10-Q
Table of Contents


 
 
 
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549

FORM 10-Q
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2015
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ____________ to ____________
 
Commission file number: 0-12247
SOUTHSIDE BANCSHARES, INC.
(Exact name of registrant as specified in its charter)

TEXAS
 
75-1848732
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
 
 
1201 S. Beckham Avenue, Tyler, Texas
 
75701
(Address of principal executive offices)
 
(Zip Code)
903-531-7111
(Registrant's telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  x    No  o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes  x    No  o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o
Accelerated filer x
Non-accelerated filer o
Smaller reporting company o
(Do not check if a smaller reporting company)
 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o  No x

The number of shares of the issuer's common stock, par value $1.25, outstanding as of November 4, 2015 was 25,372,528 shares.

 



TABLE OF CONTENTS
 
PART I.  FINANCIAL INFORMATION
 
PART II.  OTHER INFORMATION
 
EXHIBIT 31.1 – CERTIFICATION PURSUANT TO SECTION 302
 
EXHIBIT 31.2 – CERTIFICATION PURSUANT TO SECTION 302
 
EXHIBIT 32 – CERTIFICATION PURSUANT TO SECTION 906
 


Table of Contents


PART I.   FINANCIAL INFORMATION
ITEM 1.   FINANCIAL STATEMENTS
SOUTHSIDE BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(in thousands, except share amounts)
 
 
September 30,
2015
 
December 31,
2014
ASSETS
 
 
 
 
Cash and due from banks
 
$
52,311

 
$
64,001

Interest earning deposits
 
19,583

 
20,654

Total cash and cash equivalents
 
71,894

 
84,655

Investment securities:
 
 

 
 

Available for sale, at estimated fair value
 
301,627

 
306,706

Held to maturity, at carrying value (estimated fair value of $395,401 and $400,248, respectively)
 
386,385

 
388,823

Mortgage-backed securities:
 
 

 
 

Available for sale, at estimated fair value
 
1,073,368

 
1,142,002

Held to maturity, at carrying value (estimated fair value of $397,572 and $261,339, respectively)
 
385,529

 
253,496

FHLB stock, at cost
 
43,446

 
39,942

Other investments
 
5,446

 
3,929

Loans held for sale
 
4,883

 
2,899

Loans:
 
 

 
 

Loans
 
2,239,146

 
2,181,133

Less:  Allowance for loan losses
 
(18,402
)
 
(13,292
)
Net Loans
 
2,220,744

 
2,167,841

Premises and equipment, net
 
109,087

 
112,860

Goodwill
 
91,520

 
91,372

Other intangible assets, net
 
7,090

 
8,844

Interest receivable
 
17,143

 
22,436

Deferred tax asset
 
14,952

 
12,707

Unsettled trades to sell securities
 

 
57,202

Bank owned life insurance
 
94,303

 
92,384

Other assets
 
10,058

 
19,163

TOTAL ASSETS
 
$
4,837,475

 
$
4,807,261

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 

 
 

Deposits:
 
 

 
 

Noninterest bearing
 
$
681,618

 
$
661,014

Interest bearing
 
2,646,259

 
2,713,403

Total deposits
 
3,327,877

 
3,374,417

Short-term obligations:
 
 

 
 

Federal funds purchased and repurchase agreements
 
2,270

 
4,237

FHLB advances
 
442,738

 
297,368

Total short-term obligations
 
445,008

 
301,605

Long-term obligations:
 
 

 
 

FHLB advances
 
498,556

 
600,052

Long-term debt
 
60,311

 
60,311

Total long-term obligations
 
558,867

 
660,363

Unsettled trades to purchase securities
 
21,783

 
5,982

Other liabilities
 
36,792

 
39,651

TOTAL LIABILITIES
 
4,390,327

 
4,382,018

 
 
 
 
 
Off-Balance-Sheet Arrangements, Commitments and Contingencies (Note 12)
 


 


 
 
 
 
 
Shareholders' equity:
 
 

 
 

Common stock ($1.25 par, 40,000,000 shares authorized, 27,842,166 shares issued at September 30, 2015 and 26,578,127 shares issued at December 31, 2014)
 
34,803

 
33,223

Paid-in capital
 
423,167

 
389,886

Retained earnings
 
37,783

 
55,396

Treasury stock (2,469,638 shares at cost)
 
(37,692
)
 
(37,692
)
Accumulated other comprehensive loss
 
(10,913
)
 
(15,570
)
TOTAL SHAREHOLDERS' EQUITY
 
447,148

 
425,243

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
 
$
4,837,475

 
$
4,807,261

The accompanying notes are an integral part of these consolidated financial statements.

1

Table of Contents


SOUTHSIDE BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(in thousands, except per share data)
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2015
 
2014
 
2015
 
2014
Interest income
 
 
 
 
 
 
 
Loans
$
23,787

 
$
17,168

 
$
71,590

 
$
53,836

Investment securities – taxable
475

 
210

 
1,171

 
476

Investment securities – tax-exempt
5,551

 
6,325

 
17,060

 
18,304

Mortgage-backed securities
8,318

 
6,070

 
24,446

 
21,309

FHLB stock and other investments
65

 
36

 
223

 
144

Other interest earning assets
15

 
31

 
78

 
96

Total interest income
38,211

 
29,840

 
114,568

 
94,165

Interest expense
 

 
 

 
 

 
 

Deposits
2,485

 
1,876

 
7,507

 
5,976

Short-term obligations
354

 
226

 
650

 
353

Long-term obligations
2,087

 
2,018

 
6,430

 
6,368

Total interest expense
4,926

 
4,120

 
14,587

 
12,697

Net interest income
33,285

 
25,720

 
99,981

 
81,468

Provision for loan losses
2,276

 
4,868

 
6,392

 
11,651

Net interest income after provision for loan losses
31,009

 
20,852

 
93,589

 
69,817

Noninterest income
 

 
 

 
 

 
 

Deposit services
5,213

 
3,860

 
15,122

 
11,292

Net gain on sale of securities available for sale
875

 
1,151

 
3,456

 
1,660

Impairment of investment in SFG Finance, LLC

 
(2,239
)
 

 
(2,239
)
Gain on sale of loans
305

 
108

 
1,504

 
269

Trust income
835

 
798

 
2,548

 
2,340

Bank owned life insurance income
661

 
320

 
1,983

 
941

Other
1,227

 
1,021

 
3,970

 
3,077

Total noninterest income
9,116

 
5,019

 
28,583

 
17,340

Noninterest expense
 

 
 

 
 

 
 

Salaries and employee benefits
15,733

 
12,798

 
50,801

 
38,992

Occupancy expense
3,071

 
1,773

 
9,123

 
5,313

Advertising, travel & entertainment
642

 
489

 
1,982

 
1,637

ATM and debit card expense
617

 
327

 
2,046

 
946

Professional fees
825

 
1,132

 
2,360

 
3,363

Software and data processing expense
819

 
543

 
3,087

 
1,530

Telephone and communications
534

 
292

 
1,606

 
890

FDIC insurance
624

 
437

 
1,891

 
1,319

Other
3,527

 
2,226

 
11,130

 
6,635

Total noninterest expense
26,392

 
20,017

 
84,026

 
60,625

 
 
 
 
 
 
 
 
Income before income tax expense
13,733

 
5,854

 
38,146

 
26,532

Income tax expense (benefit)
1,971

 
(243
)
 
5,841

 
1,754

Net income
$
11,762

 
$
6,097

 
$
32,305

 
$
24,778

Earnings per common share – basic
$
0.46

 
$
0.31

 
$
1.27

 
$
1.25

Earnings per common share – diluted
$
0.46

 
$
0.31

 
$
1.27

 
$
1.25

Dividends paid per common share
$
0.23

 
$
0.22

 
$
0.69

 
$
0.64


The accompanying notes are an integral part of these consolidated financial statements.

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Table of Contents


SOUTHSIDE BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
(in thousands)
 
Three Months Ended
 
Nine Months Ended

September 30,
 
September 30,
 
2015
 
2014
 
2015
 
2014
Net income
$
11,762

 
$
6,097

 
$
32,305

 
$
24,778

Other comprehensive income:
 

 
 

 
 

 
 

Net unrealized holding gains on available for sale securities during the period
13,446

 
2,751

 
8,051

 
21,070

Change in net unrealized loss on securities transferred to held to maturity
220

 
282

 
746

 
836

Reclassification adjustment for net gain on sale of available for sale securities, included in net income
(875
)
 
(1,151
)
 
(3,456
)
 
(1,660
)
Amortization of net actuarial loss, included in net periodic benefit cost
691

 
260

 
1,836

 
781

Amortization of prior service credit, included in net periodic benefit cost
(4
)
 
(3
)
 
(12
)
 
(10
)
Other comprehensive income, before tax
13,478

 
2,139

 
7,165

 
21,017

Income tax expense related to other items of comprehensive income
(4,718
)
 
(862
)
 
(2,508
)
 
(7,469
)
Other comprehensive income, net of tax
8,760

 
1,277

 
4,657

 
13,548

Comprehensive income
$
20,522

 
$
7,374

 
$
36,962

 
$
38,326


The accompanying notes are an integral part of these consolidated financial statements.

3

Table of Contents


SOUTHSIDE BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(UNAUDITED)
(in thousands, except share and per share data)
 
Common
Stock
 
Paid In
Capital
 
Retained
Earnings
 
Treasury
Stock
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Total
Shareholders'
Equity
Balance at December 31, 2013
$
25,483

 
$
214,091

 
$
78,673

 
$
(37,692
)
 
$
(21,037
)
 
$
259,518

Net income

 

 
24,778

 

 

 
24,778

Other comprehensive income

 

 

 

 
13,548

 
13,548

Issuance of common stock (26,894 shares)
34

 
763

 

 

 

 
797

Stock compensation expense

 
842

 

 

 

 
842

Tax benefits related to stock awards

 
249

 

 

 

 
249

Net issuance of common stock under employee stock plans
90

 
1,025

 
(112
)
 

 

 
1,003

Cash dividends paid on common stock ($0.64 per share)

 

 
(11,865
)
 

 

 
(11,865
)
Impairment of investment in SFG Finance, LLC.

 
2,239

 

 

 

 
2,239

Stock dividend declared
1,124

 
24,941

 
(26,065
)
 

 

 

Balance at September 30, 2014
$
26,731

 
$
244,150

 
$
65,409

 
$
(37,692
)
 
$
(7,489
)
 
$
291,109

 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2014
$
33,223

 
$
389,886

 
$
55,396

 
$
(37,692
)
 
$
(15,570
)
 
$
425,243

Net income

 

 
32,305

 

 

 
32,305

Other comprehensive income

 

 

 

 
4,657

 
4,657

Issuance of common stock (33,948 shares)
42

 
894

 

 

 

 
936

Stock compensation expense

 
981

 

 

 

 
981

Tax benefits related to stock awards

 
61

 

 

 

 
61

Net issuance of common stock under employee stock plans
26

 
182

 
(39
)
 

 

 
169

Cash dividends paid on common stock ($0.69 per share)

 

 
(17,204
)
 

 

 
(17,204
)
Stock dividend declared
1,512

 
31,163

 
(32,675
)
 

 

 

Balance at September 30, 2015
$
34,803

 
$
423,167

 
$
37,783

 
$
(37,692
)
 
$
(10,913
)
 
$
447,148


The accompanying notes are an integral part of these consolidated financial statements.

4

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SOUTHSIDE BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
(UNAUDITED)
(in thousands)
 
Nine Months Ended
 
September 30,
 
2015
 
2014
OPERATING ACTIVITIES:
 
 
 
Net income
$
32,305

 
$
24,778

Adjustments to reconcile net income to net cash provided by operations:
 

 
 

Depreciation and amortization
6,467

 
2,591

Securities premium amortization (discount accretion), net
16,895

 
14,099

Accretion of loan (discounts) premium amortization, net
(2,065
)
 
(1,404
)
Provision for loan losses
6,392

 
11,651

Stock compensation expense
981

 
842

Deferred tax benefit
(2,714
)
 
(2,322
)
Tax benefit related to stock awards
(61
)
 
(253
)
Net gain on sale of securities available for sale
(3,456
)
 
(1,660
)
Impairment of investment in SFG Finance, LLC.

 
2,239

Net loss on premises and equipment
211

 
14

Net loss on other real estate owned
387

 
65

Net change in:
 

 
 

Interest receivable
5,293

 
7,752

Other assets
2,124

 
(2,185
)
Interest payable
28

 
(69
)
Other liabilities
(1,064
)
 
4,943

Loans originated for sale
(1,984
)
 
(533
)
Net cash provided by operating activities
59,739

 
60,548

 
 
 
 
INVESTING ACTIVITIES:
 

 
 

Securities held to maturity:
 

 
 

Purchases
(80,714
)
 

Maturities, calls and principal repayments
17,994

 
18,883

Securities available for sale:
 

 
 

Purchases
(697,879
)
 
(538,361
)
Sales
543,456

 
529,054

Maturities, calls and principal repayments
226,125

 
214,296

Proceeds from redemption of FHLB stock
8,603

 
11,437

Purchases of FHLB stock and other investments
(12,248
)
 
(1,841
)
Net loans originated
(58,658
)
 
(142,523
)
Purchases of premises and equipment
(2,524
)
 
(4,280
)
Proceeds from sales of premises and equipment
10

 
8

Proceeds from sales of other real estate owned
634

 
275

Proceeds from sales of repossessed assets
2,008

 
5,158

Net cash (used in) provided by investing activities
(53,193
)
 
92,106

 
 
 
 
(continued)
 
 
 

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SOUTHSIDE BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
(UNAUDITED) (continued)
(in thousands)
 
Nine Months Ended
 
September 30,
 
2015
 
2014
FINANCING ACTIVITIES:
 
 
 
Net change in deposits
(45,588
)
 
(84,327
)
Net (decrease) increase in federal funds purchased and repurchase agreements
(1,967
)
 
1,257

Proceeds from FHLB advances
13,860,663

 
6,485,983

Repayment of FHLB advances
(13,816,377
)
 
(6,530,965
)
Tax benefit related to stock awards
61

 
253

Net issuance of common stock under employee stock plan
169

 
1,003

Proceeds from the issuance of common stock
936

 
797

Cash dividends paid
(17,204
)
 
(11,865
)
Net cash used in financing activities
(19,307
)
 
(137,864
)
 
 
 
 
Net (decrease) increase in cash and cash equivalents
(12,761
)
 
14,790

Cash and cash equivalents at beginning of period
84,655

 
54,431

Cash and cash equivalents at end of period
$
71,894

 
$
69,221

 
 
 
 
SUPPLEMENTAL DISCLOSURES FOR CASH FLOW INFORMATION:
 

 
 


 
 
 
Interest paid
$
14,558

 
$
12,766

Income taxes paid
$
5,250

 
$
4,300

 
 
 
 
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES:
 

 
 


 
 
 
Loans transferred to other repossessed assets and real estate through foreclosure
$
1,453

 
$
4,581

Loans transferred to held for sale from held for investment
$

 
$
74,752

Transfer of available for sale securities to held to maturity securities
$
57,724

 
$

Adjustment to pension liability
$
(1,824
)
 
$
(771
)
5% stock dividend
$
32,675

 
$
26,065

Unsettled trades to purchase securities
$
(21,783
)
 
$
(15,224
)
Unsettled trades to sell securities
$

 
$
5,120


The accompanying notes are an integral part of these consolidated financial statements.


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SOUTHSIDE BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1.    Summary of Significant Accounting and Reporting Policies

Basis of Presentation
In this report, the words “the Company,” “we,” “us,” and “our” refer to the combined entities of Southside Bancshares, Inc. and its subsidiaries.  The words “Southside” and “Southside Bancshares” refer to Southside Bancshares, Inc.  The words “Southside Bank” and “the Bank” refer to Southside Bank.  “OABC” and “Omni” refer to OmniAmerican Bancorp, Inc. and its subsidiaries.  “SFG” refers to SFG Finance, LLC (formerly Southside Financial Group, LLC), which was a wholly-owned subsidiary of the Bank and was dissolved in April 2015.
The consolidated balance sheet as of September 30, 2015, and the related consolidated statements of income, comprehensive income, changes in shareholders' equity and cash flows and notes to the financial statements for the three- and nine-month periods ended September 30, 2015 and 2014 are unaudited; in the opinion of management, all adjustments necessary for a fair statement of such financial statements have been included.  Such adjustments consisted only of normal recurring items.  All significant intercompany accounts and transactions are eliminated in consolidation.  The preparation of these consolidated financial statements in conformity with U.S. generally accepted accounting principles (“GAAP”) requires the use of management’s estimates.  These estimates are subjective in nature and involve matters of judgment.  Actual amounts could differ from these estimates.
Certain prior period amounts have been reclassified to conform to current year presentation and had no impact on net income, equity or cash flows.
Interim results are not necessarily indicative of results for a full year.  These financial statements should be read in conjunction with the financial statements and notes thereto in our Annual Report on Form 10-K for the year ended December 31, 2014.  
On April 13, 2015, our board of directors declared a 5% stock dividend to common stock shareholders of record as of April 27, 2015, which was paid on May 14, 2015. All share data has been adjusted to give retroactive recognition to this stock dividend.  
Goodwill
The Company evaluates goodwill for impairment on an annual basis or on an interim basis if events or changes in circumstances indicate that the fair value of the asset has decreased below its carrying value. During the three months ended September 30, 2015, the Company changed its annual goodwill impairment testing date from December 31 to October 1. The Company believes this new date is preferable as it provides additional time prior to the Company's year-end to complete the annual goodwill impairment test, especially given recent acquisitions and potential future growth. This change does not accelerate, delay, avoid, or cause an impairment charge, nor does this change result in adjustments to previously issued financial statements. There were no impairments of goodwill during the three and nine months ended September 30, 2015 or 2014.
For a description of our significant accounting and reporting policies, refer to "Note 1- Summary of Significant Accounting and Reporting Policies" in our consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2014.
Accounting Pronouncements
In January 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-04, “Receivables-Troubled Debt Restructurings by Creditors (Subtopic 310-40): Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure.” This update clarifies that an in-substance repossession or foreclosure occurs, and a creditor is considered to have received physical possession of the residential real estate property collateralizing a consumer mortgage loan, upon either: (i) the creditor obtaining legal title to the property upon completion of the foreclosure; or (ii) the borrower conveying all interest in the property to

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the creditor to satisfy the loan through completion of a deed-in-lieu of foreclosure or through a similar legal agreement. ASU 2014-04 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2014. The adoption of this guidance did not have a significant impact on our consolidated financial statements.
In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers (Topic 606).”  This update states that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.  This update affects entities that enter into contracts with customers to transfer goods or services or enter into contracts for the transfer of nonfinancial assets, unless those contracts are within the scope of other standards. In August 2015, FASB issued ASU No. 2015-14, “Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date,” which effectively delayed the adoption date by one year. We are required to adopt ASU 2014-09 in the first quarter of fiscal 2018 and early adoption is permitted. The guidance permits companies to either apply the requirements retrospectively to all prior periods presented, or apply the requirements in the year of adoption, through a cumulative adjustment. We have not yet selected a transition method nor have we determined the impact of adoption on our consolidated financial statements.
In June 2014, the FASB issued ASU 2014-11, “Transfers and Servicing (Topic 860): Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures.”  This update aligns the accounting for repurchase-to-maturity transactions and repurchase agreements executed as a repurchase financing with the accounting for other typical repurchase agreements by accounting for these transactions as secured borrowings.  This update also requires a new disclosure for transactions economically similar to repurchase agreements in which the transferor retains substantially all of the exposure to the economic return of the transferred financial assets throughout the term of the transaction.  ASU 2014-11 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2014. The adoption of this guidance did not have a significant impact on our consolidated financial statements.
In August 2014, the FASB issued ASU 2014-14, “Receivables - Troubled Debt Restructurings by Creditors (Subtopic 310-40): Classification of Certain Government-Guaranteed Mortgage Loans upon Foreclosure.”  This update affects creditors that hold government-guaranteed mortgage loans, including those guaranteed by the Federal Housing Administration (FHA) of the U.S.  Department of Housing and Urban Development (HUD), and the U.S. Department of Veterans Affairs (VA).  The update requires that, upon foreclosure, a guaranteed mortgage loan be derecognized and a separate other receivable be recognized when specific criteria are met.  ASU 2014-14 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2014. The adoption of this guidance did not have a significant impact on our consolidated financial statements.
In April 2015, the FASB issued ASU 2015-05, “Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40) – Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement.” ASU 2015-05 affects the accounting for fees paid by a customer in cloud computing arrangements such as (i) software as a service, (ii) platform as a service (iii) infrastructure as a service and (iv) other similar hosting arrangements. If a cloud computing arrangement includes a software license, then the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. ASU 2015-05 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is permitted. The adoption of this guidance is not expected to have a significant impact on our consolidated financial statements.
In May 2015, the FASB issued ASU 2015-07, "Disclosures for Investments in Certain Entities that Calculate Net Asset Value per Share." ASU 2015-07 eliminates the current requirement to categorize within the fair value hierarchy investments whose fair values are measured at net asset value ("NAV"). Instead, entities will be required to disclose the fair values of such investments so that financial statement users can reconcile amounts reported in the fair value hierarchy table and the amounts reported on the balance sheet. ASU 2015-07 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is permitted. The adoption of this guidance is not expected to have a significant impact on our consolidated financial statements.



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2.    Acquisition
On December 17, 2014, we acquired 100% of the outstanding stock of OmniAmerican Bancorp, Inc. and its wholly-owned subsidiary OmniAmerican Bank (collectively, "Omni") headquartered in Fort Worth, Texas. Omni operated 14 banking offices in Fort Worth, Texas and surrounding areas. We acquired Omni to further expand our presence in the growing Fort Worth market. The operations of Omni were merged into ours as of the date of the acquisition.
The Omni acquisition was accounted for using the purchase method of accounting and accordingly, purchased assets, including identifiable intangible assets, and assumed liabilities were recorded at their respective acquisition date fair values.  The purchase price allocation related to the Omni acquisition remains preliminary and is subject to final determination and valuation of the fair value of assets acquired and liabilities assumed. Subsequent to filing our Annual Report on Form 10-K for the year ended December 31, 2014, we continued to evaluate the assets and liabilities assumed.  This evaluation resulted in adjustments to goodwill, consisting primarily of a $1.4 million adjustment to the fair value of Visa Class B stock included in other investments on the consolidated balance sheets, not previously recorded, which upon the filing of the short-period Federal Income Tax return for Omni and its subsidiaries and other immaterial adjustments was partially offset by a $1.0 million decrease to taxes receivable included in other assets on the consolidated balance sheets. The impact of the adjustments to goodwill, net of deferred tax, is reflected below. For more information concerning the fair value of the assets acquired and liabilities assumed in relation to the acquisition of Omni, see "Note 2 - Acquisition" in our Annual Report on Form 10-K for the year ended December 31, 2014.
The following table reflects the changes in the carrying amount of our goodwill for the nine months ended September 30, 2015 (in thousands):
 
 
Goodwill
 
 
 
Balance as of December 31, 2014
 
$
91,372

Plus: measurement period adjustments
 
148

Balance as of September 30, 2015
 
$
91,520

In connection with the integration of Omni into our operations, certain loans acquired have been reclassified as of December 31, 2014 to be consistent with our current classification methodology, see “Note 6 - Loans and Allowance for Probable Loan Losses” and “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Composition of Loans” in this Quarterly Report on Form 10-Q.

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3.     Earnings Per Share
Earnings per share on a basic and diluted basis have been adjusted to give retroactive recognition to stock dividends and is calculated as follows (in thousands, except per share amounts):
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2015
 
2014
 
2015
 
2014
Basic and Diluted Earnings:
 
 
 
 
 
 
 
Net income
$
11,762

 
$
6,097

 
$
32,305

 
$
24,778

Basic weighted-average shares outstanding
25,360

 
19,809

 
25,340

 
19,782

Add:   Stock awards
85

 
106

 
84

 
99

Diluted weighted-average shares outstanding
25,445

 
19,915

 
25,424

 
19,881

 
 

 
 

 
 

 
 

Basic Earnings Per Share:
$
0.46

 
$
0.31

 
$
1.27

 
$
1.25

 
 

 
 

 
 

 
 

Diluted Earnings Per Share:
$
0.46

 
$
0.31

 
$
1.27

 
$
1.25

For the three- and nine-month periods ended September 30, 2015, there were approximately 58,000 and 27,000 anti-dilutive shares, respectively. For the three- and nine-month periods ended September 30, 2014, there were approximately 3,000 and 15,000 anti-dilutive shares, respectively.

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4.     Accumulated Other Comprehensive (Loss) Income

The changes in accumulated other comprehensive (loss) income by component are as follows (in thousands):

 
Three Months Ended September 30, 2015
 
Unrealized Gains (Losses) on Securities
Pension Plans
 
 
 
Other
 
Net Prior
 Service
 (Cost)
 Credit
 
Net Gain (Loss)
 
Total
Beginning balance, net of tax
$
1,396

 
$
2

 
$
(21,071
)
 
$
(19,673
)
Other comprehensive income before reclassifications
13,666

 

 

 
13,666

Reclassified to income
(875
)
 
(4
)
 
691

 
(188
)
Income tax (expense) benefit
(4,477
)
 
1

 
(242
)
 
(4,718
)
Net current-period other comprehensive income (loss), net of tax
8,314

 
(3
)
 
449

 
8,760

Ending balance, net of tax
$
9,710

 
$
(1
)
 
$
(20,622
)
 
$
(10,913
)
 
 
 
 
 
 
 
 
 
Nine Months Ended September 30, 2015
 
Unrealized Gains (Losses) on Securities
Pension Plans
 
 
 
Other
 
Net Prior
 Service
 (Cost)
 Credit
 
Net Gain (Loss)
 
Total
Beginning balance, net of tax
$
6,238

 
$
7

 
$
(21,815
)
 
$
(15,570
)
Other comprehensive income before reclassifications
8,797

 

 

 
8,797

Reclassified to income
(3,456
)
 
(12
)
 
1,836

 
(1,632
)
Income tax (expense) benefit
(1,869
)
 
4

 
(643
)
 
(2,508
)
Net current-period other comprehensive income (loss), net of tax
3,472

 
(8
)
 
1,193

 
4,657

Ending balance, net of tax
$
9,710

 
$
(1
)
 
$
(20,622
)
 
$
(10,913
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 



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Three Months Ended September 30, 2014
 
Unrealized Gains (Losses) on Securities
Pension Plans
 
 
 
Other
 
Net Prior
 Service
 (Cost)
 Credit
 
Net Gain (Loss)
 
Total
Beginning balance, net of tax
$
3,281

 
$
(17
)
 
$
(12,030
)
 
$
(8,766
)
Other comprehensive income before reclassifications
3,033

 

 

 
3,033

Reclassified to income
(1,151
)
 
(3
)
 
260

 
(894
)
Income tax (expense) benefit
(589
)
 
2

 
(275
)
 
(862
)
Net current-period other comprehensive income (loss), net of tax
1,293

 
(1
)
 
(15
)
 
1,277

Ending balance, net of tax
$
4,574

 
$
(18
)
 
$
(12,045
)
 
$
(7,489
)
 
 
 
 
 
 
 
 
 
Nine Months Ended September 30, 2014
 
Unrealized Gains (Losses) on Securities
Pension Plans
 
 
 
Other
 
Net Prior
 Service
 (Cost)
 Credit
 
Net Gain (Loss)
 
Total
Beginning balance, net of tax
$
(8,656
)
 
$
(12
)
 
$
(12,369
)
 
$
(21,037
)
Other comprehensive income before reclassifications
21,906

 

 

 
21,906

Reclassified to income
(1,660
)
 
(10
)
 
781

 
(889
)
Income tax (expense) benefit
(7,016
)
 
4

 
(457
)
 
(7,469
)
Net current-period other comprehensive income (loss), net of tax
13,230

 
(6
)
 
324

 
13,548

Ending balance, net of tax
$
4,574

 
$
(18
)
 
$
(12,045
)
 
$
(7,489
)

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The reclassifications out of accumulated other comprehensive loss into net income are presented below (in thousands):
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2015
 
2014
 
2015
 
2014
Unrealized gains and losses on available for sale securities:
 
 
 
 
 
 
 
Realized net gain on sale of securities (1)
$
875

 
$
1,151

 
$
3,456

 
$
1,660

Tax expense
(307
)
 
(386
)
 
(1,210
)
 
(564
)
Net of tax
568

 
765

 
2,246

 
1,096

 
 
 
 
 
 
 
 
Amortization of pension plan:
 
 
 
 
 
 
 
Net actuarial loss (2)
$
(691
)
 
$
(260
)
 
$
(1,836
)
 
$
(781
)
Prior service credit (2)
4

 
3

 
12

 
10

Total before tax
(687
)
 
(257
)
 
(1,824
)
 
(771
)
Tax benefit
241

 
82

 
639

 
262

Net of tax
(446
)
 
(175
)
 
(1,185
)
 
(509
)
Total reclassifications for the period, net of tax
$
122

 
$
590

 
$
1,061

 
$
587


(1) Listed as net gain on sale of securities available for sale on the consolidated statements of income.
(2) These accumulated other comprehensive income components are included in the computation of net periodic pension cost presented in “Note 8 - Employee Benefit Plans.”

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5.     Securities

The amortized cost, gross unrealized gains and losses, carrying value, and estimated fair value of investment and mortgage-backed securities as of September 30, 2015 and December 31, 2014 are reflected in the tables below (in thousands):
 
 
 
September 30, 2015
 
 
 
 
Recognized in OCI
 
 
 
Not recognized in OCI
 
 

 
Amortized
 
Gross
Unrealized
 
Gross Unrealized
 
Carrying
 
Gross
Unrealized
 
Gross Unrealized
 
Estimated
AVAILABLE FOR SALE
 
Cost
 
Gains
 
Losses
 
Value
 
Gains
 
Losses
 
Fair Value
Investment Securities:
 
 
 
 
 
 
 
 
 
 
 
 
 

U.S. Treasury
 
$
9,971

 
$
115

 
$

 
$
10,086

 
$

 
$

 
$
10,086

U.S. Government Agency Debentures
 
4,849

 
95

 

 
4,944

 

 

 
4,944

State and Political Subdivisions
 
261,987

 
7,113

 
1,449

 
267,651

 

 

 
267,651

Other Stocks and Bonds
 
12,769

 
94

 

 
12,863

 

 

 
12,863

Other Equity Securities
 
6,055

 
28

 

 
6,083

 

 

 
6,083

Mortgage-backed Securities: (1)
 
 

 
 

 
 

 
 
 
 
 
 
 
 
Residential
 
612,400

 
13,880

 
157

 
626,123

 

 

 
626,123

Commercial

442,983

 
4,880

 
618

 
447,245

 

 

 
447,245

Total
 
$
1,351,014

 
$
26,205

 
$
2,224

 
$
1,374,995

 
$

 
$

 
$
1,374,995

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
HELD TO MATURITY
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Investment Securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
State and Political Subdivisions
 
$
390,904

 
$
4,913

 
$
9,432

 
$
386,385

 
$
10,515

 
$
1,499

 
$
395,401

Mortgage-backed Securities: (1)
 
 

 
 

 
 

 
 
 
 
 
 
 
 
Residential
 
34,803

 

 
55

 
34,748

 
2,415

 

 
37,163

Commercial
 
355,249

 
1,274

 
5,742

 
350,781

 
9,699

 
71

 
360,409

Total
 
$
780,956

 
$
6,187

 
$
15,229

 
$
771,914

 
$
22,629

 
$
1,570

 
$
792,973




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Table of Contents


 
 
December 31, 2014
 
 
 
 
Recognized in OCI
 
 
 
Not recognized in OCI
 
 
 
 
Amortized
 
Gross
Unrealized
 
Gross Unrealized
 
Carrying
 
Gross
Unrealized
 
Gross Unrealized
 
Estimated
AVAILABLE FOR SALE
 
Cost
 
Gains
 
Losses
 
Value
 
Gains
 
Losses
 
Fair Value
Investment Securities:
 
 
 
 
 
 
 
 

 
 
 
 
 
U.S. Treasury
 
$
14,883

 
$
30

 
$
7

 
$
14,906

 
$

 
$

 
$
14,906

U.S. Government Agency Debentures
 
4,835

 

 
7

 
4,828



 

 
4,828

State and Political Subdivisions
 
260,535

 
8,055

 
906

 
267,684



 

 
267,684

Other Stocks and Bonds
 
13,086

 
153

 


13,239



 

 
13,239

Other Equity Securities
 
6,061

 

 
12

 
6,049

 

 

 
6,049

Mortgage-backed Securities:(1)
 
 
 
 
 
 

 
 

 
 
 
 
 
Residential
 
952,481

 
12,624

 
807


964,298



 

 
964,298

Commercial

176,112


1,743


151


177,704



 

 
177,704

Total
 
$
1,427,993

 
$
22,605

 
$
1,890

 
$
1,448,708

 
$

 
$

 
$
1,448,708

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
HELD TO MATURITY
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Investment Securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
State and Political Subdivisions
 
$
393,525

 
$
5,168

 
$
9,870

 
$
388,823

 
$
12,181

 
$
756

 
$
400,248

Mortgage-backed Securities:(1)
 
 

 
 

 
 

 
 
 
 
 
 
 
 

Residential
 
52,287

 

 
70

 
52,217

 
2,871

 

 
55,088

Commercial
 
207,624

 

 
6,345

 
201,279

 
5,461

 
489

 
206,251

Total
 
$
653,436

 
$
5,168

 
$
16,285

 
$
642,319

 
$
20,513

 
$
1,245

 
$
661,587


(1) All mortgage-backed securities issued and/or guaranteed by U.S. government agencies or U.S. government-sponsored enterprises.

From time to time, the Company may transfer securities from available for sale (“AFS”) to held to maturity (“HTM”) due to overall balance sheet strategies. Our management has the current intent and ability to hold the transferred securities until maturity. Any net unrealized gain or loss on the transferred securities included in accumulated other comprehensive income at the time of transfer will be amortized over the remaining life of the underlying security as an adjustment of the yield on those securities. AFS securities transferred with losses included in accumulated other comprehensive income continue to be included in management’s assessment for other-than-temporary impairment for each individual security.

During the second quarter of 2015, the Company transferred commercial mortgage-backed securities with a fair value of $57.7 million from AFS to HTM. The unrealized gain on the securities transferred from AFS to HTM was $1.3 million ($864,000, net of tax) at the date of transfer based on the fair value of the securities on the transfer date.

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The following table represents the unrealized loss on securities as of September 30, 2015 and December 31, 2014 (in thousands):
 
As of September 30, 2015
 
Less Than 12 Months
 
More Than 12 Months
 
Total
 
Fair Value
 
Unrealized
Loss
 
Fair Value
 
Unrealized
Loss
 
Fair Value
 
Unrealized
Loss
AVAILABLE FOR SALE
 
 
 
 
 
 
 
 
 
 
 
Investment Securities:
 
 
 
 
 
 
 
 
 
 
 
State and Political Subdivisions
$
45,805

 
$
611

 
$
26,843

 
$
838

 
$
72,648

 
$
1,449

Mortgage-backed Securities:
 
 
 
 
 
 
 
 
 
 
 
Residential
63,028

 
147

 
3,413

 
10

 
66,441

 
157

Commercial
115,819

 
618

 

 

 
115,819

 
618

Total
$
224,652

 
$
1,376

 
$
30,256

 
$
848

 
$
254,908

 
$
2,224

HELD TO MATURITY
 

 
 

 
 

 
 

 
 

 
 

Investment Securities:
 
 
 
 
 
 
 
 
 
 
 
State and Political Subdivisions
$
38,890

 
$
307

 
$
60,179

 
$
1,192

 
$
99,069

 
$
1,499

Mortgage-backed Securities:
 
 
 
 
 
 
 
 
 
 
 
Commercial
9,956

 
68

 
2,560

 
3

 
12,516

 
71

Total
$
48,846

 
$
375

 
$
62,739

 
$
1,195

 
$
111,585

 
$
1,570

 
 
 
 
 
 
 
 
 
 
 
 
 
As of December 31, 2014
 
Less Than 12 Months
 
More Than 12 Months
 
Total
 
Fair Value
 
Unrealized
Loss
 
Fair Value
 
Unrealized
Loss
 
Fair Value
 
Unrealized
Loss
AVAILABLE FOR SALE
 

 
 

 
 

 
 

 
 

 
 

Investment Securities:
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury
$
4,968

 
$
7

 
$

 
$

 
$
4,968

 
$
7

U.S. Government Agency Debentures
4,828

 
7

 

 

 
4,828

 
7

State and Political Subdivisions
28,155

 
90

 
44,269

 
816

 
72,424

 
906

   Other Equity Securities
6,049

 
12

 

 

 
6,049

 
12

Mortgage-backed Securities:
 
 
 
 
 
 
 
 
 
 
 
Residential
347,777

 
573

 
27,632

 
234

 
375,409

 
807

Commercial
21,103

 
54

 
10,116

 
97

 
31,219

 
151

Total
$
412,880

 
$
743

 
$
82,017

 
$
1,147

 
$
494,897

 
$
1,890

HELD TO MATURITY
 

 
 

 
 

 
 

 
 

 
 

Investment Securities:
 
 
 
 
 
 
 
 
 
 
 
State and Political Subdivisions
$
7,843

 
$
31

 
$
64,946

 
$
725

 
$
72,789

 
$
756

Mortgage-backed Securities:
 
 
 
 
 
 
 
 
 
 
 
Commercial

 

 
44,144

 
489

 
44,144

 
489

Total
$
7,843

 
$
31

 
$
109,090

 
$
1,214

 
$
116,933

 
$
1,245


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We review those securities in an unrealized loss position for significant differences between fair value and the cost basis to evaluate if a classification of other-than-temporary impairment is warranted. In estimating other-than-temporary impairment losses, management considers, among other things, the length of time and the extent to which the fair value has been less than cost and the financial condition and near-term prospects of the issuer.  The Company considers an other-than-temporary impairment to have occurred when there is an adverse change in expected cash flows.  When it is determined that a decline in fair value of HTM or AFS securities is other-than-temporary, the carrying value of the security is reduced to its estimated fair value, with a corresponding charge to earnings for the credit portion and the noncredit portion to other comprehensive income. Based upon the length of time and the extent to which fair value is less than cost, we believe that none of the securities with an unrealized loss have other-than-temporary impairment at September 30, 2015.
The majority of the unrealized loss positions are comprised of highly rated municipal securities and U.S. Agency mortgage- backed securities (“MBS”) where the unrealized loss is a direct result of the change in interest rates and spreads. For those securities in an unrealized loss position, we do not currently intend to sell the securities and it is not more likely than not that we will be required to sell the securities before the anticipated recovery of their amortized cost basis. To the best of management’s knowledge and based on our consideration of the qualitative factors associated with each security, there were no securities in our investment and MBS portfolio with an other-than-temporary impairment at September 30, 2015.

Interest income recognized on securities for the periods presented (in thousands):

 
Three Months Ended
September 30,
 
2015
 
2014
U.S. Treasury
$
360

 
$
150

U.S. Government Agency Debentures
33

 

State and Political Subdivisions
5,550

 
6,332

Other Stocks and Bonds
54

 
53

Other Equity Securities
29

 

Mortgage-backed Securities
8,318

 
6,070

Total interest income on securities
$
14,344

 
$
12,605

 
Nine Months Ended
September 30,
 
2015
 
2014
U.S. Treasury
$
821

 
$
191

U.S. Government Agency Debentures
97

 
100

State and Political Subdivisions
17,065

 
18,333

Other Stocks and Bonds
158

 
156

Other Equity Securities
90

 

Mortgage-backed Securities
24,446

 
21,309

Total interest income on securities
$
42,677