have been minimal.

16

Residential Real Estate — This category consists of loans secured by some form of both owner-occupied and non-owner-occupied residential real estate. The category includes loans for home improvement, home equity lines of credit and close-end financing for 1 – 4 family properties. Mortgage loans held for sale on the secondary market are excluded from this category. Generally, the overall credit risk in this segment of the loan portfolio is low given the nature of the collateral and the Company’s strict underwriting standards for this type of financing. The Company does not originate sub-prime mortgage loans. The higher risk area of this category is the “non-owner-occupied” portion of these loans which are often reliant on rental income as the primary source of repayment.

Commercial, Industrial and Agricultural — This category consists of all business loans secured by assets other than commercial real estate. It also includes loans for agriculture production. A substantial majority of these loans are secured by equipment, accounts receivable and inventory. The loss history in this segment of the portfolio is very low due to sufficient collateralization. The primary risk involved with this category is that the loans are typically secured by depreciable assets that may not provide an adequate source of repayment if the loan goes into default.

Loans to Nondepository Financial Institutions — This category consists of all loans to mortgage companies that specialize in mortgage loan originations and mortgage warehouse loans. It also includes loans to real estate investment trusts.

Consumer and Other — This category of loans consists of all other forms of consumer debt, including automobiles, recreational vehicles, debt consolidation, household or personal use, education, taxes, mobile homes, personal lines of credit, loans to mortgage originators, loans to non-profits and overdrafts. Overdrafts are deposit accounts that become unsecured loans when overdrawn by the deposit customer. Overdrafts are monitored by account officers on a daily basis and are often cleared within a very short period of time. It is bank policy to charge off any overdrafts that remain outstanding for more than 60 days.

Loans consisted of the following at December 31, 2016 and 2015 (in thousands):

​	2016			2015
Construction and land development	​	$	280,601	​	$	223,309
Commercial real estate	​		811,278	​	​	649,109
1 – 4 family residential	​		234,829	​	​	203,103
Commercial and industrial	​		278,973	​	​	247,888
Agricultural	​		32,183	​	​	17,298
Loans to nondepository financial institutions	​		135,386	​	​	127,072
Consumer and other	​		18,376	​	​	19,108
Gross loans	​		1,791,626	​	​	1,486,887
Allowance for loan losses	​		(17,105)	​	​	(14,972)
Net loans	​	$	1,774,521	​	$	1,471,915

At December 31, 2016 and 2015, the Bank had total commercial real estate loans and construction and land development loans of  $1,091,879,000, and $871,063,000, respectively. The Bank had construction, land development, and other loans representing 115% and 112%, respectively, of total risk based capital at December 31, 2016 and 2015. The Bank had non-owner-occupied commercial real estate loans representing 379% and 356%, respectively, of total risk based capital at December 31, 2016 and 2015. Sound risk management practices and appropriate levels of capital are essential elements of a sound commercial real estate lending program (CRE). Concentrations of CRE exposures add a dimension of risk that compounds the risk inherent in individual loans. Interagency guidance on CRE concentrations describe sound risk management practices which include board and management oversight, portfolio management, management information systems, market analysis, portfolio stress testing and sensitivity analysis, credit underwriting standards, and credit risk review functions. Management believes it has implemented these practices in order to monitor its CRE. An institution which has reported loans for construction, land development, and other land loans representing 100% or more of total risk-based capital, or total

17

non-owner-occupied commercial real estate loans representing 300% or more of the institution’s total risk-based capital and the outstanding balance of commercial real estate loan portfolio has increased by 50% or more during the prior 36 months, may be identified for further supervisory analysis by regulators to assess the nature and risk posed by the concentration.

At December 31, 2016 and 2015, the Bank had approximately $27,435,000 and $26,730,000, respectively, of energy loans included in commercial and industrial loans. These energy loans represent approximately 11% and 13% of total risk based capital at December 31, 2016 and 2015, respectively. Management believes it has implemented appropriate practices for sound underwriting and the monitoring of these loans. However, the weakening of prices within the energy industry over a prolonged period may have an adverse effect on the Bank’s profitability and asset quality.

The Company extends commercial and consumer credit primarily to customers in the state of Texas. At December 31, 2016 and 2015, the majority of the Company’s loans were collateralized with real estate. The real estate collateral provides an alternate source of repayment in the event of default by the borrower, and may deteriorate in value during the time the credit is extended. The weakening of real estate markets may have an adverse effect on the Company’s profitability and asset quality. If the Company was required to liquidate the collateral securing a loan to satisfy the debt during a period of reduced real estate values, earnings and capital could be adversely affected. Additionally, the Company has loans secured by inventory, accounts receivable, equipment, marketable securities, or other assets. The debtors’ ability to honor their contracts on all loans is substantially dependent upon the general economic conditions of the region.

Nonaccrual and Past Due Loans

Loans are considered past due if the required principal and interest payments have not been received as of the date such payments were due. The accrual of interest on loans is discontinued at the time the loan is 90 days delinquent unless the credit is well-secured and in process of collection. Loans are placed on nonaccrual or charged off at an earlier date if collection of principal or interest is considered doubtful. All interest accrued but not collected for loans that are placed on nonaccrual or charged off is reversed against interest income. The interest on these loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

Year-end nonaccrual loans, segregated by class of loans, at December 31, 2016 and 2015, were as follows (in thousands):

​	2016			2015
Construction and land development	​	$	—	​	$	1,355
Commercial real estate	​		—	​	​	—
1 – 4 family residential	​		60	​	​	67
Commercial and industrial	​		—	​	​	24
Agricultural	​		—	​	​	—
Loans to nondepository financial institutions	​		—	​	​	—
Consumer and other	​		—	​	​	—
​	​	$	60	​	$	1,446

18

An age analysis of past due loans (including both accruing and nonaccruing loans), segregated by class of loans, as of December 31, 2016 and 2015, is as follows (in thousands):

​

Loans 30 – 89 Days Past Due

Loans 90 or More Days Past Due

Total Past Due Loans

Current Loans

Total Loans

Accruing Loans 90 or More Days Past Due

December 31, 2016:

​

​

​

​

​

​

Construction and land development

​

$

183

​

$

—

​

$

183

​

$

280,418

​

$

280,601

​

$

—

Commercial real estate

​

​

280

​

​

—

​

​

280

​

​

810,998

​

​

811,278

​

​

—

1 – 4 family residential

​

​

1,831

​

​

121

​

​

1,952

​

​

232,877

​

​

234,829

​

​

121

Commercial and industrial

​

​

111

​

​

—

​

​

111

​

​

278,862

​

​

278,973

​

​

—

Agricultural

​

​

—

​

​

—

​

​

—

​

​

32,183

​

​

32,183

​

​

—

Loans to nondepository financial institutions

​

​

—

​

​

—

​

​

—

​

​

135,386

​

​

135,386

​

​

—

Consumer and other

​

​

13

​

​

1

​

​

14

​

​

18,362

​

​

18,376

​

​

1

​

​

$

2,418

​

$

122

​

$

2,540

​

$

1,789,086

​

$

1,791,626

​

$

122

December 31, 2015:

​

​

​

​

​

​

Construction and land development

​

$

—

​

$

1,355

​

$

1,355

​

$

221,954

​

$

223,309

​

$

—

Commercial real estate

​

​

—

​

​

—

​

​

—

​

​

649,109

​

​

649,109

​

​

—

1 – 4 family residential

​

​

747

​

​

—

​

​

747

​

​

202,356

​

​

203,103

​

​

—

Commercial and industrial

​

​

410

​

​

—

​

​

410

​

​

247,478

​

​

247,888

​

​

—

Agricultural

​

​

—

​

​

—

​

​

—

​

​

17,298

​

​

17,298

​

​

—

Loans to nondepository financial institutions

​

​

—

​

​

—

​

​

—

​

​

127,072

​

​

127,072

​

​

—

Consumer and other

​

​

37

​

​

—

​

​

37

​

​

19,071

​

​

19,108

​

​

—

​

​

$

1,194

​

$

1,355

​

$

2,549

​

$

1,484,338

​

$

1,486,887

​

$

—

Impaired Loans

A loan is considered impaired when it is probable, based on current information and events, the Company will be unable to collect all contractual principal and interest payments due in accordance with the terms of the loan agreement. Impaired loans are measured on an individual basis based on the present value of expected future cash flows discounted at the loan’s effective interest rate or, as a practical expedient, at the loan’s observable market price or the fair value of the collateral if the loan is collateral dependent. The amount of impairment, if any, and any subsequent changes are included in the allowance for loan losses.

19

Year-end impaired loans as of December 31, 2016 and 2015 are set forth in the following table (in thousands):

​

Unpaid Contractual Principal Balance

Recorded Investment With No Allowance

Recorded Investment With Allowance

Total Recorded Investment

Related Allowance

Average Recorded Investment

Interest Income Received

December 31, 2016:

​

​

​

​

​

​

​

Construction and land development

​

$

—

​

$

—

​

$

—

​

$

—

​

$

—

​

$

578

​

$

—

Commercial real estate

​

​

—

​

​

—

​

​

—

​

​

—

​

​

—

​

​

201

​

​

—

1 – 4 family residential

​

​

84

​

​

—

​

​

60

​

​

60

​

​

10

​

​

121

​

​

—

Commercial and industrial

​

​

240

​

​

—

​

​

240

​

​

240

​

​

50

​

​

244

​

​

15

Agricultural

​

​

—

​

​

—

​

​

—

​

​

—

​

​

—

​

​

—

​

​

—

Loans to nondepository financial institutions

​

​

—

​

​

—

​

​

—

​

​

—

​

​

—

​

​

—

​

​

—

Consumer and other

​

​

—

​

​

—

​

​

—

​

​

—

​

​

—

​

​

3

​

​

—

​

​

$

324

​

$

—

​

$

300

​

$

300

​

$

60

​

$

1,147

​

$

15

December 31, 2015:

​

​

​

​

​

​

​

Construction and land development

​

$

1,355

​

$

1,355

​

$

—

​

$

1,355

​

$

—

​

$

1,443

​

$

—

Commercial real estate

​

​

—

​

​

—

​

​

—

​

​

—

​

​

—

​

​

431

​

​

—

1 – 4 family residential

​

​

85

​

​

—

​

​

67

​

​

67

​

​

10

​

​

148

​

​

1

Commercial and industrial

​

​

277

​

​

24

​

​

—

​

​

24

​

​

—

​

​

86

​

​

1

Agricultural

​

​

—

​

​

—

​

​

—

​

​

—

​

​

—

​

​

—

​

​

—

Loans to nondepository financial institutions

​

​

—

​

​

—

​

​

—

​

​

—

​

​

—

​

​

—

​

​

—

Consumer and other

​

​

11

​

​

11

​

​

—

​

​

11

​

​

—

​

​

15

​

​

—

​

​

$

1,728

​

$

1,390

​

$

67

​

$

1,457

​

$

10

​

$

2,123

​

$

2

Troubled Debt Restructurings

The restructuring of a loan is considered a “troubled debt restructuring” if both the borrower is experiencing financial difficulties and the creditor has granted a concession. Concessions may include interest rate reductions or below market interest rates, principal forgiveness, restructuring amortization schedules and other actions intended to minimize potential losses. The Company had no troubled debt restructurings during 2016, 2015 and 2014.

Credit Quality Indicators

As part of the ongoing monitoring of the credit quality of the Company’s loan portfolio, management tracks certain quality indicators including trends related to the risk grade of loans, the level of classified loans, the delinquency status of loans, net charge-offs, non-performing loans, and the general economic conditions in the state of Texas.

The Company utilizes a risk-grading definition system to assign a risk grade to each of its loans. Loans are graded on a scale of 1 to 9. A description of the general characteristics of the 9 risk grades is as follows:

Grade 1 — This grade includes loans with little or no risk of loss. Interest payments are protected by a large or exceptionally stable margin and principal is secured. These borrowers have a strong positive consistent cash flow, stable earnings and growth, significant net worth and sufficient liquidity to fully repay the debt.

Grades 2 and 3 — These grades include loans to borrowers of solid credit quality with moderate risk. Borrowers in these grades are differentiated from higher grades on the basis of leverage, asset quality, and the stability of the industry or market area.

20

Grade 4 — This grade is for “satisfactory” loans. These borrowers have acceptable financial condition and stability but are more susceptible to economic changes and greater concentration of business risk either by product or market, however borrowers demonstrate consistent profitability or strong historical cash flow; competent management but may not have been tested by cyclical market conditions.

Grade 5 — This grade includes loans on management’s “Pass/Watch list”. Pass/Watch assets are neither criticized nor classified credits. These assets have the potential for future deterioration. This grade is intended to be utilized on a temporary basis.

Grade 6 — This grade is for “Special Mention” loans. Special mention loans are considered criticized assets. These assets have the potential for future deterioration. Such loans are differentiated from a Grade 5 in terms of a higher sensitivity to severity and imminence of the potential weakness(es). If left uncorrected, these potential weakness(es) may at some future date result in the deterioration of the repayment prospects for the loan.

Grade 7 — This grade is for “Substandard” loans. Substandard loans have defined weakness(es) which make payment default or principal exposure likely but not yet certain. These loans are inappropriately protected by the current net worth and paying capacity of the borrower or the collateral pledged. Although loss may not be imminent, if the weakness(es) is not corrected, there is a distinct possibility that the Company will sustain some loss. If the likelihood of full collection of principal and interest may be in doubt these loans are placed on nonaccrual.

Grade 8 — This grade includes “Doubtful” loans. Such loans are differentiated from a Grade 7 in terms that the weakness(es) makes collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. Loans in this grade are carried on nonaccrual.

Grade 9 — This grade includes “Loss” loans. Such loans are considered uncollectible and of such little value that their continuance as assets is not warranted. Loss is not intended to imply that the loan or some portion of it will never be paid, nor does it in any way imply that there has been a forgiveness of debt.

The following table presents the risk category of loans by grade as of December 31, 2016 and 2015 (in thousands):

​

Construction and Land Development

Commercial Real Estate

1 – 4 Family Residential

Commercial and Industrial

Agricultural

Consumer and Other

Loans to Nondepository Financial Institutions

Total

December 31, 2016:

​

​

​

​

​

​

​

​

Grade 1

​

$

—

​

$

176

​

$

—

​

$

5,963

​

$

—

​

$

2,121

​

$

—

​

$

8,260

Grade 2

​

​

—

​

​

1,016

​

​

783

​

​

2,684

​

​

548

​

​

277

​

​

—

​

​

5,308

Grade 3

​

​

32,889

​

​

158,158

​

​

36,431

​

​

64,961

​

​

6,082

​

​

2,542

​

​

124,818

​

​

425,881

Grade 4

​

​

237,688

​

​

644,416

​

​

195,429

​

​

202,490

​

​

25,553

​

​

13,436

​

​

10,568

​

​

1,329,580

Grade 5

​

​

9,558

​

​

6,308

​

​

810

​

​

1,949

​

​

—

​

​

—

​

​

—

​

​

18,625

Grade 6

​

​

—

​

​

494

​

​

1,001

​

​

342

​

​

—

​

​

—

​

​

—

​

​

1,837

Grade 7

​

​

466

​

​

710

​

​

375

​

​

584

​

​

—

​

​

—

​

​

—

​

​

2,135

Grade 8

​

​

—

​

​

—

​

​

—

​

​

—

​

​

—

​

​

—

​

​

—

​

​

—

Grade 9

​

​

—

​

​

—

​

​

—

​

​

—

​

​

—

​

​

—

​

​

—

​

​

—

​

​

$

280,601

​

$

811,278

​

$

234,829

​

$

278,973

​

$

32,183

​

$

18,376

​

$

135,386

​

$

1,791,626

December 31, 2015:

​

​

​

​

​

​

​

​

Grade 1

​

$

—

​

$

184

​

$

—

​

$

12,071

​

$

—

​

$

1,591

​

$

—

​

$

13,846

Grade 2

​

​

—

​

​

8,090

​

​

91

​

​

3,879

​

​

549

​

​

465

​

​

—

​

​

13,074

Grade 3

​

​

20,560

​

​

141,026

​

​

47,897

​

​

45,154

​

​

1,790

​

​

3,007

​

​

127,072

​

​

386,506

Grade 4

​

​

197,503

​

​

486,461

​

​

153,709

​

​

176,162

​

​

14,959

​

​

13,980

​

​

—

​

​

1,042,774

Grade 5

​

​

3,891

​

​

12,190

​

​

395

​

​

9,794

​

​

—

​

​

52

​

​

—

​

​

26,322

Grade 6

​

​

—

​

​

1,158

​

​

580

​

​

154

​

​

—

​

​

—

​

​

—

​

​

1,892

Grade 7

​

​

1,355

​

​

—

​

​

431

​

​

650

​

​

—

​

​

13

​

​

—

​

​

2,449

Grade 8

​

​

—

​

​

—

​

​

—

​

​

24

​

​

—

​

​

—

​

​

—

​

​

24

Grade 9

​

​

—

​

​

—

​

​

—

​

​

—

​

​

—

​

​

—

​

​

—

​

​

—

​

​

$

223,309

​

$

649,109

​

$

203,103

​

$

247,888

​

$

17,298

​

$

19,108

​

$

127,072

​

$

1,486,887

21

Allowance for Loan Losses

The allowance is an amount that management believes will be adequate to absorb estimated losses relating to specifically identified loans, as well as probable credit losses inherent in the balance of the loan portfolio, based on an evaluation of the collectability of existing loans and prior loss experience. This evaluation also takes into consideration such factors as changes in the nature and volume of the loan portfolio, overall portfolio quality, review of specific problem loans, and current economic conditions that may affect the borrowers’ ability to pay. This evaluation does not include the effects of expected losses on specific loans or groups of loans that are related to future events or expected changes in economic conditions. While management uses the best information available to make its evaluation, future adjustments to the allowance may be necessary if there are significant changes in economic conditions. In addition, regulatory agencies, as an integral part of their examination process, periodically review the Company’s allowance for loan losses, and may require the Company to make changes to the allowance based on their judgment about information available to them at the time of their examinations.

The allowance consists of specific, general and unallocated components. The specific component relates to loans that are classified as impaired for which an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan. The general component covers nonimpaired loans and is based on historical loss experience adjusted for qualitative factors.

The following table presents the activity in the allowance for loan losses by portfolio segment for the years ended December 31, 2016, 2015 and 2014 (in thousands):

​	Construction and Land Development			Commercial Real Estate			1 – 4 Family Residential			Commercial and Industrial			Agricultural			Consumer and Other			Loans to Nondepository Financial Institutions			Unallocated			Total
December 31, 2016:	​			​			​			​			​			​			​			​			​
Beginning balance	​	$	3,234	​	$	7,658	​	$	960	​	$	2,575	​	$	67	​	$	121	​	$	277	​	$	80	​	$	14,972
Provision for loan losses	​	​	214	​	​	1,332	​	​	98	​	​	32	​	​	60	​	​	68	​	​	3	​	​	302	​	​	2,109
Charge offs	​	​	—	​	​	—	​	​	(21)	​	​	(214)	​	​	—	​	​	(84)	​	​	—	​	​	—	​	​	(319)
Recoveries	​	​	150	​	​	—	​	​	10	​	​	169	​	​	—	​	​	14	​	​	—	​	​	—	​	​	343
Net recoveries (charge offs)	​	​	150	​	​	—	​	​	(11)	​	​	(45)	​	​	—	​	​	(70)	​	​	—	​	​	—	​	​	24
Ending balance	​	$	3,598	​	$	8,990	​	$	1,047	​	$	2,562	​	$	127	​	$	119	​	$	280	​	$	382	​	$	17,105
Period-end amount allocated to:	​			​			​			​			​			​			​			​			​
Loans individually evaluated for impairment	​	$	—	​	$	—	​	$	10	​	$	50	​	$	—	​	$	—	​	$	—	​	$	—	​	$	60
Loans collectively evaluated for impairment	​	​	3,598	​	​	8,990	​	​	1,037	​	​	2,512	​	​	127	​	​	119	​	​	280	​	​	382	​	​	17,045
​	​	$	3,598	​	$	8,990	​	$	1,047	​	$	2,562	​	$	127	​	$	119	​	$	280	​	$	382	​	$	17,105
December 31, 2015:	​			​			​			​			​			​			​			​			​
Beginning balance	​	$	3,068	​	$	6,228	​	$	877	​	$	2,985	​	$	70	​	$	130	​	$	135	​	$	155	​	$	13,648
Provision for loan losses	​	​	157	​	​	1,427	​	​	107	​	​	(117)	​	​	(3)	​	​	(4)	​	​	142	​	​	(75)	​	​	1,634
Charge offs	​	​	—	​	​	—	​	​	(30)	​	​	(407)	​	​	—	​	​	(54)	​	​	—	​	​	—	​	​	(491)
Recoveries	​	​	9	​	​	3	​	​	6	​	​	114	​	​	—	​	​	49	​	​	—	​	​	—	​	​	181
Net recoveries (charge offs)	​	​	9	​	​	3	​	​	(24)	​	​	(293)	​	​	—	​	​	(5)	​	​	—	​	​	—	​	​	(310)
Ending balance	​	$	3,234	​	$	7,658	​	$	960	​	$	2,575	​	$	67	​	$	121	​	$	277	​	$	80	​	$	14,972
Period-end amount allocated to:	​			​			​			​			​			​			​			​			​
Loans individually evaluated for impairment	​	$	—	​	$	—	​	$	10	​	$	—	​	$	—	​	$	—	​	$	—	​	$	—	​	$	10
Loans collectively evaluated for impairment	​	​	3,234	​	​	7,658	​	​	950	​	​	2,575	​	​	67	​	​	121	​	​	277	​	​	80	​	​	14,962
​	​	$	3,234	​	$	7,658	​	$	960	​	$	2,575	​	$	67	​	$	121	​	$	277	​	$	80	​	$	14,972

22

​	Construction and Land Development			Commercial Real Estate			1 – 4 Family Residential			Commercial and Industrial			Agricultural			Consumer and Other			Loans to Nondepository Financial Institutions			Unallocated			Total
December 31, 2014:	​			​			​			​			​			​			​			​			​
Beginning balance	​	$	2,482	​	$	6,090	​	$	779	​	$	1,927	​	$	63	​	$	107	​	$	21	​	$	37	​	$	11,506
Provision for loan losses	​	​	577	​	​	162	​	​	30	​	​	1,077	​	​	7	​	​	120	​	​	114	​	​	118	​	​	2,205
Charge offs	​	​	—	​	​	(30)	​	​	—	​	​	(141)	​	​	—	​	​	(110)	​	​	—	​	​	—	​	​	(281)
Recoveries	​	​	9	​	​	6	​	​	68	​	​	122	​	​	—	​	​	13	​	​	—	​	​	—	​	​	218
Net recoveries (charge offs)	​	​	9	​	​	(24)	​	​	68	​	​	(19)	​	​	—	​	​	(97)	​	​	—	​	​	—	​	​	(63)
Ending balance	​	$	3,068	​	$	6,228	​	$	877	​	$	2,985	​	$	70	​	$	130	​	$	135	​	$	155	​	$	13,648
Period-end amount allocated to:	​			​			​			​			​			​			​			​			​
Loans individually evaluated for impairment	​	$	—	​	$	—	​	$	17	​	$	37	​	$	—	​	$	5	​	$	—	​	$	—	​	$	59
Loans collectively evaluated for impairment	​	​	3,068	​	​	6,228	​	​	860	​	​	2,948	​	​	70	​	​	125	​	​	135	​	​	155	​	​	13,589
​	​	$	3,068	​	$	6,228	​	$	877	​	$	2,985	​	$	70	​	$	130	​	$	135	​	$	155	​	$	13,648

The Company’s recorded investment in loans as of December 31, 2016 and 2015 related to each balance in the allowance for loan losses by portfolio segment and disaggregated on the basis of the Company’s impairment methodology was as follows (in thousands):

​	Loans Individually Evaluated for Impairment			Loans Collectively Evaluated for Impairment			Total Loans
December 31, 2016:	​			​			​
Construction and land development	​	$	—	​	$	277,103	​	$	277,103
Commercial real estate	​	​	—	​	​	795,418	​	​	795,418
1 – 4 family residential	​	​	60	​	​	233,740	​	​	233,800
Commercial and industrial	​	​	240	​	​	268,275	​	​	268,515
Agricultural	​	​	—	​	​	31,635	​	​	31,635
Loans to nondepository financial institutions	​	​	—	​	​	135,386	​	​	135,386
Consumer and other	​	​	—	​	​	12,755	​	​	12,755
Loans not subject to reserve	​	​	—	​	​	37,014	​	​	37,014
​	​	$	300	​	$	1,791,326	​	$	1,791,626
December 31, 2015:	​			​			​
Construction and land development	​	$	1,355	​	$	218,632	​	$	219,987
Commercial real estate	​	​	—	​	​	636,834	​	​	636,834
1 – 4 family residential	​	​	67	​	​	202,704	​	​	202,771
Commercial and industrial	​	​	24	​	​	231,927	​	​	231,951
Agricultural	​	​	—	​	​	16,742	​	​	16,742
Loans to nondepository financial institutions	​	​	—	​	​	127,072	​	​	127,072
Consumer and other	​	​	11	​	​	12,587	​	​	12,598
Loans not subject to reserve	​	​	—	​	​	38,932	​	​	38,932
​	​	$	1,457	​	$	1,485,430	​	$	1,486,887

23

6.   Premises and Equipment

Premises and equipment consisted of the following at December 31, 2016 and 2015 (in thousands):

​	2016			2015
Land	​	$	7,751	​	$	7,751
Building and improvements	​		16,955	​	​	16,955
Furniture and equipment	​		15,487	​	​	14,952
Construction in progress	​		—	​	​	301
Leasehold improvements	​		3,077	​	​	2,777
​	​	​	43,270	​		42,736
Less accumulated depreciation	​		(17,591)	​	​	(15,712)
​	​	$	25,679	​	$	27,024

Depreciation expense was approximately $2,147,000, $2,259,000 and $2,241,000 for the years ended December 31, 2016, 2015 and 2014, respectively.

7.   Intangible Assets

At December 31, 2016 and 2015, the Company had intangible assets in the amount of  $32,000 and $88,000, respectively. The intangible assets consist of core deposit intangibles from the acquisitions of Southwest Bank and Community Bank of Texas N.A.

The remaining amortization expense of  $32,000 related to core deposit intangibles as of December 31, 2016 will be expensed in total during 2017.

Accumulated amortization was approximately $19,204,000, $19,149,000 and $19,093,000 as of December 31, 2016, 2015 and 2014, respectively.

8.   Deposits

Deposits consisted of the following at December 31, 2016 and 2015 (in thousands):

​	2016					2015
​	Amount			Percent		Amount			Percent
Noninterest bearing demand accounts	​	$	452,898	​	27.4	​	$	389,284	​	28.7
Interest bearing checking accounts	​		86,521	​	5.2	​	​	81,622	​	6.0
Savings and limited access money market accounts	​		940,981	​	56.9	​	​	707,681	​	52.2
Certificates of deposit less than $100,000	​		15,831	​	1.0	​	​	18,896	​	1.4
Certificates of deposit $100,000 and greater	​		149,035	​	9.0	​	​	150,647	​	11.1
Individual retirement accounts less than $100,000	​		4,974	​	0.3	​	​	5,508	​	0.4
Individual retirement accounts $100,000 and greater	​		3,141	​	0.2	​	​	2,682	​	0.2
​	​	$	1,653,381	​	100.0	​	$	1,356,320	​	100.0

At December 31, 2016 and 2015, brokered time deposits totaled approximately $93,287,000 and $93,346,000, respectively. At December 31, 2016 and 2015, brokered money market deposits totaled approximately $174,136,000 and $116,364,000, respectively. At December 31, 2016 and 2015, brokered interest bearing deposits totaled approximately $1,626,000 and $1,161,000, respectively.

24

At December 31, 2016, the scheduled maturities of certificates of deposit and individual retirement accounts were as follows (in thousands):

Year	Amount
2017	​	$	124,111
2018	​	​	35,750
2019	​	​	11,127
2020	​	​	1,251
2021	​	​	742
​	​	$	172,981

The aggregate amount of certificates of deposit accounts and IRAs with a minimum denomination of $250,000 was approximately $87,647,000 and $81,898,000 at December 31, 2016 and 2015, respectively.

9.   Other Borrowings

Federal Funds Purchased

Federal funds purchased are short-term borrowings that typically mature within one to ninety days. The Bank has a federal funds line of credit with an unaffiliated bank with a maximum advanceable amount up to $40,000,000 and $20,000,000 at December 31, 2016 and 2015, respectively. This line of credit has no stated maturity date but may be canceled anytime at the sole discretion of the lending bank. The line is provided on an unsecured basis, however, the lender may require the line to be fully secured at any time. There were no federal funds purchased at December 31, 2016. Federal funds purchased totaled $5,000,000 at December 31, 2015.

Federal Home Loan Bank Advances

As a member of Federal Home Loan Bank (FHLB), the Bank has the ability to borrow up to a maximum of approximately $529,464,000 and $519,205,000 at December 31, 2016 and 2015, respectively, subject to the level of Tier 1 capital, qualified pledgable first mortgage loans, and FHLB stock owned.

FHLB advances totaled $150,000,000 and $65,000,000 at December 31, 2016 and 2015, respectively. At December 31, 2016, the advances include a borrowing of  $50,000,000 that matures on January 3, 2017 and is renewed daily as necessary under normal operations. The remaining $100,000,000 of advances mature in 2018 with interest at variable rates that reprice every four weeks. Total advances have a weighted average rate of 0.57% and 0.31% at December 31, 2016 and 2015, respectively. The FHLB has as collateral on the advances a blanket floating lien on certain other assets of the Bank, including selected loans and securities.

Federal Reserve Bank

The Bank has a line of credit with the Federal Reserve Bank. As of December 31, 2016, approximately $174,478,000 of commercial loans were pledged as collateral and the available line of credit was approximately $141,954,000. As of December 31, 2015, approximately $155,081,000 of commercial loans were pledged as collateral and the available line of credit was approximately $122,227,000. There were no borrowings outstanding at December 31, 2016 and 2015.

Line of Credit

First Texas BHC, Inc. has a line of credit with an unaffiliated bank with a maximum advanceable amount up to $25,000,000 at December 31, 2016 and 2015. This line of credit matures on September 18, 2017. Advances totaled $10,000,000 at December 31, 2016. There were no advances on the line of credit at December 31, 2015. At December 31, 2016 and 2015, the interest rate on the line of credit was 3.35% and 2.83%, respectively. The Company has unamortized loan costs of  $10,000 and $25,000 in regard to this line of credit at December 31, 2016 and 2015, respectively.

25

10.   Repurchase Agreements

In February 2008, the Bank entered into three structured repurchase transactions with two money center banks (counterparties). These are “securities sold under agreement to repurchase” transactions with 10 year maturities. Each had an initial fixed rate for either a two or three year period, and then began floating at a rate of 7% or 8% minus the three month LIBOR rate, with a cap. Each is callable by the counterparty at any time after the initial fixed rate term. The securities sold are mortgage-backed securities issued by agencies of the U.S. Government and were sold with a margin requirement as disclosed in the table below. Since the underlying securities amortize monthly and are subject to market value fluctuations, margin calls are expected and the collateral is often exchanged by the Bank with the agreement of the counterparties.

Balance	Initial Rate	Floating Rate	Cap	Margin Requirement	Maturity
$25,000,000	1.99%	8% – 3 mo LIBOR	3.97%	108.00%	2/22/2018
15,000,000	2.59%	8% – 3 mo LIBOR	4.99%	108.75%	2/22/2018
10,000,000	1.71%	7% – 3 mo LIBOR	3.41%	106.00%	3/4/2018

11.   Junior Subordinated Debentures and Subordinated Debt

Junior Subordinated Debentures

On August 13, 2007, First Texas BHC Statutory Trust II, a Delaware statutory trust and wholly owned finance subsidiary of the Company, issued 8,000 shares of floating rate trust preferred securities at $1,000 per share for an aggregate price of approximately $8,000,000, all of which was outstanding at December 31, 2016 and 2015. These securities bear an interest rate of 2% over the three-month LIBOR. The trust preferred securities will mature on September 15, 2037. The proceeds from the sale of the trust preferred securities and the issuance of $248,000 in common securities to the Company were used by Trust II to purchase approximately $8,248,000 of floating rate junior subordinated debentures of the Company which have the same payment terms as the trust preferred securities. Distributions on the trust preferred securities and on the debentures issued to the Company are payable quarterly beginning September 15, 2007.

Except under certain circumstances, the common securities issued to the Company by the trust possess sole voting rights with respect to matters involving the entity. Under certain circumstances, the Company may, from time to time, defer the debentures’ interest payments, which would result in a deferral of distribution payments on the related trust preferred securities and, with certain exceptions, prevent the Company from declaring or paying cash distributions on the Company’s common stock and any other future debt ranking equally with or junior to the debentures. The trust preferred securities are guaranteed by the Company.

Subordinated Convertible Debt

In December 2009, First Texas BHC, Inc., offered by Private Placement Subscription Agreement to sell up to $30,000,000 in aggregate principal amount of floating rate convertible subordinated promissory notes, due March 31, 2020. The Notes were issued in the form of interest-bearing subordinated convertible promissory notes. The Notes accrued interest each quarter at a floating rate equal to the daily average of the Wall Street Journal prime rate for the immediately prior quarterly period, with a minimum interest rate of 6.50% and a maximum interest rate of 9.00% per annum upon issuance and until maturity or earlier conversion or redemption. At any time on or after March 31, 2015, the Notes were redeemable, in whole or in part, at the Company’s option. The Notes were convertible, in full or in part, into shares of common stock at a conversion ratio of one share of common stock for each $24.00 in aggregate principal amount of Notes held on the record date of the conversion. The principal amount of each Note that had not been converted or redeemed would have been payable at maturity on March 31, 2020.

In February 2015, the Board of Directors of the Company voted to redeem all $13,700,000 of the floating rate convertible subordinated promissory notes on July 15, 2015. In lieu of the redemption, all holders of the Notes had the option to convert their Notes into First Texas BHC, Inc. stock at the stated conversion ratio equal to one share of common stock for each $24.00 in aggregate principal amount of Notes held on the record date of the conversion. Of the $13,700,000 in Notes outstanding at July 15, 2015, $12,199,000 were converted to stock and the remaining $1,501,000 were redeemed in cash.

26

Subordinated Debt

In September 2013, First Texas BHC, Inc., offered by Private Placement Subscription Agreement to sell up to $30,000,000 in aggregate principal amount of floating rate subordinated promissory notes, due September 30, 2023, plus up to an additional $3,000,000 to cover over-subscriptions. The Private Placement Subscription Agreement offering ended December 31, 2013. Notes issued and outstanding were $22,075,000 at December 31, 2016 and 2015, respectively. The balance outstanding of  $21,969,000 and $21,954,000 in the consolidated balance sheet at December 31, 2016 and 2015, respectively, is net of unamortized loan costs of  $106,000 and $121,000.

The Notes were issued in the form of interest-bearing subordinated promissory notes. The Notes accrue interest each quarter at a floating rate equal to the daily average of the Wall Street Journal prime rate for the immediately prior quarterly period, with a minimum interest rate of 6.00% and a maximum interest rate of 8.50% per annum upon issuance and until maturity or redemption. Interest on the Notes will be paid quarterly, in arrears, on January 15, April 15, July 15, and October 15 of each year, commencing January 15, 2014, for all subscriptions accepted on or before December 1, 2013, and on April 15, 2014, for subscriptions accepted after December 1, 2013. The Notes, at the Company’s sole discretion, may be redeemed in whole or in part, on any interest payment date occurring on or after September 30, 2018 or on an earlier date in certain limited circumstances, subject to regulatory approvals. The principal amount of each Note that has not been redeemed will be payable at maturity on September 30, 2023.

12.   Income Taxes

Income taxes consist of the following (in thousands):

​	2016			2015			2014
Current expense	​	$	10,928	​	$	8,804	​	$	6,347
Deferred benefit	​		(878)	​	​	(335)	​	​	(152)
​	​	$	10,050	​	$	8,469	​	$	6,195

Income taxes differed from the amounts computed by applying the expected U.S. federal income tax rate to earnings before income taxes as a result of the following (in thousands):

​	2016			2015			2014
Computed “expected” federal income tax expense	​	$	9,987	​	$	8,306	​	$	5,972
Non-deductible expenses	​		100	​	​	94	​	​	89
Earnings on life insurance	​		(36)	​	​	(16)	​	​	(52)
State tax expense	​		133	​	​	83	​	​	223
Other	​		(134)	​	​	2	​	​	(37)
​	​	$	10,050	​	$	8,469	​	$	6,195

Deferred taxes were as follows at December 31, 2016 and 2015 (in thousands):

​	2016			2015
Deferred tax assets:	​			​
Allowance for loan losses	​	$	5,446	​	$	4,699
Deferred compensation	​		3,053	​	​	2,464
Premises and equipment	​		72	​	​	—
Core deposit intangibles	​		2,332	​	​	2,733
Deferred loan fees	​		1,335	​	​	830
Unrealized loss on securities available for sale	​		228	​	​	170
Other	​		248	​	​	406
Total deferred tax assets	​		12,714	​	​	11,302

27

​	2016			2015
Deferred tax liabilities:	​			​
Premises and equipment	​		—	​	​	215
Goodwill	​		6,472	​	​	5,783
Other	​		73	​	​	71
Total deferred tax liabilities	​		6,545	​	​	6,069
Net deferred tax asset	​	$	6,169	​	$	5,233

In assessing the recoverability of deferred tax assets, management considers whether it is more-likely-than-not that some portion or all of the deferred tax assets will not be realized. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment.

Included in other assets at December 31, 2016 are current income tax receivables of approximately $337,000. Included in other liabilities at December 31, 2015 are current income taxes payable of approximately $343,000.

13.   Benefit Plans

401(k) Plan

The Bank has a 401(k) plan covering substantially all employees. Maximum employee contributions to the 401(k) plan are established by law. The Company, at the discretion of the Board of Directors, matches a percentage of the employee contribution. Company contributions of approximately $1,217,000, $1,098,000 and $953,000 were made to this plan in 2016, 2015 and 2014, respectively.

Deferred Compensation Arrangements

The Company has entered into deferred compensation arrangements with certain key employees. The deferred compensation arrangements allow for discretionary deferred amounts by the Company and voluntary payroll deductions by the employee after three years of service. Deferred compensation payable totaled approximately $2,015,000 and $1,805,000 at December 31, 2016 and 2015, respectively and is included in other liabilities in the accompanying balance sheets. There was no deferred compensation expense in 2016 or in 2015 and $6,000 in 2014.

Employee Stock Ownership Plan (ESOP)

Effective in July 2009, the Company established the ESOP Plan. Under this Plan, there is an Employee Stock Ownership Trust which holds the investments of the Plan. The Company was designated as the Plan Sponsor and the Bank was designated as an Employer of the Plan. The Plan covers substantially all employees who qualify as to age and length of service. Contributions to the Plan are generally invested by the Plan in the common stock of the Company. Contributions to the Plan by the Bank are at the discretion of the Board of Directors of the Company and the Bank; however, contributions must be sufficient to pay any current obligations of the Plan.

The contributions for each year will be divided among the eligible participants employed on December 31 in the proportion that each such participant’s compensation, as defined in the Plan, for that year bears to the compensation for all such participants in the Plan. Company contributions of  $200,000, $134,000 and $109,000 were made to this plan in 2016, 2015 and 2014, respectively.

In November 2014, the ESOP purchased 37,570 shares of the Company’s common stock for $1,127,000 with proceeds borrowed from the Company. The loan is secured by the shares purchased with the proceeds and will be repaid by the ESOP with funds from the Company’s discretionary contributions to the ESOP and earnings on ESOP assets. The loan calls for the ESOP to make ten annual installments of principal and interest beginning on the last business day of September 2015. Shares purchased by the ESOP with the proceeds from the loan are allocated to participants on a pro rata basis as the loan is repaid. Any remaining unallocated shares of the ESOP are reflected in “Other Equity Components” in the accompanying Consolidated Statement of Changes in Shareholders’ Equity. At December 31, 2016 and 2015 the balance of the loan due from the ESOP was $902,000 and $1,014,000, respectively. At December 31, 2016 and 2015 the unpaid interest was approximately $27,000 and $23,000, respectively.

28

14.   Stock-Based Compensation Plans

Effective December 18, 2013, the Company implemented a long term incentive plan (2013 Plan) that allows for the issuance of shares of common stock pursuant to awards under this plan. The 2013 Plan provides for the granting of stock options, stock appreciation rights, restricted stock units, performance awards, dividends equivalent rights, and other awards to employees of the Company. The 2013 Plan was in addition to three existing employee compensation plans (2008 Plans) that provide for the granting of stock options (options), stock appreciation rights (SAR) and restricted stock units (RSU) to employees of the Bank. All outstanding options, SAR’s and RSU’s issued before December 18, 2013 remain governed by the 2008 Plans. At December 31, 2016 and 2015, a maximum of 1,000,000 shares of the Company’s common stock can be issued under the 2013 Plan and 2008 Plans. As of December 31, 2016 and 2015 a total of 88,935 and 169,471 shares were available for future grants, respectively.

The following is a summary of the awards outstanding at December 31, 2016 and 2015:

Stock Options

Stock options are periodically granted by the Company to key employees with an exercise price equal to the stock’s estimated fair market value at the date of grant. The stock options have varying terms and vest and become fully exercisable during various years from the date of grant.

​

2016

2015

2014

​

Number of Shares

Weighted Average Exercise Price

Number of Shares

Weighted Average Exercise Price

Number of Shares

Weighted Average Exercise Price

Options:

​

​

​

​

​

​

Outstanding, beginning of year

​

684,874

​

$

25.29

​

​

589,410

​

$

24.48

​

​

133,684

​

$

20.03

Granted

​

122,050

​

33.45

​

​

95,464

​

​

30.29

​

​

457,926

​

​

25.77

Exercised during the year

​

(630)

​

27.00

​

​

—

​

​

—

​

​

—

​

​

—

Forfeited during the year

​

(40,304)

​

22.66

​

​

—

​

​

—

​

​

(2,200)

​

​

23.91

Expired during the year

​

—

​

​

​

​

​

—

​

​

​

​

​

—

​

​

​

Outstanding, end of year

​

765,990

​

$

26.72

​

​

684,874

​

$

25.29

​

​

589,410

​

$

24.48

Options exercisable, at end of year

​

231,748

​

$

23.70

​

​

192,800

​

$

22.26

​

​

126,500

​

$

19.98

Weighted average remaining contractual life, options outstanding

7.10 years

​

​

​

7.54 years

​

​

​

8.27 years

​

Weighted average remaining contractual life, options exercisable

5.09 years

​

​

​

4.92 years

​

​

​

4.04 years

​

Weighted average fair value per option of options granted during the year

​

$

14.77

​

​

​

​

$

13.46

​

​

​

​

$

11.48

​

The fair value of each stock option is estimated on the date of grant and when there is a change in stock value using the Black-Scholes valuation model utilizing the following assumptions. The expected term of options has been determined utilizing the “simplified” method as prescribed by the Securities and Exchange Commission’s Staff Accounting Bulletin No. 107, Share-Based Payment. The risk free interest rate is based on a treasury instrument whose term is consistent with the expected life of the stock options. As there was no public market for the Company’s common stock, the Company determined the volatility for options based on an analysis of reported data for a peer group of companies that issued options with substantially similar terms. The expected volatility of options has been determined using a weighted average of the historical volatility measures of this peer group of companies. The Company has not paid and does not anticipate paying cash dividends on its common stock; therefore the expected dividend yield is assumed to be zero.

29

The following assumptions were used in the Black-Scholes option pricing model for stock options granted in 2016 and 2015.

​	2016		2015		2014
Dividend rate	​	0.00%	​	0.00%	​	0.00%
Risk-free interest rate	​	1.67%	​	1.86%	​	2.07%
Expected life	7.3 – 7.6 years		6.2 – 7.6 years		6.5 – 7.6 years
Price Volatility	​	32.30%	​	32.30%	​	31.40%

Total compensation expense for options was $1,306,000, $1,108,000, and $575,000 for 2016, 2015, and 2014, respectively. At December 31, 2016, future compensation expense related to non-vested options is estimated to be approximately $4,721,000 and will be recognized over a remaining average vesting period of 4.83 years. The aggregate intrinsic value of outstanding options was $8.28 and $6.72 at December 31, 2016 and 2015, respectively. The Company may, at its sole discretion, accelerate the vesting of stock options to be fully exercisable upon a change of control of the Company.

Stock Appreciation Rights

No stock appreciation rights were granted in 2016, 2015 and 2014. Total compensation expense for SAR’s was $39,000, $13,000 and $494,000 for the years ended December 31, 2016, 2015 and 2014, respectively. The SAR’s have terms of 10 years from date of grant and vest and become fully exercisable during various years from 2009 to 2023. The SAR’s vest immediately upon the earliest of the recipient’s termination of employment due to death or disability, or a change in control of the Company.

​	2016		2015		2014
Outstanding, beginning of year	​	13,000	​	13,000	​	331,450
Granted	​	—	​	—	​	—
Exercised during the year	​	—	​	—	​	(318,450)
Forfeited	​	—	​	—	​	—
Outstanding, end of year	​	13,000	​	13,000	​	13,000

A summary of the Company’s nonvested SAR’s and changes during 2016 and 2015 for SAR’s granted to employees is presented below:

​	2016		2015		2014
Nonvested SAR’s, beginning of year	​	1,400	​	3,200	​	129,950
Granted during the year	​	—	​	—	​	—
Vested during the year	​	(1,000)	​	(1,800)	​	(126,750)
Exercised during the year	​	—	​	—	​	—
Forfeited	​	—	​	—	​	—
Nonvested SAR’s, end of year	​	400	​	1,400	​	3,200

During 2014, the Board of Directors of the Company approved certain actions designed to restructure the outstanding SAR’s. In connection with this restructuring, employees exercised 313,450 SAR’s and with the funds received purchased 77,107 shares of the Company’s common stock. In addition, the participants received options to purchase 236,343 shares of common stock under the terms of the 2013 Plan. The Company also loaned approximately $758,000 to the employees that exercised their SAR’s to fund the tax obligation resulting from this restructuring. The loans due to the Company are collateralized by the stock issued to the employees and are included in “Other Equity Components” in the accompanying Consolidated Statement of Changes in Shareholders’ Equity.

During 2016, 2015 and 2014, repayments of approximately $15,000, $18,000 and $0, respectively, were received from employees regarding the loans secured by stock that arose from the restructuring in 2014.

Restricted Stock Units

No RSU’s were granted in 2016 and in 2015. RSU’s are classified as liabilities. Total compensation expense for RSU’s was $339,000, $388,000 and $369,000 for the years ended December 31, 2016, 2015, and 2014,

30

respectively. At December 31, 2016, future compensation expense related to RSU’s is estimated to be approximately $291,000 and will be recognized over a remaining average vesting period of 0.83 years. The RSU’s have terms of 5 years from date of grant and vest and become fully vested in 2018. The RSU’s vest immediately upon the earliest of the recipient’s termination of employment due to death or disability, or a change in control of the Company.

​

2016

2015

2014

​

Number of Shares

Weighted Average Grant Date Fair Value

Number of Shares

Weighted Average Grant Date Fair Value

Number of Shares

Weighted Average Grant Date Fair Value

RSU’s:

​

​

​

​

​

​

Outstanding, beginning of year

​

33,809

​

$

23.00

​

​

47,513

​

$

23.00

​

​

54,723

​

$

23.00

Granted

​

—

​

​

​

​

​

—

​

​

​

​

​

29,750

​

Exercised during the year

​

(20,415)

​

​

​

​

​

(13,704)

​

​

​

​

​

(7,210)

​

Forfeited during the year

​

—

​

​

​

​

​

—

​

​

​

​

​

(29,750)

​

Outstanding, end of year

​

13,394

​

​

​

​

​

33,809

​

​

​

​

​

47,513

​

Weighted average fair value per share of RSU’s at year end

​

$

36.00

​

​

​

​

$

33.00

​

​

​

​

$

32.00

​

Weighted average remaining contractual life

0.83 years

​

​

​

1.17 years

​

​

​

1.66 years

​

During 2016, participants exercised 20,415 RSU’s and with the funds purchased 19,835 shares of the Company’s common stock. The Company also loaned approximately $187,000 to the participants that exercised their RSU’s to fund the tax obligation resulting from this restructuring. The loans due to the Company are collateralized by the stock issued to the employees and are included in “Other Equity Components” in the accompanying Consolidated Statement of Changes in Shareholders’ Equity.

During 2015, participants exercised 13,704 RSU’s and with the funds purchased 12,299 shares of the Company’s common stock. The Company also loaned approximately $107,000 to the participants that exercised their RSU’s to fund the tax obligation resulting from this restructuring. The loans due to the Company are collateralized by the stock issued to the employees and are included in “Other Equity Components” in the accompanying Consolidated Statement of Changes in Shareholders’ Equity.

During 2014, the Board of Directors of the Company approved certain actions designed to restructure the outstanding RSU’s. In connection with this restructuring, all RSU awards that were granted in 2014 were forfeited by the participant in return for options to purchase 74,375 shares of common stock under the terms of the 2013 Plan. Additionally, participants exercised 7,210 RSU’s and with the funds received purchased 6,796 shares of the Company’s common stock. The Company also loaned approximately $64,000 to the participants that exercised their RSU’s to fund the tax obligation resulting from this restructuring. The loans due to the Company are collateralized by the stock issued to the participants and are reflected as “Other Equity Components” in the accompanying Consolidated Statement of Changes in Stockholders’ Equity.

15.   Commitments, Contingencies and Financial Instruments With Off-Balance-Sheet Risk

The Company is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the balance sheet.

31

The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual amount of these instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments. These financial instruments were as follows at year end (in thousands):

​	2016			2015
Commitments to extend credit	​	$	587,350	​	$	410,633
Standby letters of credit	​		3,483	​	​	5,035
​	​	$	590,833	​	$	415,668

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained if deemed necessary by the Company upon extension of credit is based on managements’ credit evaluation of the counterparty. Collateral held varies but may include accounts receivable, inventory, property, single and family residences, property and equipment and income-producing commercial properties.

Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. In the event the customer does not perform in accordance with the terms of the agreement with the third party, the Company would be required to fund the commitment. The maximum potential amount of future payments the Company could be required to make is represented by the contractual amount shown in the table above. If the commitment is funded, the Company would be entitled to seek recovery from the customer. As of December 31, 2016 and 2015, no amounts have been recorded as liabilities for the Company’s potential obligations under these guarantees.

Lease Commitments

The Company leases certain office facilities under operating leases that expire at various dates through 2025. The Company has renewal options on these leases. Rent expense totaled approximately $2,043,000, $2,037,000 and $1,951,000 in 2016, 2015 and 2014, respectively. Equipment and telephone leases expire at various dates through 2017. Equipment and telephone lease expense totaled approximately $131,000, $162,000 and $157,000 in 2016, 2015 and 2014, respectively.

Future minimum lease payments for facilities under all noncancelable operating leases as of December 31, 2016 are as follows (in thousands):

Year	Amount
2017	​	$	1,845
2018	​	​	1,506
2019	​	​	455
2020	​	​	201
Thereafter	​	​	907
​	​	$	4,914

32

Minimum future rentals to be received on noncancelable operating leases in effect as of December 31, 2016 are as follows (in thousands):

Year	Amount
2017	​	$	343
2018	​	​	319
2019	​	​	154
2020	​	​	—
Thereafter	​	​	—
​	​	$	816

Contingencies

Various contingent assets and liabilities are not reflected in the consolidated financial statements, including claims and legal actions arising in the ordinary course of business. In the opinion of management, after consultation with legal counsel, the ultimate disposition of these matters is not expected to have a material effect on the Company’s financial condition or results of income or cash flows.

16.   Concentrations of Credit

The Company maintains deposits with other financial institutions in amounts that may exceed FDIC insurance coverage. The Company has not experienced any losses in such accounts and believes it is not exposed to any significant credit risks on cash and cash equivalents.

17.   Related Party Transactions

The Company’s directors, executive officers and their affiliates were customers of, and had transactions with, the Bank in the ordinary course of business. Similar transactions are expected in the future. All loans included in such transactions were made on substantially the same terms, including interest rates and collateral requirements, as those prevailing at the time for comparable transactions with unaffiliated persons and did not involve more than normal risk of loss or present other favorable features. At December 31, 2016 and 2015, the aggregate amount of loans to related parties was approximately $37,399,000 and $34,810,000, respectively. During 2016, approximately $22,859,000 new loans were made and repayments totaled approximately $20,270,000. Additionally, at December 31, 2016, there were unfunded commitments to related parties of approximately $15,444,000.

18.   Fair Values Disclosures

The following methods and assumptions were used by the Company in estimating fair values of financial instruments as disclosed herein:

Cash and cash equivalents

The carrying amounts of cash and cash equivalents approximate their fair value.

Securities and other equity investments

Fair values for securities excluding other equity investments, are based on quoted market prices or dealer quotes. If current quoted market price is not available, fair value is estimated using quoted market prices for similar instruments or broker pricing and bid/ask spreads. Management believes the carrying values of other equity investments such as stock in the Federal Reserve Bank, the Federal Home Loan Bank and Independent Bankers Financial Corporation generally approximate fair value.

Loans and loans held for sale

For variable-rate loans that reprice frequently and have no significant changes in credit risk, fair values are based on carrying values. Fair values for certain mortgage loans (for example, one-to-four family residential) and other consumer loans are based on quoted market prices of similar loans sold in conjunction with securitization

33

transactions, adjusted for differences in loan characteristics. Fair values for commercial real estate and commercial loans are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. Fair values of loans held for sale are based on commitments on hand from investors or prevailing market rates.

Servicing rights and interest-only receivable strips

The carrying amounts of servicing rights and interest-only receivable strips approximate their fair value.

Deposits

The fair values disclosed for demand deposits are, by definition, equal to the amount payable on demand at the reporting date (that is their carrying amounts). The carrying amounts of variable-rate, fixed term money market accounts and certificates of deposit (CDs) approximate their fair values at the reporting date. Fair values for fixed-rate CDs are estimated using a discounted cash flow calculation that applies interest rates currently being offered on CDs to a schedule of aggregated expected monthly maturities on time deposits.

Other borrowings

The carrying amounts of other short-term borrowings approximate fair value. The fair value of long-term fixed rate borrowings is estimated based on the present value of expected cash flows using current interest rates for similar financial instruments.

Accrued interest

The carrying amounts of accrued interest approximate their fair values.

Repurchase agreements

The carrying amount of repurchase agreements is estimated using discounted cash flow analysis based upon current incremental borrowing rates for similar types of borrowing arrangements.

Junior subordinated debentures

The carrying amount of long term variable-rate borrowings approximate fair value.

Subordinated Debt

The carrying amount of long term variable-rate borrowings approximate fair value.

Off-balance-sheet instruments

Commitments to extend credit and standby letters of credit have short maturities and therefore have no significant fair value.

34

The following estimated fair value amounts have been determined by the Company using available market information and appropriate valuation methodologies. However, considerable judgment is required to interpret market data to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts the Company could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts. The fair value estimates presented herein are based on pertinent information available to management as of the respective balance sheet date. Although management is not aware of any factors that would significantly affect the estimated fair value amounts, such amounts have not been comprehensively revalued since the presentation dates, and therefore, estimates of fair value after the balance sheet date may differ significantly from the amounts presented herein (in thousands):

​

​

​

​

Total Estimated Fair Value

​

Carrying Amount

Level 1 Inputs

Level 2 Inputs

Level 3 Inputs

December 31, 2016:

​

​

​

​

Financial assets:

​

​

​

​

Cash and cash equivalents

​

$

189,920

​

$

189,920

​

$

—

​

$

—

Securities available for sale

​

​

63,296

​

​

1,774

​

​

58,208

​

​

708

Other equity investments

​

​

12,857

​

​

—

​

​

—

​

​

12,857

Loans held for sale

​

​

4,836

​

​

—

​

​

4,836

​

​

—

Loans, net

​

​

1,774,521

​

​

—

​

​

—

​

​

1,779,709

Accrued interest receivable

​

​

4,195

​

​

4,195

​

​

—

​

​

—

Servicing rights

​

​

274

​

​

—

​

​

274

​

​

—

Interest-only receivable strips

​

​

183

​

​

—

​

​

183

​

​

—

Financial liabilities:

​

​

​

​

Deposits

​

​

1,653,381

​

​

—

​

​

—

​

​

1,652,759

Short-term borrowings

​

​

159,990

​

​

—

​

​

149,984

​

​

—

Repurchase Agreements

​

​

50,000

​

​

—

​

​

—

​

​

51,836

Junior subordinated debentures

​

​

8,248

​

​

—

​

​

—

​

​

8,248

Subordinated debt

​

​

21,969

​

​

—

​

​

—

​

​

21,969

Accrued interest payable

​

​

836

​

​

836

​

​

—

​

​

—

Off-balance sheet instruments:

​

​

​

​

Commitments to extend credit

​

​

—

​

​

—

​

​

—

​

​

—

Standby letters of credit and financial guarantees

​

​

—

​

​

—

​

​

—

​

​

—

December 31, 2015:

​

​

​

​

Financial assets:

​

​

​

​

Cash and cash equivalents

​

$

108,839

​

$

108,839

​

$

—

​

$

—

Securities available for sale

​

​

70,749

​

​

1,763

​

​

68,282

​

​

704

Other equity investments

​

​

8,773

​

​

—

​

​

—

​

​

8,773

Loans held for sale

​

​

8,903

​

​

—

​

​

8,903

​

​

—

Loans, net

​

​

1,471,915

​

​

—

​

​

—

​

​

1,482,166

Accrued interest receivable

​

​

3,450

​

​

3,450

​

​

—

​

​

—

Servicing rights

​

​

365

​

​

—

​

​

365

​

​

—

Interest-only receivable strips

​

​

279

​

​

—

​

​

279

​

​

—

Financial liabilities:

​

​

​

​

Deposits

​

​

1,356,320

​

​

—

​

​

—

​

​

1,355,995

Short-term borrowings

​

​

69,975

​

​

—

​

​

69,988

​

​

—

Repurchase Agreements

​

​

50,000

​

​

—

​

​

—

​

​

53,491

Junior subordinated debentures

​

​

8,248

​

​

—

​

​

—

​

​

8,248

Subordinated debt

​

​

21,954

​

​

—

​

​

—

​

​

21,954

Accrued interest payable

​

​

762

​

​

762

​

​

—

​

​

—

Off-balance sheet instruments:

​

​

​

​

Commitments to extend credit

​

​

—

​

​

—

​

​

—

​

​

—

Standby letters of credit and financial guarantees

​

​

—

​

​

—

​

​

—

​

​

—

35

19.   Fair Value Measurements

The fair value of an asset or liability is the price that would be received to sell an asset or paid to transfer that liability in an orderly transaction occurring in the principal market (or most advantageous market in the absence of a principal market) for such asset or liability. In estimating fair value, the Company utilizes valuation techniques that are consistent with the market approach, the income approach and/or the cost approach. Such valuation techniques are consistently applied. Inputs to valuation techniques include the assumptions that market participants would use in pricing an asset or liability. ASC Topic 820, Fair Value Measurements and Disclosures, establishes a fair value hierarchy for valuation inputs that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The fair value hierarchy is as follows:

Level 1 Inputs — Unadjusted quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date.

Level 2 Inputs — Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. These might include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (such as interest rates, volatilities, prepayment speeds, credit risks, etc.) or inputs that are derived principally from or corroborated by market data by correlation or other means.

Level 3 Inputs — Unobservable inputs for determining the fair values of assets or liabilities that reflect an entity’s own assumptions about the assumptions that market participants would use in pricing the assets or liabilities.

A description of the validation methodologies used for assets and liabilities measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy is set forth below.

In general, fair value is based upon quoted market prices, where available. If such quoted market prices are not available, fair value is based upon internally developed models that primarily use, as inputs, observable market-based parameters. Valuation adjustments may be made to ensure that assets and liabilities are recorded at fair value. These adjustments may include amounts to reflect counterparty credit quality and the Company’s creditworthiness, among other things, as well as unobservable parameters. Any such valuation adjustments are applied consistently over time. The Company’s valuation methodologies may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. While management believes the Company’s valuation methodologies are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain assets and liabilities could result in a different estimate of fair value at the reporting date. Furthermore, the reported fair value amounts have not been comprehensively revalued since the presentation dates, and therefore, estimates of fair value after the balance sheet date may differ significantly from the amounts presented herein.

Securities available for sale are valued at fair value on a recurring basis. The fair values of Level 1 securities are determined by obtaining quoted market prices on nationally recognized securities exchanges. The Company’s municipal and mortgage-backed securities are classified within Level 2 of the valuation hierarchy. The Company obtains these fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment spreads, credit information and the bond’s terms and conditions, among other things. The Level 3 investments consist of Trust Preferred Securities which are issued by a financial institution. Broker pricing and bid/ask spreads, when available, may vary widely.

In accordance with ASC Topic 820, certain financial assets and financial liabilities are measured at fair value on a nonrecurring basis; that is, the assets and liabilities are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment). Financial assets or liabilities required to be measured at fair value on a nonrecurring basis include impaired loans and mortgage servicing rights. Nonfinancial assets or liabilities required to be measured at fair value on a nonrecurring basis include other real estate owned.

Impaired loans (loans which are not expected to repay all principal and interest amounts due in accordance with the original contractual terms) are measured on an observable market price (if available) or at the fair value

36

of the loan’s collateral (if collateral dependent). Fair value of the loan’s collateral is determined by appraisals or independent valuation which is then adjusted for the estimated costs related to liquidation of the collateral. Management’s ongoing review of appraisal information may result in additional discounts or adjustments to valuation based upon more recent market sales activity or more current appraisal information derived from properties of similar type and/or locale. A significant portion of the Company’s impaired loans are measured using the estimated fair market value of the collateral less the estimated costs to sell. Therefore, the Company has categorized its impaired loans as Level 3.

Other real estate owned is carried at the lower of cost or fair value less estimated selling costs. Fair value is estimated through current appraisals, real estate brokers or listing prices. As these properties are actively marketed, estimated fair values may be adjusted by management to reflect current economic and market conditions and, as such, are classified as Level 3.

The following table represents assets and liabilities reported on the consolidated balance sheets at their fair value as of December 31, 2016 and 2015 by level within the ASC 820 fair value measurement hierarchy (in thousands):

​	Fair Value Measurements at Reporting December 31, 2016 and 2015 (in thousands)
​	Assets/Liabilities Measured at Fair Value		Quoted Price in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
December 31, 2016:	​		​		​		​
Measured on a recurring basis:	​		​		​		​
Assets:	​		​		​		​
U.S. government securities	​	2,606	​	—	​	2,606	​	—
U.S. government agency	​	29,544	​	—	​	29,544	​	—
Mortgage-backed securities	​	28,664	​	—	​	28,664	​	—
Trust preferred securities	​	708	​	—	​	—	​	708
CRA Qualified Investment Fund	​	1,774	​	1,774	​	—	​	—
Measured on a nonrecurring basis:	​		​		​		​
Assets:	​		​		​		​
Impaired loans	​	240	​	—	​	—	​	240
December 31, 2015:	​		​		​		​
Measured on a recurring basis:	​		​		​		​
Assets:	​		​		​		​
U.S. government agency	​	32,528	​	—	​	32,528	​	—
Mortgage-backed securities	​	35,754	​	—	​	35,754	​	—
Trust preferred securities	​	704	​	—	​	—	​	704
CRA Qualified Investment Fund	​	1,763	​	1,763	​	—	​	—
Measured on a nonrecurring basis:	​		​		​		​
Assets:	​		​		​		​
Impaired loans	​	1,447	​	—	​	—	​	1,447

37

The table below presents a reconciliation and income statement classification of gains and losses for all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the years ended December 31, 2016, 2015 and 2014 (in thousands):

​	2016			2015			2014
Balance, beginning of year	​	$	704	​	$	701	​	$	426
Total unrealized gains	​		—	​	​	—	​	​	272
Included in earnings:	​			​			​
Accretion on securities	​		4	​	​	3	​	​	3
Balance, end of year	​	$	708	​	$	704	​	$	701

20.   Small Business Lending Fund Preferred Stock

On September 15, 2011 the Company entered into a Securities Purchase Agreement (the Purchase Agreement) with the Secretary of the United States Treasury (the Treasury), pursuant to which the Company issued 29,822 shares of the Company’s Senior Non-Cumulative Perpetual Preferred Stock, Series C (the series C Preferred Stock), having a liquidation amount per share equal to $1,000, for a total purchase price of $29,822,000. The Purchase Agreement was entered into, and the Series C Preferred Stock was issued, as authorized by the Small Business Lending Fund program (SBLF).

The Series C Preferred Stock was entitled to receive non-cumulative dividends, payable quarterly in arrears, on each January 1, April 1, July 1 and October 1, beginning October 1, 2011. The dividend rate, as a percentage of the liquidation amount, could fluctuate on a quarterly basis during the first 10 quarters during which the Series C Preferred Stock was outstanding, based upon changes in the level of  “Qualified Small Business Lending” or “QSBL” (as defined in the Purchase Agreement) by the Company. Based upon the increase in the Bank’s level of QSBL over the baseline level calculated under the terms of the Purchase Agreement, the dividend rate for the initial dividend period had been set at 1.34%. For the second through ninth calendar quarters, the dividend rate was adjusted to between one 1% and 5% per annum, to reflect the amount of change in the Bank’s level of QSBL. If the level of the Bank’s qualified small business loans declined so that the percentage increase in QSBL as compared to the baseline level was less than 10%, then the dividend rate payable on the Series C Preferred Stock would increase. For the tenth calendar quarter through four and one half years after issuance, the dividend rate was fixed at between 1% and 7% based upon the increase in QSBL as compared to the baseline. After four and one half years from issuance, the dividend rate increased to 9%. The dividend rate as of December 31, 2015 was 1.00%.

The Series C Preferred Stock was non-voting, except in limited circumstances. If the Company missed five dividend payments, whether or not consecutive, the holder of the Series C Preferred Stock had the right, but not the obligation, to appoint a representative as an observer on the Company’s Board of Directors. The Series C Preferred Stock could be redeemed at any time at the Company’s option, at a redemption price of 100% of the liquidation amount plus accrued but unpaid dividends to the date of redemption for the current period, subject to the approval of the Company’s federal banking regulator. The Company was permitted to repay its SBLF funding in increments of 25% subject to the approval of the Company’s federal banking regulator.

In December 2015, the Board of Directors of the Company signed a Unanimous Written Consent that approved the redemption of SBLF stock. The SBLF stock of  $29,822,000 plus accrued dividends was redeemed on January 28, 2016.

21.   Regulatory Matters

The Company and the Bank are subject to regulatory capital requirements administered by federal banking agencies. Capital adequacy guidelines and prompt corrective action regulations, involve quantitative measures of assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Failure to meet capital requirements can initiate regulatory action. The final rules implementing Basel Committee on Banking Supervision’s capital guidelines for U.S. banks (Basel III rules) became effective for the Company and the Bank on January 1, 2015 with full compliance with all of the

38

requirements being phased in over a multi-year schedule, and fully phased in by January 1, 2019. The net unrealized gain or loss on securities available for sale is not included in computing regulatory capital. Management believes as of December 31, 2016 and 2015, the Company and Bank meet all capital adequacy requirements to which it is subject.

Prompt corrective action regulations for banking institutions provide five classifications: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized, although these terms are not used to represent overall financial condition. If adequately capitalized, regulatory approval is required to accept brokered deposits. If undercapitalized, capital distributions are limited, as is asset growth and expansion, and capital restoration plans are required. At December 31, 2016, the most recent regulatory notifications categorized the Bank as well-capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes have changed the Bank’s category.

Additionally, Basel III added a 2.5% “capital conservation buffer” which was designed for bank holding companies and banking institutions to absorb losses during periods of economic stress. The implementation of the capital conservation buffer began on January 1, 2016 at the 0.625% level and will be phased in over a four-year period (increasing by 0.625% on each subsequent January 1, until it reaches 2.5% on January 1, 2019). Bank holding companies and banking institutions with capital ratios below the minimum for capital adequacy purposes plus the capital conservation buffer will face constraints on dividends, equity repurchases and executive compensation relative to the amount of the shortfall.

Actual and required capital amounts and ratios of the Bank at December 31, 2016 and 2015 are presented below (in thousands):

​

Actual

Minimum Required for Capital Adequacy Purposes

Minimum for Capital Adequacy Purposes Plus Capital Conservation Buffer

Minimum to be Well Capitalized under Prompt Corrective Action Provisions

​

Amount

Ratio

Amount

Ratio

Amount

Ratio

Amount

Ratio

December 31, 2016:

​

​

​

​

​

​

​

​

Total capital to risk weighted assets

​

​

​

​

​

​

​

​

Consolidated

​

$

237,002

​

12.008%

​

$

157,896

​

8.00%

​

$

170,232

​

8.625%

​

$

197,371

​

10.00%

Bank

​

​

243,865

​

12.370%

​

​

157,720

​

8.00%

​

​

170,042

​

8.625%

​

​

197,150

​

10.00%

Tier 1 (core) capital to risk weighted assets

​

​

​

​

​

​

​

​

Consolidated

​

​

197,928

​

10.028%

​

​

118,422

​

6.00%

​

​

130,758

​

6.625%

​

​

157,896

​

8.00%

Bank

​

​

226,760

​

11.502%

​

​

118,290

​

6.00%

​

​

130,612

​

6.625%

​

​

157,720

​

8.00%

Common Tier 1 (CET1)

​

​

​

​

​

​

​

​

Consolidated

​

​

189,928

​

9.623%

​

​

88,817

​

4.50%

​

​

101,152

​

5.125%

​

​

128,291

​

6.50%

Bank

​

​

226,760

​

11.502%

​

​

88,718

​

4.50%

​

​

101,039

​

5.125%

​

​

128,148

​

6.50%

Tier 1 (core) capital to average assets

​

​

​

​

​

​

​

​

Consolidated

​

​

197,928

​

10.037%

​

​

78,879

​

4.00%

​

​

78,879

​

4.000%

​

​

98,599

​

5.00%

Bank

​

​

226,760

​

11.530%

​

​

78,695

​

4.00%

​

​

78,695

​

4.000%

​

​

98,369

​

5.00%

December 31, 2015:

​

​

​

​

​

​

​

​

Total capital to risk weighted assets

​

​

​

​

​

​

​

​

Consolidated

​

$

244,493

​

15.13%

​

$

129,299

​

8.00%

​

​

N/A

​

N/A

​

$

161,624

​

10.00%

Bank

​

​

198,189

​

12.30%

​

​

128,948

​

8.00%

​

​

N/A

​

N/A

​

​

161,185

​

10.00%

Tier 1 (core) capital to risk weighted assets

​

​

​

​

​

​

​

​

Consolidated

​

​

207,567

​

12.84%

​

​

96,974

​

6.00%

​

​

N/A

​

N/A

​

​

129,299

​

8.00%

Bank

​

​

183,217

​

11.40%

​

​

96,711

​

6.00%

​

​

N/A

​

N/A

​

​

128,948

​

8.00%

Common Tier 1 (CET1)

​

​

​

​

​

​

​

​

Consolidated

​

​

169,745

​

10.50%

​

​

72,731

​

4.50%

​

​

N/A

​

N/A

​

​

105,056

​

6.50%

Bank

​

​

183,217

​

11.40%

​

​

72,533

​

4.50%

​

​

N/A

​

N/A

​

​

104,770

​

6.50%

Tier 1 (core) capital to average assets

​

​

​

​

​

​

​

​

Consolidated

​

​

207,567

​

12.47%

​

​

66,555

​

4.00%

​

​

N/A

​

N/A

​

​

83,194

​

5.00%

Bank

​

​

183,217

​

11.00%

​

​

66,370

​

4.00%

​

​

N/A

​

N/A

​

​

82,962

​

5.00%

39

22.   Parent Company Only Condensed Financial Information

Condensed Balance Sheets
December 31,
(in thousands)

​	2016			2015
Assets	​			​
Cash and cash equivalents	​	$	642	​	$	40,567
Investment in banking subsidiaries	​	​	262,457	​	​	219,241
Other asets	​	​	4,347	​	​	7,415
Total assets	​	$	267,446	​	$	267,223
Liabilities and equity	​			​
Debt	​	$	40,207	​	$	30,177
Accrued expenses and other liabilities	​	​	396	​	​	448
Shareholders’ equity	​	​	226,843	​	​	236,598
Total liabilities and shareholders’ equity	​	$	267,446	​	$	267,223

Condensed Statements of Income and Comprehensive Income
Year Ended December 31,
(in thousands)

​	2016			2015			2014
Equity in earnings of subsidiaries	​	$	20,017	​	$	16,858	​	$	12,751
Interest expense	​		(1,815)	​	​	(2,024)	​	​	(2,418)
Other expense	​		(297)	​	​	(453)	​	​	(260)
Income before income tax benefit	​		17,905	​	​	14,381	​	​	10,073
Income tax benefit	​		714	​	​	830	​	​	893
Net income	​		18,619	​	​	15,211	​	​	10,966
Change in net unrealized loss	​		(108)	​	​	(2)	​	​	1,203
Total comprehensive income	​	$	18,511	​	$	15,209	​	$	12,169

40

EX-99.3

Exhibit 99.3

First Texas BHC, Inc. and Subsidiaries

Condensed Consolidated Financial Statements (Unaudited)

September 30, 2017

Contents

Independent Auditor’s Review Report	3
Condensed Consolidated Balance Sheets	4
Condensed Consolidated Statements of Income	5
Condensed Consolidated Statements of Comprehensive Income	6
Condensed Consolidated Statements of Changes in Shareholders’ Equity	7
Condensed Consolidated Statements of Cash Flows	8
Notes to Condensed Consolidated Financial Statements	9-31

 

Independent Auditor’s Review Report

To the Board of Directors and Stockholders

of Southwest Bank

We have reviewed the condensed consolidated financial statements of First Texas BHC, Inc. and Subsidiaries (Company), which comprise the balance sheet as of September 30, 2017, and the related consolidated statements of income, comprehensive income, shareholders’ equity, and cash flows for the nine-month periods ended September 30, 2017 and 2016.

Management’s Responsibility for the Financial Information

The Company’s management is responsible for the preparation and fair presentation of the condensed consolidated financial information in accordance with accounting principles generally accepted in the United States of America; this responsibility includes the design, implementation, and maintenance of internal control sufficient to provide a reasonable basis for the preparation and fair presentation of interim financial information accordance with accounting principles generally accepted in the United States of America.

Our responsibility is to conduct our reviews in accordance with auditing standards generally accepted in the United States of America applicable to reviews of interim financial information. A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with auditing standards generally accepted in the United States of America, the objective of which is the expression of an opinion regarding the financial information. Accordingly, we do not express such an opinion.

Conclusion

Based on our review, we are not aware of any material modifications that should be made to the condensed financial information referred to above for it to be in accordance with accounting principles generally accepted in the United States of America.

Report on Condensed Consolidated Balance Sheet as of December 31, 2016

We have previously audited, in accordance with auditing standards generally accepted in the United States of America, the consolidated balance sheet as of December 31, 2016, and the related consolidated statements of income, comprehensive income, changes in shareholders' equity, and cash flows for the year then ended (not presented herein); and we expressed an unmodified audit opinion on those audited consolidated financial statements in our report dated March 13, 2017. In our opinion, the accompanying condensed consolidated balance sheet of First Texas BHC, Inc. and Subsidiaries as of December 31, 2016, is consistent, in all material respects, with the audited consolidated financial statements from which it has been derived.

Payne & Smith, LLC

December 20, 2017

5952 Royal Lane • Suite 158 • Dallas, TX 75230 •214 / 363-9927• Fax 214 / 363-9980

- 3 -

FIRST TEXAS BHC, INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

September 30, 2017 and December 31, 2016

(In thousands of dollars except share amounts)

	September 30,			December 31,
	2017			2016
	(Unaudited)
ASSETS
Cash and cash equivalents	$	128,287		$	189,920
Securities available for sale, at fair value		62,021			63,296
Other equity investments		19,234			12,857
Loans held for sale		3,082			4,836
Loans, net		2,241,346			1,774,521
Premises and equipment, net		24,862			25,679
Cash surrender value of life insurance policies		7,181			6,790
Goodwill		37,227			37,227
Core deposit intangibles, net		-			32
Deferred tax asset, net		4,866			6,169
Accrued interest receivable		6,143			4,195
Other assets		5,160			3,485
Total assets	$	2,539,409		$	2,129,007
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Non-interest-bearing demand deposits	$	488,710		$	452,898
Interest-bearing deposits		1,384,479			1,200,483
Total deposits		1,873,189			1,653,381
Other borrowings		329,950			159,990
Repurchase agreements		50,000			50,000
Junior subordinated debentures		8,248			8,248
Subordinated debt - non-convertible		21,981			21,969
Other liabilities		8,818			8,576
Total liabilities		2,292,186			1,902,164
Commitments and contingencies		-			-
Shareholders' equity:
Common stock, $1 par value; 10,000,000 shares authorized; 7,884,553 shares issued and shares outstanding at September 30, 2017; and 7,774,033 shares issued and 7,755,170 shares outstanding at December 31, 2016		7,885			7,774
Surplus		172,270			169,225
Retained earnings		69,363			53,117
Treasury stock		-			(830	)
Other equity components		(1,925	)		(2,019	)
Accumulated other comprehensive loss		(370	)		(424	)
Total shareholders' equity		247,223			226,843
Total liabilities and shareholders' equity	$	2,539,409		$	2,129,007

See accompanying notes to condensed consolidated financial statements and independent auditor’s review report.

- 4 -

FIRST TEXAS BHC, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Income

Nine Months Ended September 30, 2017 and 2016

(Unaudited)

(In thousands of dollars, except per share amounts)

	2017		2016
Interest income:
Loans, including fees	$	73,387	$	57,048
Securities		794		868
Federal funds sold and other		910		446
Total interest income		75,091		58,362
Interest expense:
Deposits		10,130		5,291
Other borrowings		4,612		3,226
Total interest expense		14,742		8,517
Net interest income		60,349		49,845
Provision for loan losses		3,817		1,948
Net interest income after provision for loan losses		56,532		47,897
Noninterest income:
Service charges		1,310		1,245
Other fee income		2,770		2,875
Net gain on sale of loans		1,955		2,243
Other		4,304		4,017
Total noninterest income		10,339		10,380
Noninterest expense:
Salaries and employee benefits		27,420		25,037
Occupancy		2,990		2,840
Equipment		1,458		1,517
Professional fees		2,285		1,576
Communications		466		482
Data processing		2,146		2,071
Core deposit intangible amortization		32		42
Business development		1,105		999
Supplies		147		126
Other		3,601		2,963
Total noninterest expense		41,650		37,653
Income before income taxes		25,221		20,624
Income tax expense		8,975		7,193
Net income		16,246		13,431
Preferred stock dividends		-		(22	)
Net income available to common shareholders	$	16,246	$	13,409
Basic Earnings Per Share	$	2.06	$	1.73
Diluted Earnigns Per Share	$	1.90	$	1.57

See accompanying notes to condensed consolidated financial statements and independent auditor’s review report.

- 5 -

FIRST TEXAS BHC, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Comprehensive Income

Nine Months Ended September 30, 2017 and 2016

(Unaudited)

(In thousands of dollars)

	2017		2016
Net Income	$	16,246	$	13,431
Other comprehensive income, net of tax, on securities available for sale:
Change in net unrealized loss and gain, net of tax benefit of $19 and tax expense of $188, for 2017 and 2016, respectively		54		537
Other comprehensive (loss) income, net of tax		54		537
Total comprehensive income, net of tax	$	16,300	$	13,968

See accompanying notes to condensed consolidated financial statements and independent auditor’s review report.

- 6 -

FIRST TEXAS BHC, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Changes in Shareholders' Equity

Nine Months Ended September 30, 2017
(Unaudited)

(In thousands of dollars)

	Common Stock		Surplus		Retained Earnings		Accumulated  Other  Comprehensive Income (Loss)			Treasury  Stock			Other  Equity  Components			Total Shareholders' Equity
Balance, January 1, 2017	$	7,774	$	169,225	$	53,117	$	(424	)	$	(830	)	$	(2,019	)	$	226,843
Net income		-		-		16,246		-			-			-			16,246
Other comprehensive income		-		-		-		54			-			-			54
Issuance of common stock (110,520 shares)		111		1,986		-		-			-			-			2,097
Sale of treasury stock (18,863 shares)		-		-		-		-			830			-			830
Loan to ESOP		-		23		-		-			-			196			219
Loans secured by common stock		-		5		-		-			-			(102	)		(97	)
Stock-based compensation expense recognized in earnings		-		1,031		-		-			-			-			1,031
Balance, September 30, 2017	$	7,885	$	172,270	$	69,363	$	(370	)	$	-		$	(1,925	)	$	247,223

See accompanying notes to condensed consolidated financial statements and independent auditor’s review report.

- 7 -

FIRST TEXAS BHC, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

Nine Months Ended September 30, 2017 and 2016

(Unaudited)

(In thousands of dollars)

	2017			2016
Cash flows from operating activities:
Net income	$	16,246		$	13,431
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		1,598			1,653
Net amortization on securities available for sale		235			236
Amortization of debt issuance costs		42			22
Provision for loan losses		3,817			1,948
Stock-based compensation expense		1,031			972
Net increase in cash surrender value of life insurance		(195	)		(107	)
Writedown on other real estate owned		117			200
Net loss (gain) on sale of other real estate owned		30			(189	)
Net gain on sale of loans		(1,955	)		(2,243	)
Net loss (gain) on disposal of property and equipment		21			(1	)
Deferred tax expense		886			597
Originations of loans held for sale		(94,108	)		(109,733	)
Proceeds from loans held for sale		95,862			112,188
Increase in other assets		(9,613	)		(7,261	)
Increase (decrease) in other liabilities		242			(1,410	)
Net cash provided by operating activities		14,256			10,303
Cash flows from investing activities:
Securities available for sale:
Purchases		(5,503	)		(18,198	)
Maturities, calls and principal repayments		6,627			25,592
Net change in loans		(469,085	)		(265,426	)
Proceeds from sale of other real estate owned		251			-
Proceeds from sale of premises and equipment		-			1
Purchases of premises and equipment		(770	)		(735	)
Purchase of life insurance policies		(196	)		(153	)
Net cash used in investing activities		(468,676	)		(258,919	)
Cash flows from financing activities:
Net increase in deposits		219,808			158,260
Decrease in federal funds purchased		-			(5,000	)
Advances on FHLB borrowings		120,000			119,000
Advance on line of credit		50,000			10,000
Debt issuance costs included in other borrowings		(70	)		-
Dividends on preferred stock		-			(22	)
Decrease in ESOP loan		219			141
Increase in loans secured by common stock		(97	)		(159	)
Redemption of preferred stock		-			(29,822	)
Payments of vested stock options		-			(539	)
Sale (purchase) of treasury stock		830			(914	)
Issuance of common stock		2,097			1,677
Net cash provided by financing activities		392,787			252,622
Net (decrease) increase in cash and cash equivalents		(61,633	)		4,006
Cash and cash equivalents at beginning of period		189,920			108,839
Cash and cash equivalents at end of period	$	128,287		$	112,845
Supplemental Cash Flows Information
Interest paid	$	14,496		$	8,508
Income taxes paid	$	9,663		$	7,990
Real estate acquired in foreclosure or in settlement of loans	$	398		$	2,157

See accompanying notes to condensed consolidated financial statements and independent auditor’s review report.

- 8 -

FIRST TEXAS BHC, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

September 30, 2017

1.       Nature of Operations and Summary of Significant Accounting Policies

Pending Acquisition of First Texas BHC, Inc. by Simmons First National Corporation

On January 23, 2017, First Texas BHC, Inc. (First Texas) entered into an agreement and plan of merger (merger agreement) with Simmons First National Corporation (Simmons).

Under the terms of the agreement Simmons will acquire all of the outstanding common stock of First Texas for approximately $462,000,000 (based on Simmons common stock closing price as of January 20, 2017). More specifically, First Texas shareholders and other equity right holders will receive, in the aggregate, 6,500,000 shares of Simmons common stock and $70,000,000 in cash, all subject to certain conditions and potential adjustments.

The merger agreement contains both customary and specific representations, warranties, and covenants for each of the parties. Also the merger agreement contains certain termination rights for both Simmons and First Texas and further provides that a termination fee of $18,000,000 will be payable by First Texas to Simmons upon termination of the agreement under certain specified circumstances.

As more fully discussed in Subsequent Events disclosed at Note 11, Simmons acquired First Texas on October 19, 2017. First Texas is the parent company of Southwest Bank.

Basis of Presentation

The condensed consolidated financial statements include the accounts of First Texas BHC, Inc. (Parent) (a Texas Corporation), and its wholly-owned subsidiaries, SWB Recovery Corp. and Southwest Bank (Bank) and the Bank’s wholly-owned subsidiary, Harob, (collectively referred to as the Company). The Parent owns the outstanding common stock of First Texas BHC Statutory Trust II (Trust II), which was formed for the purpose of issuing company-obligated, mandatorily-redeemable preferred securities.

Certain prior period amounts have been reclassified to conform to current period classification. The condensed consolidated balance sheet of the Company as of December 31, 2016, has been derived from the audited consolidated financial statements of the Company as of December 31, 2016. The results of operations for the period are not necessarily indicative of the results to be expected for the full year.

Certain information and note disclosures normally included in the Company’s annual audited financial statements prepared in with accounting principles generally accepted in the United States of America and the prevailing practices within the banking industry have been condensed or omitted. These condensed consolidated financial statements do not represent complete financial statements and should be read in conjunction with the Company’s audited consolidated financial statements as of and for the year ended December 31, 2016 and notes thereto.

The Subsidiary entities are included in the accompanying financial statements from their dates of acquisition. All significant intercompany accounts and transactions have been eliminated in consolidation.

Nature of Operations

The Company is principally engaged in traditional community banking activities provided through its banking offices in Fort Worth, Dallas, Saginaw, Mansfield, Burleson, Grapevine, and Arlington. Community banking activities include the Company’s commercial and retail lending, deposit gathering, investment, and treasury management activities. Mortgage banking activities are provided through offices in Fort Worth, Dallas, and Austin.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect certain reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses for the reporting period. Actual results could differ from those estimates. The allowance for possible loan losses, valuation of other real estate owned and goodwill, the fair value of stock-based compensation awards, and the fair values of financial instruments are particularly subject to change.

See independent auditor’s review report

- 9 -

FIRST TEXAS BHC, INC. AND SUBSIDIARIES

(Unaudited)

Date of Management’s Review

The Company has evaluated subsequent events for recognition and disclosure through December 20, 2017, the date on which the condensed consolidated financial statements were available to be issued. Refer to Note 11 for discussion of subsequent events.

Cash and Cash Equivalents

For the purposes of reporting cash flows, cash and cash equivalents include cash on hand, deposits with other financial institutions, and federal funds sold. All highly liquid investments with an initial maturity of less than ninety days are considered to be cash equivalents. Cash flows from loans and deposits are reported net. The Company maintains deposits with other financial institutions. Furthermore, federal funds sold are essentially uncollateralized loans to other financial institutions. Management regularly evaluates the credit risk associated with the counterparties to these transactions and believes that the Company is not exposed to any significant credit risks on cash and cash equivalents.

The Company was not required to have funds on hand or on deposit at September 30, 2017 and December 31, 2016 with the Federal Reserve Bank to meet regulatory reserve and clearing requirements.

Securities

Securities are classified as held to maturity and carried at amortized cost when management has the positive intent and ability to hold them to maturity. Securities are classified as available for sale when they may be used as part of the Company’s asset/liability strategy and may be sold prior to maturity in response to changes in interest rate risk, prepayment risk, or other similar economic factors. Securities available for sale are carried at fair value, with unrealized holding gains and losses, net of tax, reported in other comprehensive income. Management determines the appropriate classification of securities at the time of purchase. As of September 30, 2017 and December 31, 2016, all securities were classified as available for sale.

The amortization of premiums and accretion of discounts, computed by the interest method over their contractual lives, are recognized in interest income. Gains and losses on sales are based on the amortized cost of the security sold.

Declines in the fair value of individual securities below their cost that are considered other than temporary result in write downs of the individual securities to their fair value. The related write downs, if any, are included in earnings as realized losses.

Other equity investments such as stock in the Federal Home Loan Bank, Federal Reserve Bank, and Independent Bankers Financial Corporation are carried at cost.

Loans Held for Sale

Loans originated or purchased and intended for sale in the secondary market are carried at the lower of aggregate cost or fair value, as determined by aggregate outstanding commitments from investors or current investor yield requirements. Gains or losses on sales of mortgage loans are recognized based on the difference between the selling price and the carrying value of the related mortgage loans.

Loans

Loans are reported at the principal balance outstanding, less the allowance for loan losses, net of unamortized premium, net deferred loan fees, net deferred loan costs, and net non-accrual interest paid. Interest is accrued daily on the outstanding balances. Loan origination and commitment fees, as well as certain direct origination costs, are deferred and amortized as a yield adjustment over the lives of the related loans. Further information regarding the Company’s accounting policy related to past due loans, nonaccrual loans, impaired loans, and troubled-debt restructuring is presented in Note 3 – Loans and Allowance for Loan Losses.

Allowance for Loan Losses

The allowance for loan losses is a reserve established through a provision for loan losses charged to expense, which represents management’s best estimate of probable losses that have been incurred within the existing portfolio of loans. The allowance, in the judgment of management, is necessary to reserve for estimated losses inherent in the loan portfolio. For further information regarding the Company’s policies and methodology used to estimate the allowance for loan losses is presented in Note 3 – Loans and Allowance for Loan Losses.

See independent auditor’s review report

- 10 -

FIRST TEXAS BHC, INC. AND SUBSIDIARIES

(Unaudited)

Loan Servicing and Sales

In the normal course of business, the Company sells the guaranteed portion of certain loans originated with the partial guarantee of the Small Business Administration (SBA) or U.S. Department of Agriculture (USDA). At the time of these sales, the Company retains servicing rights and interest-only strips on those loans. Gain or loss on sale of the receivables depends in part on the previous carrying amount of the financial assets involved in the transfer, allocated between the assets sold and the retained interests based on their relative fair values at the date of transfer. To obtain fair values, quoted market prices are used if available. However, quotes are generally not available for retained interests, so the Company generally estimates fair value based on the present value of future expected cash flows. Future expected cash flows are estimated by management based on key assumptions such as credit losses, prepayment speeds, forward yield curves, and discount rates commensurate with the risks involved.

The related servicing rights represent the estimated present values of future cash flows related to rights to service SBA and USDA loans for other investors. Loan servicing rights are amortized against loan servicing fee income on an accelerated basis in proportion to, and over the period of, estimated net future loan servicing fee income. Service fee income is recognized as the related loan payments are collected. At September 30, 2017 and December 31, 2016, the Company had capitalized loan servicing rights of approximately $199,000 and $274,000, respectively, included in other assets in the accompanying financial statements.

Capitalized interest-only strip receivables represent contractual rights to receive the rate differential between the interest rate sold to investors and the rate retained by the Company. Capitalized interest-only strip receivables are amortized against interest income as an adjustment to yield in proportion to, and over the period of, estimated net future loan servicing fee income. At September 30, 2017 and December 31, 2016, the Company had capitalized interest-only strip receivables of approximately $127,000 and $183,000, respectively, included in other assets in the accompanying financial statements.

Deferred gain on sale of loans represents the relative value of the loan sale proceeds of the retained, unguaranteed portion of the loan retained, net of amounts capitalized and the gain immediately recognized. Deferred gain is recognized into income in proportion to, and over the period of, estimated net future loan servicing fee income. At September 30, 2017 and December 31, 2016, the Company had deferred gains of approximately $490,000 and $684,000, respectively, included in other liabilities in the accompanying financial statements.

Management periodically evaluates both servicing rights and interest-only strip receivables for impairment, and, if necessary, writes such assets down to their estimated fair values. At September 30, 2017 and December 31, 2016, management has determined that the carrying amounts of servicing assets and interest-only strip receivables approximate their estimated fair values.

Premises and Equipment

Land is carried at cost. Building and improvements, and furniture and equipment are stated at cost less accumulated depreciation, computed on a straight-line basis over the estimated useful lives of the assets ranging from 3 to 40 years. Leasehold improvements are generally depreciated over the term of the respective leases. The related cost and accumulated depreciation are removed from the accounts at the time an asset is sold or retired, and any resulting gain or loss is recognized in income. Maintenance and repairs are charged to operating expenses as incurred.

Other Real Estate Owned

Other real estate owned is initially recorded at fair value less the estimated costs to sell the asset. Write downs of carrying value required at the time of foreclosure are recorded as a charge to the allowance for loan losses. Costs related to the development of such real estate are capitalized, whereas those related to holding the property are expensed. Foreclosed property is subject to periodic reevaluation based upon estimates of fair value. In determining the valuation of other real estate owned, management obtains independent appraisals for significant properties. Valuation adjustments are provided, as necessary, by charges to operations.

Goodwill

Goodwill represents the excess of the cost of business acquired over the fair value of the net assets acquired. Goodwill is assessed, at least annually, for impairment, as well as when events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. The Company bases its evaluation on such impairment factors as the nature of the assets, the future economic benefit of the assets, any historical or future profitability measurements, and other market conditions or factors that may be present.

See independent auditor’s review report

- 11 -

FIRST TEXAS BHC, INC. AND SUBSIDIARIES

(Unaudited)

Intangibles and Other Long-Lived Assets

Intangible assets are acquired assets that lack physical substance but can be distinguished from goodwill because of contractual or other legal rights or because the asset is capable of being sold or exchanged either on its own or in combination with a related contract, asset, or liability. The Company’s intangible assets relate to core deposits. Intangible assets with definite useful lives are amortized on a straight-line basis over their estimated useful life. Intangible assets, premises and equipment and other long-lived assets are tested for impairment whenever events or changes in circumstances indicate the carrying amount of the assets may not be recoverable from future cash flows. If impaired, the assets are recorded at fair value and an impairment loss is recognized.

Stock-Based Compensation

The Company accounts for stock-based employee compensation plans in accordance with accounting rules, which require companies to expense the fair value of employee stock options and other forms of stock-based employee compensation in the financial statements over the period that an employee provides service in exchange for the award. Under these rules, the Company measures compensation cost related to stock options based on the grant-date fair value of the award using the Black-Scholes option-pricing model and recognizes it ratably, less estimated forfeitures, over the vesting term of the award.

Income Taxes

Income tax expense is the total of the current year income tax due or refundable and the change in deferred tax assets and liabilities (excluding deferred tax assets and liabilities related to components of other comprehensive income). Deferred tax assets and liabilities are the expected future tax amounts for the temporary differences between carrying amounts and the tax bases of assets and liabilities, computed using enacted tax rates. A valuation allowance, if needed, reduces deferred tax assets to the expected amount most likely to be realized. Realization of deferred tax assets is dependent upon the generation of a sufficient level of future taxable income and recoverable taxes paid in prior years. Although realization is not assured, management believes it is more-likely-than-not that all of the deferred tax assets will be realized.

The Company files a consolidated income tax return with its subsidiaries. Federal income tax expense or benefit has been allocated to subsidiaries on a separate return basis. The open tax years are 2013 through 2017. When and if applicable, potential interest and penalty costs are accrued as incurred, with expenses recognized in selling, general and administrative, expenses in the statements of operations.

For the year ended December 31, 2016, management has determined there are no uncertain tax positions.

Comprehensive Income

Accounting principles generally require that recognized revenue, expenses, gains and losses be included in net income. Although certain changes in assets and liabilities, such as unrealized gains and losses on available for sale securities, are not reported as a separate component in the consolidated statement of income, such items are components of comprehensive income. Gains and losses on available for sale securities are reclassified to net income as the gains or losses are realized upon sale of the securities. Other than temporary impairment charges are reclassified to net income at the time of the charge.

Fair Values of Financial Instruments

ASC Topic 820, Fair Value Measurements and Disclosures, defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and requires certain disclosures about fair value measurements (see Note 6 – Fair Values of Financial Instruments). In general, fair values of financial instruments are based upon quoted market prices, where available. If such quoted market prices are not available, a fair value is based upon models that primarily use, as inputs, observable market-based parameters. Valuation adjustments may be made to ensure that financial instruments are recorded at fair value. These adjustments may include amounts to reflect counterparty credit quality and the Company’s creditworthiness, among other things, as well as unobservable parameters. Any such validation adjustments are applied consistently over time.

Transfers of Financial Assets

Transfers of financial assets are accounted for as sales when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (i) the assets have been isolated from the Company, (ii) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and (iii) the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity.

See independent auditor’s review report

- 12 -

FIRST TEXAS BHC, INC. AND SUBSIDIARIES

(Unaudited)

Dividend Restriction

Banking regulations require the maintenance of certain capital and net income levels that may limit the amount of dividends that may be paid. Approval by regulatory authorities is required if the effect of dividends declared would cause the regulatory capital of the Bank to fall below specified minimum levels. Regulatory capital requirements are more fully disclosed in Note 5 – Regulatory Matters.

Earnings per Share

Basic earnings per share represent income available to shareholders divided by the weighted average number of shares outstanding during each period. Diluted earnings per share reflect additional potential shares that would have been outstanding if dilutive potential shares had been issued. Potential shares that may be issued by the Company relate to stock options, stock appreciation rights, and restricted stock units.

Earnings per share (EPS) were computed as follows for the three month periods ended September 30:

	Net		2017
	Income		Weighted		Per
	Available to		Average		Share
	Shareholders		Share		Amount
2017
Basic earnings per share	$	16,246,618		7,876,901	$	2.06
Effect of dilutive shares
Stock options				644,158
Stock appreciation rights				13,000
Restricted stock units				10,805
				667,963
Diluted earnings per share	$	16,246,618		8,544,864	$	1.90

	Net		2016
	Income		Weighted		Per
	Available to		Average		Share
	Shareholders		Share		Amount
2016
Basic earnings per share	$	13,408,936		7,741,818	$	1.73
Effect of dilutive shares
Stock options				748,280
Stock appreciation rights				13,000
Restricted stock units				25,802
				787,082
Diluted earnings per share	$	13,408,936		8,528,900	$	1.57

See independent auditor’s review report

- 13 -

FIRST TEXAS BHC, INC. AND SUBSIDIARIES

(Unaudited)

2.       Securities Available for Sale

Securities available for sale consisted of the following at September 30, 2017 and December 31, 2016 (in thousands):

			Gross		Gross		Estimated
	Amortized		Unrealized		Unrealized		Fair
	Cost		Gains		Losses		Value
September 30, 2017:
U.S. government securities		5,079				14		5,065
U.S. government agency		29,860				189		29,671
Mortgage-backed securities		24,884		78		202		24,760
Trust preferred securities		940				230		710
CRA Qualified Investment Fund		1,827				12		1,815
	$	62,590	$	78	$	647	$	62,021
December 31, 2016:
U.S. government securities		2,618		-		12		2,606
U.S. government agency		29,864		3		323		29,544
Mortgage-backed securities		28,730		117		183		28,664
Trust preferred securities		938		-		230		708
CRA Qualified Investment Fund		1,798		-		24		1,774
	$	63,948	$	120	$	772	$	63,296

Securities with a fair value of approximately $57,922,000 and $59,523,000 at September 30, 2017 and December 31, 2016, respectively, were sold under agreements to repurchase or were pledged to secure public fund deposits, long term borrowings, or lines of credit, as required or permitted by law.

Unrealized losses and fair value, aggregated by length of time that individual securities have been in a continuous unrealized loss position, as of September 30, 2017 and December 31, 2016, are summarized as follows (in thousands):

See independent auditor’s review report

- 14 -

FIRST TEXAS BHC, INC. AND SUBSIDIARIES

(Unaudited)

	Continuous Unrealized				Continuous Unrealized
	Losses Existing for				Losses Existing for
	Less than 12 months				Greater than 12 months					Total
	Fair		Unrealized		Fair			Unrealized		Fair		Unrealized
	Value		Losses		Value			Losses		Value		Losses
Securities Available for Sale
September 30, 2017:
U.S. government securities		5,065		14			_		-		5,065		14
U.S. government agency		21,736		124		7,935			65		29,671		189
Mortgage-backed securities		18,490		167		2,236			35		20,726		202
Trust preferred securities		-		-		700			230		700		230
CRA Qualified Investment Fund		1,815		12		-			-		1,815		12
	$	47,106	$	317	$	10,871		$	330	$	57,977	$	647
December 31, 2016:
U.S. government securities		2,606		12		-			-		2,606		12
U.S. government agency		24,541		323		-			-		24,541		323
Mortgage-backed securities		21,561		183		-			-		21,561		183
Trust preferred securities		-		-		708			230		708		230
CRA Qualified Investment Fund		1,774		24		-			-		1,774		24
	$	50,482	$	542	$	708		$	230	$	51,190	$	772

Unrealized losses relate principally to current interest rates for similar types of securities. In analyzing an issuer’s financial condition, management considers whether the securities are issued by the federal government or its agencies, whether downgrades by bond rating agencies have occurred, and the results of reviews of the issuer’s financial condition. The Company does not intend to sell these securities and it is more-likely-than-not that the Company will not be required to sell prior to recovery.

Management evaluates securities for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. Consideration is given to (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) the intent and ability of the Company to sell or whether it would be more-likely-than-not required to sell its investments in the issuer for a period of time sufficient to allow for any anticipated recovery. As of September 30, 2017, and December 31, 2016, no investment securities were other-than-temporarily impaired.

The amortized cost and estimated fair value of securities at September 30, 2017, by contractual maturity, are shown below. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations. Mortgage-backed securities are shown separately since they are not due at a single maturity date (in thousands):

See independent auditor’s review report

- 15 -

FIRST TEXAS BHC, INC. AND SUBSIDIARIES

(Unaudited)

	Available For Sale
	Amortized		Estimated
	Cost		Fair Value
Due less than one year	$	-	$	-
Due one through five years		34,939		34,736
Due over five through ten years		-		-
Due after ten years		940		710
		35,879		35,446
CRA qualified investment fund		1,827		1,815
Mortgage-backed securities		24,884		24,760
	$	62,590	$	62,021

3.       Loans and Allowance for Loan Losses

Risk By Loan Category

To determine an appropriate allowance for loan losses, management separates loans into separate categories based on similar risk characteristics. These categories and their risk characteristics are described below:

Construction and Land Development – This category consists of loans secured by vacant land, which includes developed commercial land, undeveloped commercial land, rural land, single family residential lots, lot development loans, and interim construction for both 1-4 family and commercial developments. These loans are closely monitored by on-site inspections and are considered to have higher risks than other real estate loans due to their ultimate repayment being sensitive to interest rate changes, government regulation of real property, general economic conditions and the availability of long-term financing.

Commercial Real Estate – This category consists of loans secured by both owner-occupied and non-owner occupied commercial real estate properties and represents the largest category of the Company’s total loan portfolio. A majority of the loans in this category are secured by non-owner occupied commercial properties. The remainder of this segment is secured by owner occupied properties. The non-owner occupied portion of this category presents a higher risk profile given the reliance on third- party rental income and the successful operation of the property to service the regular payment, but overall credit risk is low. A substantial majority of these loans have adequate secondary sources of repayment through financially strong guarantors that are well known to the Company. Commercial real estate loans may be more adversely affected by conditions in the real estate markets or in the general economy. The properties securing the Company’s portfolio are diverse in terms of type and geographic location. Loan losses in this category have been minimal.

Residential Real Estate – This category consists of loans secured by some form of both owner-occupied and non-owner-occupied residential real estate. The category includes loans for home improvement, home equity lines of credit and close-end financing for 1-4 family properties. Mortgage loans held for sale on the secondary market are excluded from this category. Generally, the overall credit risk in this segment of the loan portfolio is low given the nature of the collateral and the Company’s strict underwriting standards for this type of financing. The Company does not originate sub-prime mortgage loans. The higher risk area of this category is the “non-owner-occupied” portion of these loans which are often reliant on rental income as the primary source of repayment.

Commercial, Industrial and Agricultural – This category consists of all business loans secured by assets other than commercial real estate. It also includes loans for agriculture production. A substantial majority of these loans are secured by equipment, accounts receivable and inventory. The loss history in this segment of the portfolio is very low due to sufficient collateralization. The primary risk involved with this category is that the loans are typically secured by depreciable assets that may not provide an adequate source of repayment if the loan goes into default.

Loans to Nondepository Financial Institutions – This category consists of all loans to mortgage companies that specialize in mortgage loan originations and mortgage warehouse loans. It also includes loans to real estate investment trusts.

Consumer and Other – This category of loans consists of all other forms of consumer debt, including automobiles, recreational vehicles, debt consolidation, household or personal use, education, taxes, mobile homes, personal lines of credit, loans to mortgage originators, loans to non-profits and overdrafts. Overdrafts are deposit accounts that become unsecured loans when overdrawn by the deposit customer. Overdrafts are monitored by account officers on a daily basis and are often cleared within a very short period of time. It is bank policy to charge off any overdrafts that remain outstanding for more than 60 days.

See independent auditor’s review report

- 16 -

FIRST TEXAS BHC, INC. AND SUBSIDIARIES

(Unaudited)

Loans consisted of the following at September 30, 2017 and December 31, 2016 (in thousands):

	September 30,			December 31,
	2017			2016
Construction and land development	$	367,869		$	280,601
Commercial real estate		973,390			811,278
1 - 4 family residential		261,676			234,829
Commercial and industrial		414,395			278,973
Agricultural		70,395			32,183
Loans to nondepository financial institutions		159,088			135,386
Consumer and other		15,357			18,376
Gross loans		2,262,170			1,791,626
Allowance for loan losses		(20,824	)		(17,105	)
Net loans	$	2,241,346		$	1,774,521

At September 30, 2017 and December 31, 2016, the Bank had total commercial real estate loans and construction and land development loans of $1,341,259,000 and $1,091,879,000, respectively. The Bank had construction, land development, and other loans representing 121% and 115%, respectively, of total risk based capital at September 30, 2017 and December 31, 2016. The Bank had non-owner-occupied commercial real estate loans representing 384% and 379%, respectively, of total risk based capital at September 30, 2017 and December 31, 2016. Sound risk management practices and appropriate levels of capital are essential elements of a sound commercial real estate lending program (CRE). Concentrations of CRE exposures add a dimension of risk that compounds the risk inherent in individual loans. Interagency guidance on CRE concentrations describe sound risk management practices which include board and management oversight, portfolio management, management information systems, market analysis, portfolio stress testing and sensitivity analysis, credit underwriting standards, and credit risk review functions. Management believes it has implemented these practices in order to monitor its CRE. An institution which has reported loans for construction, land development, and other land loans representing 100% or more of total risk-based capital, or total non-owner occupied commercial real estate loans representing 300% or more of the institution's total risk-based capital and the outstanding balance of commercial real estate loan portfolio has increased by 50% or more during the prior 36 months, may be identified for further supervisory analysis by regulators to assess the nature and risk posed by the concentration.

At September 30, 2017 and December 31, 2016, the Bank had approximately $30,528,000 and $27,435,000, respectively, of energy loans included in commercial and industrial loans. These energy loans represent approximately 10% and 11%, respectively, of total risk based capital at September 30, 2017 and December 31, 2016. Management believes it has implemented appropriate practices for sound underwriting and the monitoring of these loans. However, the weakening of prices within the energy industry over a prolonged period may have an adverse effect on the Company’s profitability and asset quality.

The Company extends commercial and consumer credit primarily to customers in the State of Texas. At September 30, 2017 and December 31, 2016, the majority of the Company's loans were collateralized with real estate. The real estate collateral provides an alternate source of repayment in the event of default by the borrower, and may deteriorate in value during the time the credit is extended. The weakening of real estate markets may have an adverse effect on the Company's profitability and asset quality. If the Company was required to liquidate the collateral securing a loan to satisfy the debt during a period of reduced real estate values, earnings and capital could be adversely affected. Additionally, the Company has loans secured by inventory, accounts receivable, equipment, marketable securities, or other assets. The debtors' ability to honor their contracts on all loans is substantially dependent upon the general economic conditions of the region.

Nonaccrual and Past Due Loans

Loans are considered past due if the required principal and interest payments have not been received as of the date such payments were due. The accrual of interest on loans is discontinued at the time the loan is 90 days delinquent unless the credit is well-secured and in process of collection. Loans are placed on nonaccrual or charged-off at an earlier date if collection of principal or interest is considered doubtful. All interest accrued but not collected for loans that are placed on nonaccrual or charged off is reversed against interest income. The interest on these loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

See independent auditor’s review report

- 17 -

FIRST TEXAS BHC, INC. AND SUBSIDIARIES

(Unaudited)

Nonaccrual loans, segregated by class of loans, at September 30, 2017 and December 31, 2016, were as follows (in thousands):

	September 30, 2017		December 31, 2016
Construction and land development	$	-	$	-
Commercial real estate		-		-
1 - 4 family residential		138		60
Commercial and industrial		-		-
Agricultural		-		-
Loans to nondepository financial institutions		-		-
Consumer and other		-		-
	$	138	$	60

An age analysis of past due loans (including both accruing and nonaccruing loans), segregated by class of loans, as of September 30, 2017 and December 31, 2016, is as follows (in thousands):

	Loans  30-89 Days Past Due		Loans  90 or More  Days  Past Due		Total Past  Due Loans		Current Loans		Total Loans		Accruing  Loans 90 or  More Days Past Due
September 30, 2017:
Construction and land development	$	178	$	-	$	178	$	367,691	$	367,869	$	-
Commercial real estate		-		-		-		973,390		973,390		-
1-4 family residential		2,461		16		2,477		259,199		261,676		-
Commercial and industrial		87		-		87		414,308		414,395		-
Agricultural		-		-		-		70,395		70,395		-
Loans to nondepository financial institutions		-		-		-		159,088		159,088		-
Consumer and other		14				14		15,343		15,357		-
	$	2,740	$	16	$	2,756	$	2,259,414	$	2,262,170	$	-
December 31, 2016:
Construction and land development	$	183	$	-	$	183	$	280,418	$	280,601	$	-
Commercial real estate		280		-		280		810,998		811,278		-
1-4 family residential		1,831		121		1,952		232,877		234,829		121
Commercial and industrial		111		-		111		278,862		278,973		-
Agricultural		-		-		-		32,183		32,183		-
Loans to nondepository financial institutions		-		-		-		135,386		135,386		-
Consumer and other		13		1		14		18,362		18,376		1
	$	2,418	$	122	$	2,540	$	1,789,086	$	1,791,626	$	122

Impaired Loans

A loan is considered impaired when it is probable, based on current information and events, the Company will be unable to collect all contractual principal and interest payments due in accordance with the terms of the loan agreement. Impaired loans are measured on an individual basis based on the present value of expected future cash flows discounted at the loan’s effective interest rate or, as a practical expedient, at the loan’s observable market price or the fair value of the collateral if the loan is collateral dependent. The amount of impairment, if any, and any subsequent changes are included in the allowance for loan losses.

See independent auditor’s review report

- 18 -

FIRST TEXAS BHC, INC. AND SUBSIDIARIES

(Unaudited)

Impaired loans as of September 30, 2017 and December 31, 2016 are set forth in the following table (in thousands):

	Unpaid Contractual Principal Balance		Recorded  Investment  With No  Allowance		Recorded Investment With Allowance		Total Recorded Investment		Related Allowance		Average Recorded Investment		Interest Income Received
September 30, 2017:
Construction and land development	$	-	$	-	$	-	$	-	$	-	$	-	$	-
Commercial real estate		-		-		-		-		-		-		-
1-4 family residential		318		84		203		287		14		136		3
Commercial and industrial		192		-		192		192		50		192		11
Agricultural		-		-		-		-		-		-		-
Loans to nondepository financial institutions		-		-		-		-		-		-		-
Consumer and other		-		-		-		-		-		-		-
	$	510	$	84		395	$	479	$	64	$	328	$	14
December 31, 2016:
Construction and land development	$	-	$	-	$	-	$	-	$	-	$	578	$	-
Commercial real estate		-		-		-		-		-		201		-
1-4 family residential		84		-		60		60		10		121		-
Commercial and industrial		240		-		240		240		50		244		15
Agricultural		-		-		-		-		-		-		-
Loans to nondepository financial institutions		-		-		-		-		-		-		-
Consumer and other		-		-		-		-		-		3		-
	$	324	$	-	$	300	$	300	$	60	$	1,147	$	15

Troubled Debt Restructurings

The restructuring of a loan is considered a “troubled debt restructuring” if both the borrower is experiencing financial difficulties and the creditor has granted a concession. Concessions may include interest rate reductions or below market interest rates, principal forgiveness, restructuring amortization schedules and other actions intended to minimize potential losses. The Company had no troubled debt restructurings at September 30, 2017 and December 31, 2016.

Credit Quality Indicators

As part of the ongoing monitoring of the credit quality of the Company’s loan portfolio, management tracks certain quality indicators including trends related to the risk grade of loans, the level of classified loans, the delinquency status of loans, net charge-offs, non-performing loans, and the general economic conditions in the state of Texas.

The Company utilizes a risk-grading definition system to assign a risk grade to each of its loans. Loans are graded on a scale of 1 to 9. A description of the general characteristics of the 9 risk grades is as follows:

Grade 1 – This grade includes loans with little or no risk of loss. Interest payments are protected by a large or exceptionally stable margin and principal is secured. These borrowers have a strong positive consistent cash flow, stable earnings and growth, significant net worth and sufficient liquidity to fully repay the debt.

Grades 2 and 3 – These grades include loans to borrowers of solid credit quality with moderate risk. Borrowers in these grades are differentiated from higher grades on the basis of leverage, asset quality, and the stability of the industry or market area.

Grade 4 – This grade is for “satisfactory” loans. These borrowers have acceptable financial condition and stability but are more susceptible to economic changes and greater concentration of business risk either by product or market, however borrowers demonstrate consistent profitability or strong historical cash flow; competent management but may not have been tested by cyclical market conditions.

Grade 5 – This grade includes loans on management’s “Pass/Watch list”. Pass/Watch assets are neither criticized nor classified credits. These assets have the potential for future deterioration. This grade is intended to be utilized on a temporary basis.

Grade 6 – This grade is for “Special Mention” loans. Special mention loans are considered criticized assets. These assets have the potential for future deterioration. Such loans are differentiated from a Grade 5 in terms of a higher sensitivity to severity and imminence of the potential weakness(es). If left uncorrected, these potential weakness(es) may at some future date result in the deterioration of the repayment prospects for the loan.

See independent auditor’s review report

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FIRST TEXAS BHC, INC. AND SUBSIDIARIES

(Unaudited)

Grade 7 – This grade is for “Substandard” loans. Substandard loans have defined weakness(es) which make payment default or principal exposure likely but not yet certain. These loans are inappropriately protected by the current net worth and paying capacity of the borrower or the collateral pledged. Although loss may not be imminent, if the weakness(es) is not corrected, there is a distinct possibility that the Company will sustain some loss. If the likelihood of full collection of principal and interest may be in doubt these loans are placed on nonaccrual.

Grade 8 – This grade includes “Doubtful” loans. Such loans are differentiated from a Grade 7 in terms that the weakness(es) makes collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. Loans in this grade are carried on nonaccrual.

Grade 9 – This grade includes “Loss” loans. Such loans are considered uncollectible and of such little value that their continuance as assets is not warranted. Loss is not intended to imply that the loan or some portion of it will never be paid, nor does it in any way imply that there has been a forgiveness of debt.

The following table presents the risk category of loans by grade as of September 30, 2017 and December 31, 2016 (in thousands):

	Construction													Loans to
	and						Commercial					Consumer		Nondepository
	Land		Commercial		1-4 Family		and					and		Financial
	Development		Real Estate		Residential		Industrial			Agricultural		Other		Institutions		Total
September 30, 2017:
Grade 1	$	-	$	171	$	-	$	3,217		$	-	$	2,443	$	-	$	5,831
Grade 2		-		980		74		31,796			548		261		-		33,659
Grade 3		27,228		204,514		37,665		88,946			5,674		1,654		46,765		412,446
Grade 4		332,983		761,480		221,940		285,201			62,758		8,979		84,763		1,758,104
Grade 5		7,658		5,381		515		4,818			1,415		2,002		27,560		49,349
Grade 6		-		446		138		30			-		-		-		614
Grade 7		-		418		1,344		387			-		18		-		2,167
Grade 8		-		-		-		-			-		-		-		-
Grade 9		-		-		-		-			-		-		-		-
	$	367,869	$	973,390	$	261,676	$	414,395		$	70,395	$	15,357	$	159,088	$	2,262,170
December 31, 2016:
Grade 1	$	-	$	176	$	-	$	5,963		$	-	$	2,121			$	8,260
Grade 2		-		1,016		783		2,684			548		277				5,308
Grade 3		32,889		158,158		36,431		64,961			6,082		2,542		124,818		425,881
Grade 4		237,688		644,416		195,429		202,490			25,553		13,436		10,568		1,329,580
Grade 5		9,558		6,308		810		1,949			-						18,625
Grade 6		-		494		1,001		342			-						1,837
Grade 7		466		710		375		596			-						2,147
Grade 8		-		-		-		(12	)		-						(12	)
Grade 9		-		-		-		-			-						-
	$	280,601	$	811,278	$	234,829	$	278,973		$	32,183	$	18,376	$	135,386	$	1,791,626

Allowance for Loan Losses

The allowance is an amount that management believes will be adequate to absorb estimated losses relating to specifically identified loans, as well as probable credit losses inherent in the balance of the loan portfolio, based on an evaluation of the collectability of existing loans and prior loss experience. This evaluation also takes into consideration such factors as changes in the nature and volume of the loan portfolio, overall portfolio quality, review of specific problem loans, and current economic conditions that may affect the borrowers’ ability to pay. This evaluation does not include the effects of expected losses on specific loans or groups of loans that are related to future events or expected changes in economic conditions. While management uses the best information available to make its evaluation, future adjustments to the allowance may be necessary if there are significant changes in economic conditions. In addition, regulatory agencies, as an integral part of their examination process, periodically review the Company’s allowance for loan losses, and may require the Company to make changes to the allowance based on their judgment about information available to them at the time of their examinations.

See independent auditor’s review report

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FIRST TEXAS BHC, INC. AND SUBSIDIARIES

(Unaudited)

The allowance consists of specific, general and unallocated components. The specific component relates to loans that are classified as impaired for which an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan. The general component covers nonimpaired loans and is based on historical loss experience adjusted for qualitative factors.

The following table presents the activity in the allowance for loan losses by portfolio segment for the nine months ended September 30, 2017 and year ended December 31, 2016 (in thousands):

	Construction															Loans to
	and		Commercial					Commercial					Consumer			Nondepository
	Land		Real		1-4 Family			and					and			Financial
	Development		Estate		Residential			Industrial			Agricultural		Other			Institutions			Unallocated			Total
September 30, 2017:
Beginning balance	$	3,598	$	8,990	$	1,047		$	2,562		$	127	$	119		$	280		$	382		$	17,105
Provision for loan losses		1,173		1,423		105			1,308			150		27			(80	)		(289	)		3,817
Charge-offs		-		-		-			(148	)		-		(77	)		-			-			(225	)
Recoveries		5		-		22			75			-		25			-			-			127
Net (charge-offs)/recoveries		5		-		22			(73	)		-		(52	)		-			-			(98	)
Ending balance	$	4,776	$	10,413	$	1,174		$	3,797		$	277	$	94		$	200		$	93		$	20,824
Period-end amount allocated to:
Loans individually evaluated for impairment	$	-	$	-	$	14		$	50		$	-	$	-		$	-		$	-		$	64
Loans collectively evaluated for impairment		4,776		10,413		1,160			3,747			277		94			200			93			20,760
	$	4,776	$	10,413	$	1,174		$	3,797		$	277	$	94		$	200		$	93		$	20,824
December 31, 2016:
Beginning balance	$	3,234	$	7,658	$	960		$	2,575		$	67	$	121		$	277		$	80		$	14,972
Provision for loan losses		214		1,332		98			32			60		68			3			302			2,109
Charge-offs		-		-		(21	)		(214	)		-		(84	)								(319	)
Recoveries		150		-		10			169			-		14									343
Net (charge-offs)/recoveries		150		-		(11	)		(45	)		-		(70	)		-			-			24
Ending balance	$	3,598	$	8,990	$	1,047		$	2,562		$	127	$	119		$	280		$	382		$	17,105
Period-end amount allocated to:
Loans individually evaluated for impairment	$	-	$	-	$	10		$	50		$	-	$	-		$	-		$	-		$	60
Loans collectively evaluated for impairment		3,598		8,990		1,037			2,512			127		119			280			382			17,045
	$	3,598	$	8,990	$	1,047		$	2,562		$	127	$	119		$	280		$	382		$	17,105

The Company’s recorded investment in loans as of September 30, 2017 and December 31, 2016 related to each balance in the allowance for loan losses by portfolio segment and disaggregated on the basis of the Company’s impairment methodology was as follows (in thousands):

See independent auditor’s review report

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FIRST TEXAS BHC, INC. AND SUBSIDIARIES

(Unaudited)

	Loans		Loans
	Individually		Collectively
	Evaluated for		Evaluated for		Total
	Impairment		Impairment		Loans
September 30, 2017:
Construction and land development	$	-	$	366,581	$	366,581
Commercial real estate		-		956,909		956,909
1-4 family residential		287		261,352		261,639
Commercial and industrial		192		417,976		418,168
Agricultural		-		69,246		69,246
Loans to nondepository financial institutions		-		144,288		144,288
Consumer and other		-		10,058		10,058
Loans not subject to reserve		-		35,281		35,281
	$	479	$	2,261,691	$	2,262,170
December 31, 2016:
Construction and land development	$	-	$	277,103	$	277,103
Commercial real estate		-		795,418		795,418
1-4 family residential		60		233,740		233,800
Commercial and industrial		240		268,275		268,515
Agricultural		-		31,635		31,635
Loans to nondepository financial institutions		-		135,386		135,386
Consumer and other		-		12,755		12,755
Loans not subject to reserve		-		37,014		37,014
	$	300	$	1,791,326	$	1,791,626

4.       Income Taxes

The provision for income taxes includes these components (in thousands):

	September 30,		September 30,
	2017		2016
Taxes currently payable	$	7,701	$	7,852
Deferred income taxes		1,274		(659	)
Income tax expense	$	8,975	$	7,193

A reconciliation of income tax expense at the statutory rate to the Company’s actual income tax expense is shown below: (in thousands):

	September 30,			September 30,
	2017			2016
Computed at the statutory rate (35%)	$	8,827		$	7,218
Changes resulting from					(43	)
Increase in cash surrender of bank-owned life insurance		(74	)		(43	)
Tax exempt interest		(13	)		(16	)
Other		235			34
	$	8,975		$	7,193

See independent auditor’s review report

- 22 -

FIRST TEXAS BHC, INC. AND SUBSIDIARIES

(Unaudited)

The tax effects of temporary differences related to deferred taxes shown on the consolidated balance sheet were (in thousands):

	September 30,		December 31,
	2017		2016
Deferred tax assets:
Allowance for loan losses	$	6,748	$	5,446
Deferred compensation		1,666		3,053
Premises and equipment		285		72
Core deposit intangibles		2,001		2,332
Deferred loan fees		1,086		1,335
Unrealized loss on securities available for sale		199		228
Other		260		248
Total deferred tax assets		12,245		12,714
Deferred tax liabilities:
Goodwill		7,289		6,472
Other		90		73
Total deferred tax liabilities		7,379		6,545
Net deferred tax asset	$	4,866	$	6,169

5.       Regulatory Matters

The Company and the Bank are subject to regulatory capital requirements administered by federal banking agencies. Capital adequacy guidelines and prompt corrective action regulations, involve quantitative measures of assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Failure to meet capital requirements can initiate regulatory action. The final rules implementing Basel Committee on Banking Supervision’s capital guidelines for U.S. banks (Basel III rules) became effective for the Company and the Bank on January 1, 2015 with full compliance with all of the requirements being phased in over a multi-year schedule, and fully phased in by January 1, 2019. The net unrealized gain or loss on available for sale securities is not included in computing regulatory capital. Management believes as of September 30, 2017 and December 31, 2016, the Company and Bank meet all capital adequacy requirements to which it is subject.

Prompt corrective action regulations for banking institutions provide five classifications: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized, although these terms are not used to represent overall financial condition. If adequately capitalized, regulatory approval is required to accept brokered deposits. If undercapitalized, capital distributions are limited, as is asset growth and expansion, and capital restoration plans are required. At September 30, 2017, the most recent regulatory notifications categorized the Bank as well-capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes have changed the Bank’s category.

Additionally, Basel III added a 2.5% “capital conservation buffer” which was designed for bank holding companies and banking institutions to absorb losses during periods of economic stress. The implementation of the capital conservation buffer began on January 1, 2016 at the 0.625% level and will be phased in over a four-year period (increasing by 0.625% on each subsequent January 1, until it reaches 2.5% on January 1, 2019). Band holding companies and banking institutions with capital ratios below the minimum for capital adequacy purposes plus the capital conservation buffer will face constraints on dividends, equity repurchases and executive compensation relative to the amount of the shortfall.

See independent auditor’s review report

- 23 -

FIRST TEXAS BHC, INC. AND SUBSIDIARIES

(Unaudited)

Actual and required capital amounts and ratios at September 30, 2017 and December 31, 2016 are presented below (in thousands):

											Minimum for Capital					Minimum to be Well
						Minimum Required					Adequacy Purposes					Capitalized Under
						for Capital					Plus Capital					Prompt Corrective
	Actual					Adequacy Purposes					Conservation Buffer					Action Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio			Amount		Ratio
September 30, 2017:
Total capital to risk weighted assets
Consolidated	$	261,096		10.269	%	$	203,406		8.00	%	$	235,188		9.250	%	$	254,257		10.00	%
Bank only	$	304,327		11.986	%	$	203,125		8.00	%	$	234,863		9.250	%	$	253,906		10.00	%
Tier I (core) capital to risk weighted assets
Consolidated	$	218,291		8.586	%	$	152,554		6.00	%	$	184,336		7.250	%	$	203,406		8.00	%
Bank only	$	283,503		11.166	%	$	152,343		6.00	%	$	184,082		7.250	%	$	203,125		8.00	%
Common Tier 1 (CET1)
Consolidated	$	210,291		8.271	%	$	114,416		4.50	%	$	146,198		5.750	%	$	165,267		6.50	%
Bank only	$	283,503		11.166	%	$	114,258		4.50	%	$	145,996		5.750	%	$	165,039		6.50	%
Tier I (core) capital to average assets
Consolidated	$	218,291		9.272	%	$	94,171		4.00	%	$	94,171		4.000	%	$	117,714		5.00	%
Bank only	$	283,503		12.058	%	$	94,043		4.00	%	$	94,043		4.000	%	$	117,554		5.00	%
December 31, 2016:
Total capital to risk weighted assets
Consolidated	$	237,002		12.008	%	$	157,896		8.00	%	$	170,232		8.625	%	$	197,371		10.00	%
Bank only	$	243,865		12.370	%	$	157,720		8.00	%	$	170,042		8.625	%	$	197,150		10.00	%
Tier I (core) capital to risk weighted assets
Consolidated	$	197,928		10.028	%	$	118,422		6.00	%	$	130,758		6.625	%	$	157,896		8.00	%
Bank only	$	226,760		11.502	%	$	118,290		6.00	%	$	130,612		6.625	%	$	157,720		8.00	%
Common Tier 1 (CET1)
Consolidated	$	189,928		9.623	%	$	88,817		4.50	%	$	101,152		5.125	%	$	128,291		6.50	%
Bank only	$	226,760		11.502	%	$	88,718		4.50	%	$	101,039		5.125	%	$	128,148		6.50	%
Tier I (core) capital to average assets
Consolidated	$	197,928		10.037	%	$	78,879		4.00	%	$	78,879		4.000	%	$	98,599		5.00	%
Bank only	$	226,760		11.530	%	$	78,695		4.00	%	$	78,695		4.000	%	$	98,369		5.00	%

6.       Fair Values of Financial Instruments

The following methods and assumptions were used by the Company in estimating fair values of financial instruments as disclosed herein:

Cash and cash equivalents

The carrying amounts of cash and cash equivalents approximate their fair value.

Securities and other equity investments

Fair values for securities excluding other equity investments, are based on quoted market prices or dealer quotes. If current quoted market price is not available, fair value is estimated using quoted market prices for similar instruments or broker pricing and bid/ask spreads. Management believes the carrying values of other equity investments such as stock in the Federal Reserve Bank, the Federal Home Loan Bank and Independent Bankers Financial Corporation generally approximate fair value.

Loans and loans held for sale

For variable-rate loans that reprice frequently and have no significant changes in credit risk, fair values are based on carrying values. Fair values for certain mortgage loans (for example, one-to-four family residential) and other consumer loans are based on quoted market prices of similar loans sold in conjunction with securitization transactions, adjusted for differences in loan characteristics. Fair values for commercial real estate and commercial loans are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. Fair values of loans held for sale are based on commitments on hand from investors or prevailing market rates.

See independent auditor’s review report

- 24 -

FIRST TEXAS BHC, INC. AND SUBSIDIARIES

(Unaudited)

Servicing rights and interest-only receivable strips

The carrying amounts of servicing rights and interest-only receivable strips approximate their fair value.

Deposits

The fair values disclosed for demand deposits are, by definition, equal to the amount payable on demand at the reporting date (that is their carrying amounts). The carrying amounts of variable-rate, fixed term money market accounts and certificates of deposit (CDs) approximate their fair values at the reporting date. Fair values for fixed-rate CDs are estimated using a discounted cash flow calculation that applies interest rates currently being offered on CDs to a schedule of aggregated expected monthly maturities on time deposits.

Other borrowings

The carrying amounts of other short-term borrowings approximate fair value. The fair value of long-term fixed rate borrowings is estimated based on the present value of expected cash flows using current interest rates for similar financial instruments.

Accrued interest

The carrying amounts of accrued interest approximate their fair values.

Repurchase agreements

The carrying amount of repurchase agreements is estimated using discounted cash flow analysis based upon current incremental borrowing rates for similar types of borrowing arrangements.

Junior subordinated debentures

The carrying amount of long term variable-rate borrowings approximate fair value.

Subordinated Debt

The carrying amount of long term variable-rate borrowings approximate fair value.

Off-balance-sheet instruments

Commitments to extend credit and standby letters of credit have short maturities and therefore have no significant fair value.

The following estimated fair value amounts have been determined by the Company using available market information and appropriate valuation methodologies. However, considerable judgment is required to interpret market data to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts the Company could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts. The fair value estimates presented herein are based on pertinent information available to management as of the respective balance sheet date. Although management is not aware of any factors that would significantly affect the estimated fair value amounts, such amounts have not been comprehensively revalued since the presentation dates, and therefore, estimates of fair value after the balance sheet date may differ significantly from the amounts presented herein (in thousands):

See independent auditor’s review report

- 25 -

FIRST TEXAS BHC, INC. AND SUBSIDIARIES

(Unaudited)

			Total Estimated Fair Value
	Carrying		Level 1		Level 2		Level 3
	Amount		Inputs		Inputs		Inputs
September 30, 2017:
Financial assets:
Cash and cash equivalents	$	128,287	$	128,287	$	-	$	-
Securities available for sale		62,021		1,815		59,496		710
Other equity investments		19,234		-		-		19,234
Loans held for sale		3,082		-		3,082		-
Loans, net		2,241,346		-		-		2,250,063
Accrued interest receivable		6,143		6,143		-		-
Servicing rights		199		-		199		-
Interest-only receivable strips		127		-		127		-
Financial liabilities:
Deposits	$	1,873,189	$	-	$	-	$	1,866,185
Short-term borrowings		329,950		-		329,959		-
Repurchase agreements		50,000		-		-		50,635
Junior subordinated debentures		8,248		-		-		8,248
Subordinated debt		21,981		-		-		21,981
Accrued interest payable		1,082		1,082		-		-
Off-balance sheet assets/liabilities:
Commitments to extend credit	$	-	$	-	$	-	$	-
Standby letters of credit and financial guarantees		-		-		-		-
December 31, 2016:
Financial assets:
Cash and cash equivalents	$	189,920	$	189,920	$	-	$	-
Securities available for sale		63,296		1,774		60,814		708
Other equity investments		12,857		-		-		12,857
Loans held for sale		4,836		-		4,836		-
Loans, net		1,774,521		-		-		1,779,709
Accrued interest receivable		4,195		4,195		-		-
Servicing rights		274		-		274		-
Interest-only receivable strips		183		-		183		-
Financial liabilities:
Deposits	$	1,653,381	$	-	$	-	$	1,652,759
Short-term borrowings		159,990		-		159,974		-
Repurchase agreements		50,000		-		-		51,836
Junior subordinated debentures		8,248		-		-		8,248
Subordinated debt		21,969		-		-		21,969
Accrued interest payable		836		836		-		-
Off-balance sheet assets/liabilities:
Commitments to extend credit	$	-	$	-	$	-	$	-
Standby letters of credit and financial guarantees		-		-		-		-

See independent auditor’s review report

- 26 -

FIRST TEXAS BHC, INC. AND SUBSIDIARIES

(Unaudited)

Fair Value Measurements

The fair value of an asset or liability is the price that would be received to sell an asset or paid to transfer that liability in an orderly transaction occurring in the principal market (or most advantageous market in the absence of a principal market) for such asset or liability. In estimating fair value, the Company utilizes valuation techniques that are consistent with the market approach, the income approach and/or the cost approach. Such valuation techniques are consistently applied. Inputs to valuation techniques include the assumptions that market participants would use in pricing an asset or liability. ASC Topic 820, Fair Value Measurements and Disclosures, establishes a fair value hierarchy for valuation inputs that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The fair value hierarchy is as follows:

Level 1 Inputs – Unadjusted quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date.

Level 2 Inputs – Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. These might include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (such as interest rates, volatilities, prepayment speeds, credit risks, etc.) or inputs that are derived principally from or corroborated by market data by correlation or other means.

Level 3 Inputs – Unobservable inputs for determining the fair values of assets or liabilities that reflect an entity's own assumptions about the assumptions that market participants would use in pricing the assets or liabilities.

A description of the validation methodologies used for assets and liabilities measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy is set forth below.

In general, fair value is based upon quoted market prices, where available. If such quoted market prices are not available, fair value is based upon internally developed models that primarily use, as inputs, observable market-based parameters. Valuation adjustments may be made to ensure that assets and liabilities are recorded at fair value. These adjustments may include amounts to reflect counterparty credit quality and the Company’s creditworthiness, among other things, as well as unobservable parameters. Any such valuation adjustments are applied consistently over time. The Company’s valuation methodologies may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. While management believes the Company’s valuation methodologies are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain assets and liabilities could result in a different estimate of fair value at the reporting date. Furthermore, the reported fair value amounts have not been comprehensively revalued since the presentation dates, and therefore, estimates of fair value after the balance sheet date may differ significantly from the amounts presented herein.

Securities available for sale are valued at fair value on a recurring basis. The fair values of Level 1 securities are determined by obtaining quoted market prices on nationally recognized securities exchanges. The Company’s municipal and mortgage-backed securities are classified within Level 2 of the valuation hierarchy. The Company obtains these fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment spreads, credit information and the bond’s terms and conditions, among other things. The Level 3 investments consist of Trust Preferred Securities which are issued by a financial institution. Broker pricing and bid/ask spreads, when available, may vary widely. There was no Level 3 activity during the year.

In accordance with ASC Topic 820, certain financial assets and financial liabilities are measured at fair value on a nonrecurring basis; that is, the assets and liabilities are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment). Financial assets or liabilities required to be measured at fair value on a nonrecurring basis include impaired loans and mortgage servicing rights. Nonfinancial assets or liabilities required to be measured at fair value on a nonrecurring basis include other real estate owned.

Impaired loans (loans which are not expected to repay all principal and interest amounts due in accordance with the original contractual terms) are measured on an observable market price (if available) or at the fair value of the loan’s collateral (if collateral dependent). Fair value of the loan’s collateral is determined by appraisals or independent valuation which is then adjusted for the estimated costs related to liquidation of the collateral. Management’s ongoing review of appraisal information may result in additional discounts or adjustments to valuation based upon more recent market sales activity or more current appraisal information derived from properties of similar type and/or locale. A significant portion of the Company’s impaired loans are measured using the estimated fair market value of the collateral less the estimated costs to sell. Therefore, the Company has categorized its impaired loans as Level 3.

See independent auditor’s review report

- 27 -

FIRST TEXAS BHC, INC. AND SUBSIDIARIES

(Unaudited)

Other real estate owned is carried at the lower of cost or fair value less estimated selling costs. Fair value is estimated through current appraisals, real estate brokers or listing prices. As these properties are actively marketed, estimated fair values may be adjusted by management to reflect current economic and market conditions and, as such, are classified as Level 3.

The following table represents assets and liabilities reported on the consolidated balance sheets at their fair value as of September 30, 2017 and December 31, 2016 by level within the ASC 820 fair value measurement hierarchy (in thousands):

	Fair Value Measurements at Reporting
	September 30, 2017 and December 31, 2016 (Dollars in Thousands)
			Quoted Prices in		Significant Other		Significant
	Assets/Liabilities		Active Markets for		Observable		Unobservable
	Measured at		Identical Assets		Inputs		Inputs
	Fair Vaulue		(Level 1)		(Level 2)		(Level 3)
September 30, 2017:
Measured on a recurring basis:
Assets:
U.S. government securities		5,065		-		5,065		-
U.S. government agency		29,671		-		29,671		-
Mortgage-backed securities		24,760		-		24,760		-
Trust preferred securities		710		-		-		710
CRA qualified investment fund		1,815		1,815		-		-
Measured on a nonrecurring basis:
Assets:
Impaired loans		479		-		-		479
December 31, 2016:
Measured on a recurring basis:
Assets:
U.S. government securities		2,606		-		2,606		-
U.S. government agency		29,544		-		29,544		-
Mortgage-backed securities		28,664		-		28,664		-
Trust preferred securities		708		-		-		708
CRA qualified investment fund		1,774		1,774		-		-
Measured on a nonrecurring basis:
Assets:
Impaired loans		240		-		-		240

The table below presents a reconciliation and income statement classification of gains and losses for all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the period ended September 30, 2017 and December 31, 2016 (in thousands):

	September 30,		December 31,
	2017		2016
Balance, beginning of year	$	708	$	704
Included in earnings:
Accretion on securities		2		4
Balance, end of period	$	710	$	708

See independent auditor’s review report

- 28 -

FIRST TEXAS BHC, INC. AND SUBSIDIARIES

(Unaudited)

7.       Commitments, Contingencies and Financial Instruments With Off-Balance-Sheet Risk

The Company is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the balance sheet.

The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual amount of these instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments. These financial instruments were as follows at September 30, 2017 and December 31, 2016 (in thousands):

	September 30,		December 31,
	2017		2016
Commitments to extend credit	$	813,052	$	587,350
Standby letters of credit		8,980		3,483
	$	822,032	$	590,833

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained if deemed necessary by the Company upon extension of credit is based on managements’ credit evaluation of the counterparty. Collateral held varies but may include accounts receivable, inventory, property, single and family residences, property and equipment and income-producing commercial properties.

Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. In the event the customer does not perform in accordance with the terms of the agreement with the third party, the Company would be required to fund the commitment. The maximum potential amount of future payments the Company could be required to make is represented by the contractual amount shown in the table above. If the commitment is funded, the Company would be entitled to seek recovery from the customer. As of September 30, 2017 and December 31, 2016, no amounts have been recorded as liabilities for the Company’s potential obligations under these guarantees.

Contingencies

Various contingent assets and liabilities are not reflected in the consolidated financial statements, including claims and legal actions arising in the ordinary course of business. In the opinion of management, after consultation with legal counsel, the ultimate disposition of these matters is not expected to have a material effect on the Company's financial condition or results of income or cash flows.

8.       Other Borrowings

Federal Funds Purchased

Federal funds purchased are short-term borrowings that typically mature within one to ninety days. The Bank has federal funds lines of credits with unaffiliated banks with a maximum advanceable amount up to $40,000,000 at September 30, 2017 and December 31, 2016. The lines of credits have no stated maturity date but may be canceled anytime at the sole discretion of the lending bank. The lines are provided on an unsecured basis; however, the lender may require the line to be fully secured at any time. There were no federal funds purchased at September 30, 2017 and December 31, 2016.

See independent auditor’s review report

- 29 -

FIRST TEXAS BHC, INC. AND SUBSIDIARIES

(Unaudited)

Federal Home Loan Bank Advances

As a member of Federal Home Loan Bank (FHLB), the Bank has the ability to borrow up to a maximum of approximately $538,056,000 and $529,464,000 at September 30, 2017 and December 31, 2016, respectively, subject to the level of Tier 1 capital, qualified pledgable first mortgage loans, and FHLB stock owned.

FHLB advances totaled $270,000,000 and $150,000,000 at September 30, 2017 and December 31, 2016, respectively. At September 30, 2017, the advances include borrowings of $170,000,000 that mature in the fourth quarter of 2017 and are renewable as necessary under normal operations. The remaining $100,000,000 of advances matures in the second quarter of 2018 with interest at variable rates that reprice every 28 days. Total advances have a weighted average rate of 1.23% and 0.57% at September 30, 2017 and December 31, 2016, respectively. The FHLB has as collateral on the advances a blanket floating lien on certain other assets of the Bank, including selected loans and securities.

Federal Reserve Bank

The Bank has a line of credit with the Federal Reserve Bank. As of September 30, 2017, approximately $253,583,000 of commercial loans were pledged as collateral and the available line of credit was approximately $189,507,000. As of December

31, 2016, approximately $174,478,000 of commercial loans were pledged as collateral and the available line of credit was approximately $141,954,000. There were no borrowings outstanding at September 30, 2017 and December 31, 2016.

Other Borrowings

During May 2017, First Texas BHC, Inc. (the Holding Company) increased the maximum advanceable amount under the line of credit with an unaffiliated bank to $35,000,000 from $25,000,000 at December 31, 2016. On June 29, 2017, the Holding Company entered into an agreement with the unaffiliated bank and converted the line of credit facility into a term note for the principal sum of $60,000,000 drawn in full at the time. The term note requires payment of interest only, computed on the unpaid principal balance based on the 90 day London Interbank Offered Rate (LIBOR) plus 2.5% (3.79% at June 30, 2017), and payable quarterly on the first day of each calendar quarter commencing on July 1, 2017 through April 1 2018. The entire unpaid principal amount thereof, together with the accrued interest shall become due on May 31, 2018 or upon the closing with Simmons First National Corporation, whichever happens first. The term note is collateralized by the common stock of Southwest Bank. At September 30, 2017, the unpaid balance on the term note was $60,000,000. At December 31, 2016, advances on the line of credit approximated $10,000,000. The Company had unamortized loan costs of $50,000 and $10,000 in regard to these borrowings at September 30, 2017 and December 31, 2016, respectively.

9.       Repurchase Agreements

In February 2008, the Bank entered into three structured repurchase transactions with two money center banks (counterparties). These are “securities sold under agreement to repurchase” transactions with 10 year maturities. Each had an initial fixed rate for either a two or three year period, and then began floating at a rate of 7% or 8% minus the three month LIBOR rate, with a cap. Each is callable by the counterparty after the initial fixed rate term and are callable quarterly thereafter until maturity. The securities sold are mortgage-backed securities issued by agencies of the U.S. Government and were sold with a margin requirement as disclosed in the table below. Since the underlying securities amortize monthly and are subject to market value fluctuations, margin calls are expected and the collateral is often exchanged by the Bank with the agreement of the counterparties. The Bank had $50,000,000 in repurchase agreements at September 30, 2017 and December 31, 2016 quantified as follows:

Balance	Initial Rate			Floating Rate		Cap			Margin Requirement			Maturity
25,000,000		1.99	%		8% - 3 mo LIBOR		3.97	%		108.00	%		2/22/2018
15,000,000		2.59	%		8% - 3 mo LIBOR		4.99	%		108.75	%		2/22/2018
10,000,000		1.71	%		7% - 3 mo LIBOR		3.41	%		106.00	%		3/4/2018

See independent auditor’s review report

- 30 -

FIRST TEXAS BHC, INC. AND SUBSIDIARIES

(Unaudited)

10.       Junior Subordinated Debentures and Subordinated Debt

Junior Subordinated Debentures

On August 13, 2007, First Texas BHC Statutory Trust II, a Delaware statutory trust and wholly owned finance subsidiary of the Company, issued 8,000 shares of floating rate trust preferred securities at $1,000 per share for an aggregate price of approximately $8,000,000, all of which was outstanding at September 30, 2017, and December 31, 2016. These securities bear an interest rate of 2% over the three-month LIBOR. The trust preferred securities will mature on September 15, 2037. The proceeds from the sale of the trust preferred securities and the issuance of $248,000 in common securities to the Company were used by Trust II to purchase approximately $8,248,000 of floating rate junior subordinated debentures of the Company which have the same payment terms as the trust preferred securities. Distributions on the trust preferred securities and on the debentures issued to the Company are payable quarterly beginning September 15, 2007.

Except under certain circumstances, the common securities issued to the Company by the trust possess sole voting rights with respect to matters involving the entity. Under certain circumstances, the Company may, from time to time, defer the debentures’ interest payments, which would result in a deferral of distribution payments on the related trust preferred securities and, with certain exceptions, prevent the Company from declaring or paying cash distributions on the Company’s common stock and any other future debt ranking equally with or junior to the debentures. The trust preferred securities are guaranteed by the Company.

Subordinated Debt

In September 2013, First Texas BHC, Inc., offered by Private Placement Subscription Agreement to sell up to $30,000,000 in aggregate principal amount of floating rate subordinated promissory notes, due September 30, 2023, plus up to an additional $3,000,000 to cover over-subscriptions. The Private Placement Subscription Agreement offering ended December 31, 2013. Notes issued and outstanding were $22,075,000 at September 30, 2017 and December 31, 2016, respectively. The balance outstanding of $21,981,000 and $21,969,000 at September 30, 2017 and December 31, 2016 respectively, is net of unamortized loan costs of $94,000 and $106,000.

The Notes were issued in the form of interest-bearing subordinated promissory notes. The Notes accrue interest each quarter at a floating rate equal to the daily average of the Wall Street Journal prime rate for the immediately prior quarterly period, with a minimum interest rate of 6.00% and a maximum interest rate of 8.50% per annum upon issuance and until maturity or redemption. Interest on the Notes will be paid quarterly, in arrears, on January 15, April 15, July 15, and October 15 of each year, commencing January 15, 2014, for all subscriptions accepted on or before December 1, 2013, and on April 15, 2014, for subscriptions accepted after December 1, 2013. The Notes, at the Company’s sole discretion, may be redeemed in whole or in part, on any interest payment date occurring on or after September 30, 2018 or on an earlier date in certain limited circumstances, subject to regulatory approvals. The principal amount of each Note that has not been redeemed will be payable at maturity on September 30, 2023.

11.       Subsequent Events

Acquisition of First Texas BHC, Inc.by Simmons First National Corporation

On October 19, 2017, Simmons First National Corporation (Simmons), the parent company of Simmons Bank, completed the acquisition of First Texas BHC, Inc., (First Texas), the parent company of Southwest Bank, pursuant to the terms of the Agreement and Plan of Merger. Simmons acquired all of the outstanding common stock of First Texas for approximately $462,000,000 (based on Simmons’ common stock closing price as of January 20, 2017) whereby the shareholders and other equity right holders of First Texas receive a total of 6,500,000 shares of Simmons’ common stock and $70,000,000 in cash.

At December 20, 2017, the merger between Simmons Bank and Southwest Bank (the “Bank”) is pending. The Bank’s management expects the merger to occur on February 20, 2018 in accordance with the Agreement and Plan of Merger between Simmons Bank and the Bank.

The foregoing limited description of the transaction and merger agreement does not purport to be complete and is qualified in its entirety by reference to the merger agreement.

See independent auditor’s review report

- 31 -

EX-99.4

Exhibit 99.4

UNAUDITED PRO FORMA COMBINED CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

The following unaudited pro forma combined condensed consolidated financial statements and explanatory notes show the impact on the historical financial positions and results of operations of Simmons First National Corporation (“Simmons”), Southwest Bancorp, Inc. (“OKSB”) and First Texas BHC, Inc. (“First Texas”) and have been prepared to illustrate the effects of the OKSB merger and First Texas merger under the acquisition method of accounting with Simmons treated as the acquirer. The following unaudited pro forma combined condensed consolidated financial statements have been prepared using the acquisition method of accounting, giving effect to our completed acquisitions of Hardeman County Investment Company, Inc. (“HCIC”), which closed on May 15, 2017, and OKSB and First Texas, which both closed on October 19, 2017. The unaudited pro forma combined condensed consolidated balance sheets combine the historical financial information of Simmons and HCIC, OKSB and First Texas as of September 30, 2017, and assume that the acquisitions were completed on that date. The unaudited pro forma combined condensed consolidated statements of income for the six-month period ended September 30, 2017 and the 12-month period ended December 31, 2016 give effect to the acquisitions as if the transactions had been completed on January 1, 2016.

The unaudited pro forma combined condensed consolidated financial statements are presented for illustrative purposes only and does not indicate the financial results of the combined company had the companies actually been combined on the dates described above, nor is it necessarily indicative of the results of operations in future periods or the future financial position of the combined entities. The unaudited pro forma combined condensed consolidated financial statements also do not consider any potential impacts of current market conditions on revenues, expense efficiencies, asset dispositions and share repurchases, among other factors.

 Unaudited Pro Forma Combined Condensed

 Consolidated Balance Sheets

 As of September 30, 2017

				Acquisitions
(in thousands)	Simmons Historical			OKSB Historical			First Texas  Historical			Pro Forma Acquisition Adjustments			Pro Forma Combined
ASSETS
Cash and non-interest bearing balances due from banks		108,675		$	33,464		$	25,897		$	-		$	168,036
Interest bearing balances due from banks		322,295			53,994			102,390			(169,415	)(1),(2),(10)		309,264
Cash and cash equivalents		430,970			87,458			128,287			(169,415	)		477,300
Federal funds sold		1,320			-			-			-			1,320
Interest bearing balances due from banks - time		4,059			-			-			-			4,059
Investment securities - held-to-maturity		406,033			10,351			-			-			416,384
Investment securities - available-for-sale		1,317,420			369,484			62,021			-			1,748,925
Total investments		1,723,453			379,835			62,021			-			2,165,309
Mortgage loans held for sale		12,614			5,657			3,345			-			21,616
Assets held in trading accounts		49			-			-			-			49
Other assets held for sale		182,378			-			-			-			182,378
Loans:
Legacy loans		5,211,312			-			-			-			5,211,312
Allowance for loan losses		(42,717	)		(26,943	)		(20,824	)		47,767	(3)		(42,717	)
Loans acquired, net of discount and allowance		1,092,039			2,024,892			2,261,907			(80,905	)(4)		5,297,933
Net loans		6,260,634			1,997,949			2,241,083			(33,138	)		10,466,528
Premises and equipment		224,376			21,335			24,862			15,581	(5)		286,154
Foreclosed assets		31,477			6,283			-			(1,126	)(6)		36,634
Interest receivable		30,749			7,072			6,143			-			43,964
Bank owned life insurance		148,984			28,661			7,181			-			184,826
Goodwill		375,731			13,545			37,227			399,210	(7)		825,713
Other intangible assets		55,501			5,749			326			47,519	(8)		109,095
Other assets		53,075			66,039			28,934			(1,963	)(2),(9)		146,085
Total assets	$	9,535,370		$	2,619,583		$	2,539,409		$	256,668		$	14,951,030
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Non-interest bearing transaction accounts	$	1,669,860		$	569,147		$	488,710		$	-		$	2,727,717
Interest bearing transaction accounts and savings deposits		4,344,779			857,828			1,030,484			-			6,233,091
Time deposits		1,310,951			620,533			353,995			(2,496	)(10)		2,282,983
Total deposits		7,325,590			2,047,508			1,873,189			(2,496	)		11,243,791
Federal funds purchased and securities sold under agreements to repurchase		121,687			10,448			50,000			-			182,135
Other borrowings		522,541			203,000			329,950			15,005	(11)		1,070,496
Subordinated debentures		67,418			45,000			30,229			-			142,647
Other liabilities held for sale		176,964			-			-			-			176,964
Accrued interest and other liabilities		63,971			13,916			8,818			6,828	(12)		93,533
Total liabilities		8,278,171			2,319,872			2,292,186			19,337			12,909,566
Stockholders' equity:														-
Common stock		322			21,260			7,885			(29,007	)(1),(13)		460
Surplus		763,443			124,126			172,388			487,613	(1),(13)		1,547,570
Undivided profits		504,085			196,929			69,245			(266,174	)(13)		504,085
Accumulated other comprehensive income (loss)		(10,651	)		(427	)		(370	)		797	(13)		(10,651	)
Treasury Stock		-			(42,177	)		(1,925	)		44,102	(13)		-
Total stockholders' equity		1,257,199			299,711			247,223			237,331			2,041,464
Total liabilities and stockholders' equity	$	9,535,370		$	2,619,583		$	2,539,409		$	256,668		$	14,951,030

 Unaudited Pro Forma Combined Condensed

 Consolidated Statements of Income

 For the Nine Months Ended September 30, 2017

			Acquisitions
(in thousands, except per share data)	Simmons Historical		OKSB Historical		First Texas Historical		Pro Forma Acquisition Adjustments			Pro Forma Combined
INTEREST INCOME
Loans	$	219,734	$	66,569	$	73,387	$	6,805	(14)	$	366,495
Federal funds sold		17		-		-		-			17
Investment securities		28,659		5,382		794		-			34,835
Mortgage loans held for sale		430		-		-		-			430
Interest bearing balances due from banks		969		290		527		(817	)(15)		969
Other interest-earning assets		-		1,088		383		-			1,471
TOTAL INTEREST INCOME		249,809		73,329		75,091		5,988			404,217
INTEREST EXPENSE
Deposits		15,050		6,425		10,130		393	(16)		31,998
Federal funds purchased and securities sold under agreements to repurchase		250		6		1,580		-			1,836
Other borrowings		4,628		1,781		2,027		-			8,436
Subordinated debentures		1,870		1,856		1,005		-			4,731
TOTAL INTEREST EXPENSE		21,798		10,068		14,742		393			47,001
NET INTEREST INCOME		228,011		63,261		60,349		5,595			357,216
Provision for loan losses		16,792		5,885		3,817		-			26,494
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES		211,219		57,376		56,532		5,595			330,722
NON-INTEREST INCOME
Trust income		12,550		-		3,779		-			16,329
Service charges on deposit accounts		25,492		5,609		1,310		-			32,411
Other service charges and fees (includes insurance income)		7,145		644		213		-			8,002
Mortgage and SBA lending income		9,603		1,926		1,955		-			13,484
Investment banking income		2,007		-		-		-			2,007
Debit and credit card fees		25,457		1,323		735		-			27,515
Bank owned life insurance income		2,402		843		210		-			3,455
Gain (loss) on sale of securities		2,302		769		-		-			3,071
Other income		15,178		2,803		2,137		-			20,118
TOTAL NON-INTEREST INCOME		102,136		13,917		10,339		-			126,392
NON-INTEREST EXPENSE
Salaries and employee benefits		105,026		29,205		27,420		-			161,651
Occupancy expense, net		14,459		4,280		2,990		-			21,729
Furniture and equipment expense		13,833		4,140		1,458		-			19,431
Other real estate and foreclosure expense		2,177		160		10		-			2,347
Deposit insurance		2,480		586		976		-			4,042
Merger related costs		7,879		-		-		-			7,879
Other operating expenses		58,035		7,455		8,796		3,238	(17)		77,524
TOTAL NON-INTEREST EXPENSE		203,889		45,826		41,650		3,238			294,603
NET INCOME BEFORE INCOME TAXES		109,466		25,467		25,221		2,356			162,510
Provision for income taxes		35,429		8,907		8,975		924	(18)		54,235
NET INCOME		74,037		16,560		16,246		1,432			108,275
Preferred stock dividends		-		-		-		-			-
NET INCOME AVAILABLE TO COMMON SHAREHOLDERS	$	74,037	$	16,560	$	16,246	$	1,432		$	108,275
BASIC EARNINGS PER SHARE	$	2.33	$	0.89	$	2.06				$	2.38
DILUTED EARNINGS PER SHARE	$	2.31	$	0.89	$	1.90				$	2.37
Average common shares outstanding		31,797						13,750	(19)		45,547
Average diluted shares outstanding		32,007						13,750	(19)		45,757

 Unaudited Pro Forma Combined Condensed

 Consolidated Statements of Income

 For the Year Ended December 31, 2016

			Acquisition
(in thousands, except per share data)	Simmons Historical		HCIC Historical		HCIC Pro Forma Acquisition Adjustments			Pro Forma Simmons and Hardeman Combined
INTEREST INCOME
Loans	$	265,652	$	13,475	$	1,357	(a)	$	280,484
Federal funds sold		57		36		-			93
Investment securities		33,479		3,349		-			36,828
Mortgage loans held for sale		1,102		7		-			1,109
Interest bearing balances due from banks		699		-		-			699
Other interest-earning assets		16		-		-			16
TOTAL INTEREST INCOME		301,005		16,867		1,357			319,229
INTEREST EXPENSE
Deposits		15,217		1,321		-			16,538
Federal funds purchased and securities sold under agreements to repurchase		273		113		-			386
Other borrowings		4,148		24		-			4,172
Subordinated debentures		2,161		145		-			2,306
TOTAL INTEREST EXPENSE		21,799		1,603		-			23,402
NET INTEREST INCOME		279,206		15,264		1,357			295,827
Provision for loan losses		20,065		120		-			20,185
NET INTEREST INCOME AFTER PROVISION  FOR LOAN LOSSES		259,141		15,144		1,357			275,642
NON-INTEREST INCOME
Trust income		15,442		-		-			15,442
Service charges on deposit accounts		32,414		3,470		-			35,884
Other service charges and fees (includes insurance income)		6,913		3,491		-			10,404
Mortgage and SBA lending income		22,442		338		-			22,780
Investment banking income		3,471		-		-			3,471
Debit and credit card fees		30,740		10		-			30,750
Bank owned life insurance income		3,324		234		-			3,558
Gain (loss) on sale of securities		5,848		70		-			5,918
Other income		18,788		41		-			18,829
TOTAL NON-INTEREST INCOME		139,382		7,654		-			147,036
NON-INTEREST EXPENSE
Salaries and employee benefits		133,457		9,741		-			143,198
Occupancy expense, net		18,667		2,057		-			20,724
Furniture and equipment expense		16,683		-		-			16,683
Other real estate and foreclosure expense		4,461		205		-			4,666
Deposit insurance		3,469		170		-			3,639
Merger related costs		4,835		-		-			4,835
Other operating expenses		73,513		3,990		523	(b)		78,026
TOTAL NON-INTEREST EXPENSE		255,085		16,163		523			271,771
NET INCOME BEFORE INCOME TAXES		143,438		6,635		834			150,907
Provision for income taxes		46,624		405		327	(c)		47,356
NET INCOME		96,814		6,230		507			103,551
Preferred stock dividends		24		-		-			24
NET INCOME AVAILABLE TO COMMON SHAREHOLDERS	$	96,790	$	6,230	$	507		$	103,527
BASIC EARNINGS PER SHARE	$	3.16	$	38.22				$	3.29
DILUTED EARNINGS PER SHARE	$	3.13	$	38.22				$	3.26
Average common shares outstanding		30,646				800	(d)		31,446
Average diluted shares outstanding		30,964				800	(d)		31,764

 Unaudited Pro Forma Combined Condensed

 Consolidated Statements of Income

 For the Year Ended December 31, 2016

			Acquisitions
(in thousands, except per share data)	Pro Forma Simmons and HCIC Combined		OKSB Historical			First Texas Historical		Pro Forma Acquisition Adjustments			Pro Forma Combined
INTEREST INCOME
Loans	$	280,484	$	81,527		$	77,971	$	17,106	(14)	$	457,088
Federal funds sold		93		-			-		-			93
Investment securities		36,828		7,407			1,134		-			45,369
Mortgage loans held for sale		1,109		-			-		-			1,109
Interest bearing balances due from banks		699		-			251		(251	)(15)		699
Other interest-earning assets		16		206			398		-			620
TOTAL INTEREST INCOME		319,229		89,140			79,754		16,855			504,978
INTEREST EXPENSE
Deposits		16,538		5,968			7,472		1,800	(16)		31,778
Federal funds purchased and securities
sold under agreements to repurchase		386		-			2,118		-			2,504
Other borrowings		4,172		1,379			921		-			6,472
Subordinated debentures		2,306		2,350			1,340		-			5,996
TOTAL INTEREST EXPENSE		23,402		9,697			11,851		1,800			46,750
NET INTEREST INCOME		295,827		79,443			67,903		15,055			458,228
Provision for loan losses		20,185		4,769			2,109		-			27,063
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES		275,642		74,674			65,794		15,055			431,165
NON-INTEREST INCOME
Trust income		15,442		-			4,925		-			20,367
Service charges on deposit accounts		35,884		7,638			1,688		-			45,210
Other service charges and fees (includes insurance income)		10,404		1,014			232		-			11,650
Mortgage and SBA lending income		22,780		2,672			2,970		-			28,422
Investment banking income		3,471		-			261		-			3,732
Debit and credit card fees		30,750		1,906			938		-			33,594
Bank owned life insurance income		3,558		899			85		-			4,542
Gain (loss) on sale of securities		5,918		294			-		-			6,212
Other income		18,829		1,662			2,627		-			23,118
TOTAL NON-INTEREST INCOME		147,036		16,085			13,726		-			176,847
NON-INTEREST EXPENSE
Salaries and employee benefits		143,198		37,724			33,536		-			214,458
Occupancy expense, net		20,724		6,417			3,828		-			30,969
Furniture and equipment expense		16,683		4,642			2,045		-			23,370
Other real estate and foreclosure expense		4,666		(222	)		117		-			4,561
Deposit insurance		3,639		1,376			832		-			5,847
Merger related costs		4,835		-			-		-			4,835
Other operating expenses		78,026		13,309			10,493		4,318	(17)		106,146
TOTAL NON-INTEREST EXPENSE		271,771		63,246			50,851		4,318			390,186
NET INCOME BEFORE INCOME TAXES		150,907		27,513			28,669		10,737			217,826
Provision for income taxes		47,356		9,809			10,050		4,212	(18)		71,427
NET INCOME		103,551		17,704			18,619		6,525			146,399
Preferred stock dividends		24		-			22		-			46
NET INCOME AVAILABLE TO COMMON SHAREHOLDERS	$	103,527	$	17,704		$	18,597	$	6,525		$	146,353
BASIC EARNINGS PER SHARE	$	3.29	$	0.93		$	2.40				$	3.24
DILUTED EARNINGS PER SHARE	$	3.26	$	0.92		$	2.18				$	3.22
Average common shares outstanding		31,446							13,750	(19)		45,196
Average diluted shares outstanding		31,764							13,750	(19)		45,514

Notes to Pro Forma Combined Condensed Consolidated Financial Statements

Note 1. Basis of Presentation

The unaudited pro forma combined condensed consolidated financial statements and explanatory notes show the impact on the historical financial condition and results of operations of Simmons First National Corporation (“Simmons”) resulting from its acquisitions of Southwest Bancorp, Inc. (“OKSB”) and First Texas BHC, Inc. (“First Texas”) under the acquisition method of accounting. Under the acquisition method of accounting, the assets and liabilities of OKSB and First Texas are recorded by Simmons at their respective fair values as of the date the transaction is completed. The unaudited pro forma combined condensed consolidated balance sheets combine the historical financial information of Simmons, OKSB and First Texas as of September 30, 2017, and assume that the OKSB and First Texas acquisitions were completed on that date. The unaudited pro forma combined condensed consolidated statements of income for the nine-month period ended September 30, 2017, and for the year ended December 31, 2016, give effect to Simmons’ acquisitions of Hardeman County Investment Company, Inc. (“HCIC”), OKSB and First Texas as if the three transactions had been completed on January 1, 2016.

Since the transactions are recorded using the acquisition method of accounting, all loans are recorded at fair value, including adjustments for credit quality, and no allowance for credit losses is carried over to Simmons’ balance sheet. In addition, certain anticipated nonrecurring costs associated with the OKSB and First Texas acquisitions such as potential severance, professional fees, legal fees and conversion-related expenditures are not reflected in the pro forma statements of income and will be expensed as incurred.

While the recording of the acquired loans at their fair value will impact the prospective determination of the provision for credit losses and the allowance for credit losses, for purposes of the unaudited pro forma combined condensed consolidated statement of income for the nine-month period ended September 30, 2017 and for the year ended December 31, 2016, Simmons assumed no adjustments to the historical amount of OKSB’s and First Texas’ provision for credit losses. If such adjustments were estimated, there could be a significant change to the historical amounts of provision for credit losses presented.

The unaudited pro forma combined condensed consolidated statements of income are presented in two stages. The first stage presents the results of HCIC as combined with the historical results of Simmons and reflecting pro forma adjustments. The HCIC transaction closed effective May 15, 2017 and is not a significant acquisition under SEC rules and regulations and, while not required to be presented, is provided for information purposes only. The second stage presents the combined results of Simmons with HCIC, with the historical results and pro forma adjustments for OKSB and First Texas. These transactions combined are significant and were subject to shareholder approval. The OKSB and First Texas acquisitions were completed on October 19, 2017.

Note 2. Merger and Acquisition Integration Costs

The retail branch operations, commercial lending activities, mortgage banking operations, trust and investment services, along with all other operations of OKSB and First Texas will be integrated into Simmons Bank. The operation integration and the system conversion for First Texas are scheduled for the first quarter of 2018. The operation integration and the system conversion for OKSB are scheduled for the second quarter of 2018.

The specific details of the plan to integrate the operations of OKSB and First Texas will continue to be refined over the next several months, and will include assessing personnel, benefit plans, premises, equipment and service contracts to determine where we may take advantage of redundancies. Certain decisions arising from these assessments may involve involuntary termination of employees, vacating leased premises, changing information systems, canceling contracts with certain service providers, and selling or otherwise disposing of certain premises, furniture and equipment. Simmons also expects to incur merger-related costs including professional fees, legal fees, system conversion costs and costs related to communications with customers and others. To the extent there are costs associated with these actions, the costs will be recorded based on the nature of the cost and the timing of these integration actions.

Note 3. Estimated Annual Cost Savings

Simmons expects to realize cost savings and to generate revenue enhancements from the OKSB and First Texas acquisitions. Revenue enhancements are expected from an expansion of trust services, SBA lending activities, consumer finance products and credit card services to the larger footprint of Simmons. Cost savings for First Texas are projected at 32% of non-interest expense, and cost savings for OKSB are projected at 35% of non-interest expense. These cost savings and revenue enhancements are not reflected in the pro forma combined condensed consolidated financial statements and there can be no assurance they will be achieved in the amount or manner currently contemplated.

Note 4. Pro Forma Adjustments

The following pro forma adjustments have been reflected in the unaudited pro forma combined condensed consolidated financial statements presented for OKSB and First Texas. All adjustments are based on current assumptions and valuations, which are subject to change. Unless otherwise noted, all adjustments are based on assumptions and valuations as of the merger agreement dates for the respective pending acquisitions and are subject to change.

(1) Adjustment reflects the merger consideration expected to be paid for each acquisition. The merger consideration expected to be paid for the OKSB acquisition is $514.7 million, consisting of $419.8 million in Simmons common stock and $94.9 million in cash (based on Simmons’ closing common stock price of $57.90 per share on September 30, 2017, OKSB shares of common stock outstanding of 18,685,144 as of September 30, 2017, and the right to receive $5.08 and 0.3880 shares of Simmons common stock for each share of OKSB common stock, pursuant to the OKSB merger agreement). The merger consideration expected to be paid for First Texas is $446.4 million, consisting of $376.4 million in Simmons common stock and $70 million in cash (based on Simmons’ closing common stock price of $57.90 per share on September 30, 2017 and the right to receive 6,500,000 shares of Simmons common stock and $70 million, pursuant to the First Texas merger agreement).

(2) Adjustment represents the estimated seller-incurred merger expenses, which are expected to be paid immediately prior to the merger closing date, and the related tax benefit. Estimated seller-incurred merger expenses are $9.7 million for OKSB and the related tax benefit is $3.8 million. Estimated seller-incurred merger expenses are $9.8 million for First Texas and the related tax benefit is $3.8 million.

Estimated Simmons’-incurred merger expenses primarily including severance, professional, legal and conversion related expenditures, are not reflected in the pro forma combined condensed consolidated balance sheet as these integrated costs will be expensed by Simmons as required by U.S. generally accepted accounting principles, or GAAP.

(3) Purchase accounting adjustment to eliminate each target’s allowance for loan losses, which cannot be carried over in accordance with GAAP.

(4) Adjustment reflects the necessary write down of the acquired loan portfolios, allocated to each target as described below.

OKSB: The total adjustment of $43.1 million is comprised of approximately $6.7 million of non-accretable credit adjustments and approximately $38.6 million of accretable yield adjustments, net of the purchase accounting adjustment to eliminate $2.2 million existing credit mark.

First Texas: The total adjustment of $37.8 million is comprised entirely of accretable yield adjustments.

(5) Adjustment reflects the estimated fair value of acquired premises and equipment, including all branches, based on Simmons’ evaluation during due diligence. Adjustment is $5.5 million for OKSB and $10.1 million for First Texas.

(6) Adjustment reflects the estimated fair value of foreclosed assets acquired from OKSB. First Texas held no foreclosed assets as of September 30, 2017.

(7) Adjustment represents the excess of the consideration paid over the fair value of net assets acquired, net of the reversal of OKSB’s and First Texas’ previously recorded goodwill of $13.5 million and $37.2 million, respectively. See Note (1) for additional information regarding how the pro forma purchase price was calculated. The reconciliation of the pro forma purchase price to goodwill recorded can be summarized as follows:

	OKSB				First Texas
Fair value of common shares issued			$	419,766			$	376,350
Cash consideration				94,921				70,000
Total pro forma purchase price			$	514,687			$	446,350
Fair value of assets acquired:
Cash and cash equivalents	$	87,458			$	128,287
Investment securities		379,835				62,021
Loans held for sale		5,657				3,345
Net loans		1,981,821				2,224,073
Bank premise and equipment		26,792				34,986
OREO, net of valuation allowance		5,157				-
Interest receivable		7,072				6,143
Bank owned life insurance		28,661				7,181
Core deposit intangible		45,940				7,654
Other assets		56,138				29,224
Total assets	$	2,624,531			$	2,502,914
Fair value of liabilities assumed:
Deposits	$	2,045,295			$	1,872,906
Fed funds purchased and securities sold under agreements to repurchase		10,448				50,000
Other borrowings		203,000				329,950
Subordinated debentures		45,000				30,229
Other liabilities		19,281				10,281
Total liabilities	$	2,323,024			$	2,293,366
Net assets acquired			$	301,507			$	209,548
Preliminary pro forma goodwill			$	213,180			$	236,802

(8) Purchase accounting adjustment to establish a core deposit intangible in recognition of the fair value of core deposits acquired. This intangible asset represents the value of the relationship that OKSB and First Texas has with their deposit customers as of the date of acquisition. The fair value was calculated using a discounted cash flow methodology that considered expected customer attrition rates, cost of the deposit base, and the net maintenance cost attributable to customer deposits. The total adjustment for OKSB of $40.2 million reflects a core deposit intangible asset of $42.1 million, net of the purchase accounting adjustment to eliminate $1.9 million existing core deposit intangible. The total adjustment for First Texas of $7.3 million is comprised entirely of the core deposit intangible asset.

(9) Adjustment represents the estimated current and deferred income tax assets and liabilities recorded to reflect the differences in the carrying values of the acquired assets and assumed liabilities for financial reporting purposes and the cost basis for federal and state income tax purposes at Simmons’ then-effective combined federal and state income tax rate of 39.225%. OKSB is estimated to have a net deferred tax asset adjustment of ($6.1) million. First Texas is estimated to have a net deferred tax asset adjustment of $4.1 million.

(10) Adjustment reflects the estimated fair value discount of OKSB’s and First Texas’ time deposits of $2.2 million and $283,000, respectively. These estimates are based on Simmons’ preliminary evaluation and are subject to revision as the goodwill evaluation period remains open. The fair value was estimated using a discounted cash flow methodology based on current market rates for similar remaining maturities.

(11) Adjustment reflects a $75.0 million line of credit obtained by Simmons to pay down $60.0 million in outstanding debt for First Texas.

(12) Adjustment reflects the Company’s estimate of the fair value of a reserve for unfunded commitments not previously recorded by First Texas. No adjustment is necessary for OKSB as the Company determined the existence of an adequate reserve during due diligence.

(13) Purchase accounting adjustment to eliminate OKSB’s and First Texas’ previously existing equity accounts.

(14) Upon completion of the mergers, Simmons evaluated each acquired loan portfolio to determine the preliminary credit and interest rate fair value adjustments. The accretable portion of the fair value adjustment will be accreted into earnings using the level yield method over the remaining maturity of the underlying loans. This adjustment represents the Company’s best estimate of the expected accretion that would have been recorded in 2016 and the first nine months of 2017 assuming the mergers closed on January 1, 2016. The amount and timing of the estimated accretion of this purchase accounting adjustment are subject to revision as the goodwill evaluation period remains open.

(15) Adjustment reflects reversal of interest income on interest bearing balances due from banks for OKSB and First Texas due to consideration paid for each acquisition being derived from interest bearing balances due from banks.

(16) The pro forma adjustment to reflect the estimated fair value of time deposits of OKSB and First Texas based on current interest rates for comparable deposits will be amortized as an addition to the cost of such time deposits over an estimated life of one year and three years, respectively.

(17) The core deposit intangible for OKSB will be amortized over eleven years on a straight-line basis. The core deposit intangible for First Texas will be amortized over fifteen years on a straight-line basis. The annual amortization expense will be approximately $3.8 million and $489,000 for OKSB and First Texas, respectively.

(18) Reflects the tax impact of the pro forma acquisition adjustments at Simmons’ then-effective combined federal and state income tax rate of 39.225%.

(19) Pro forma weighted average common shares outstanding assumes 7,249,836 common shares issued for OKSB and 6,500,000 common shares issued for First Texas.

(a) Simmons has evaluated the acquired portfolio to estimate the necessary credit and interest rate fair value adjustments. Subsequently, the accretable portion of the fair value adjustment will be accreted into earnings using the level yield method over the remaining maturity of the underlying loans. For purposes of the pro forma impact on the year ended December 31, 2016, the net discount accretion was calculated by summing monthly estimates of accretion/amortization on each loan portfolio, which was calculated based on the remaining maturity of each loan pool. The overall weighted average maturity of the loan portfolio is approximately 4.6 years. The 2016 pro forma accretion income projected for HCIC is $1.4 million. The estimated non-accretable yield portion of the net discount of approximately $956,000 will not be accreted into earnings.

(b) The core deposit intangible will be amortized over fifteen years on a straight-line basis. The annual amortization expense will be approximately $523,000.

(c) Reflects the tax impact of the pro forma acquisition adjustments at Simmons’ then-effective combined federal and state income tax rate of 39.225%.

(d) Pro forma weighted average common shares outstanding assumes the actual stock issued at the close of the HCIC merger on May 15, 2017 of 799,970 shares of common stock was outstanding for the full period presented.