Document
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 June 30, 2016
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 July 25, 2016 was 26,251,270 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)
 
 
June 30,
2016
 
December 31,
2015
ASSETS
 
 
 
 
Cash and due from banks
 
$
45,663

 
$
54,288

Interest earning deposits
 
18,450

 
26,687

Total cash and cash equivalents
 
64,113

 
80,975

Securities available for sale, at estimated fair value
 
1,416,335

 
1,460,492

Securities held to maturity, at carrying value (estimated fair value of $829,003 and $799,763, respectively)
 
784,925

 
784,296

FHLB stock, at cost
 
47,702

 
51,047

Other investments
 
5,428

 
5,462

Loans held for sale
 
5,883

 
3,811

Loans:
 
 

 
 

Loans
 
2,384,321

 
2,431,753

Less:  Allowance for loan losses
 
(14,908
)
 
(19,736
)
Net Loans
 
2,369,413

 
2,412,017

Premises and equipment, net
 
107,242

 
107,929

Goodwill
 
91,520

 
91,520

Other intangible assets, net
 
5,534

 
6,548

Interest receivable
 
22,194

 
22,700

Deferred tax asset
 
6,651

 
19,903

Unsettled trades to sell securities
 
—

 
9,343

Bank owned life insurance
 
96,375

 
95,080

Other assets
 
11,690

 
10,953

TOTAL ASSETS
 
$
5,035,005

 
$
5,162,076

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 

 
 

Deposits:
 
 

 
 

Noninterest bearing
 
$
679,831

 
$
672,470

Interest bearing
 
2,890,418

 
2,782,937

Total deposits
 
3,570,249

 
3,455,407

Short-term obligations:
 
 

 
 

Federal funds purchased and repurchase agreements
 
11,065

 
2,429

FHLB advances
 
374,652

 
645,407

Total short-term obligations
 
385,717

 
647,836

Long-term obligations:
 
 

 
 

FHLB advances
 
498,837

 
502,281

Long-term debt
 
60,311

 
60,311

Total long-term obligations
 
559,148

 
562,592

Unsettled trades to purchase securities
 
11,793

 
19,350

Other liabilities
 
35,798

 
32,829

TOTAL LIABILITIES
 
4,562,705

 
4,718,014

 
 
 
 
 
Off-Balance-Sheet Arrangements, Commitments and Contingencies (Note 13)
 


 


 
 
 
 
 
Shareholders’ equity:
 
 

 
 

Common stock ($1.25 par value, 40,000,000 shares authorized, 29,164,334 shares issued at June 30, 2016 and 27,865,798 shares issued at December 31, 2015)
 
36,455

 
34,832

Paid-in capital
 
458,817

 
424,078

Retained earnings
 
19,874

 
41,527

Treasury stock, at cost (2,913,064 at June 30, 2016 and 2,469,638 at December 31, 2015)
 
(47,891
)
 
(37,692
)
Accumulated other comprehensive income (loss)
 
5,045

 
(18,683
)
TOTAL SHAREHOLDERS’ EQUITY
 
472,300

 
444,062

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
 
$
5,035,005

 
$
5,162,076


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
 
Six Months Ended
 
June 30,
 
June 30,
 
2016
 
2015
 
2016
 
2015
Interest income
 
 
 
 
 
 
 
Loans
$
26,233

 
$
23,887

 
$
53,998

 
$
47,803

Investment securities – taxable
107

 
459

 
321

 
696

Investment securities – tax-exempt
5,137

 
5,644

 
10,492

 
11,509

Mortgage-backed securities
9,366

 
7,666

 
18,757

 
16,128

FHLB stock and other investments
185

 
65

 
402

 
158

Other interest earning assets
61

 
29

 
131

 
63

Total interest income
41,089

 
37,750

 
84,101

 
76,357

Interest expense
 

 
 

 
 

 
 

Deposits
3,515

 
2,493

 
6,771

 
5,022

Short-term obligations
906

 
154

 
1,602

 
296

Long-term obligations
2,289

 
2,198

 
4,732

 
4,343

Total interest expense
6,710

 
4,845

 
13,105

 
9,661

Net interest income
34,379

 
32,905

 
70,996

 
66,696

Provision for loan losses
3,768

 
268

 
6,084

 
4,116

Net interest income after provision for loan losses
30,611

 
32,637

 
64,912

 
62,580

Noninterest income
 

 
 

 
 

 
 

Deposit services
5,099

 
4,920

 
10,184

 
9,909

Net gain on sale of securities available for sale
728

 
105

 
3,169

 
2,581

Gain on sale of loans
873

 
822

 
1,516

 
1,199

Trust income
869

 
820

 
1,724

 
1,713

Bank owned life insurance income
647

 
653

 
1,321

 
1,322

Brokerage services
535

 
472

 
1,110

 
1,111

Other
619

 
1,139

 
1,942

 
1,884

Total noninterest income
9,370

 
8,931

 
20,966

 
19,719

Noninterest expense
 

 
 

 
 

 
 

Salaries and employee benefits
14,849

 
16,869

 
32,581

 
35,068

Occupancy expense
2,993

 
3,105

 
6,328

 
6,304

Advertising, travel & entertainment
722

 
683

 
1,407

 
1,340

ATM and debit card expense
736

 
750

 
1,448

 
1,429

Professional fees
1,478

 
793

 
2,816

 
1,535

Software and data processing expense
739

 
1,237

 
1,488

 
2,268

Telephone and communications
468

 
603

 
952

 
1,072

FDIC insurance
645

 
629

 
1,283

 
1,267

FHLB prepayment fees
148

 
—

 
148

 
—

Other
3,036

 
3,768

 
6,771

 
7,603

Total noninterest expense
25,814

 
28,437

 
55,222

 
57,886

 
 
 
 
 
 
 
 
Income before income tax expense
14,167

 
13,131

 
30,656

 
24,413

Income tax expense
2,772

 
1,967

 
5,745

 
3,870

Net income
$
11,395

 
$
11,164

 
$
24,911

 
$
20,543

Earnings per common share – basic
$
0.43

 
$
0.42

 
$
0.94

 
$
0.77

Earnings per common share – diluted
$
0.43

 
$
0.42

 
$
0.94

 
$
0.77

Dividends paid per common share
$
0.24

 
$
0.23

 
$
0.47

 
$
0.46


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

2
Table of Contents


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

June 30,
 
June 30,
 
2016
 
2015
 
2016
 
2015
Net income
$
11,395

 
$
11,164

 
$
24,911

 
$
20,543

Other comprehensive income (loss):
 

 
 

 
 

 
 

Securities available for sale and transferred securities:
 
 
 
 
 
 
 
Net unrealized holding gains (losses) on available for sale securities during the period
16,247

 
(16,244
)
 
43,991

 
(6,724
)
Change in net unrealized loss on securities transferred to held to maturity
—

 
1,329

 
—

 
1,329

Reclassification adjustment for amortization of unrealized losses on securities transferred to held to maturity
87

 
244

 
144

 
526

Reclassification adjustment for net gain on sale of available for sale securities, included in net income
(728
)
 
(105
)
 
(3,169
)
 
(2,581
)
Derivatives:
 
 
 
 
 
 
 
Change in net unrealized loss on effective cash flow hedge interest rate swap derivatives
(3,134
)
 
—

 
(5,378
)
 
—

Pension plans:
 
 
 
 
 
 
 
Amortization of net actuarial loss, included in net periodic benefit cost
502

 
614

 
913

 
1,145

Amortization of prior service cost (credit), included in net periodic benefit cost
8

 
(4
)
 
4

 
(8
)
Other comprehensive income (loss), before tax
12,982

 
(14,166
)
 
36,505

 
(6,313
)
Income tax (benefit) expense related to other items of comprehensive income
(4,544
)
 
4,959

 
(12,777
)
 
2,210

Other comprehensive income (loss), net of tax
8,438

 
(9,207
)
 
23,728

 
(4,103
)
Comprehensive income
$
19,833

 
$
1,957

 
$
48,639

 
$
16,440


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

3
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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, 2014
$
33,223

 
$
389,886

 
$
55,396

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

Net income
—

 
—

 
20,543

 
—

 
—

 
20,543

Other comprehensive loss
—

 
—

 
—

 
—

 
(4,103
)
 
(4,103
)
Issuance of common stock (21,499 shares)
26

 
587

 
—

 
—

 
—

 
613

Stock compensation expense
—

 
567

 
—

 
—

 
—

 
567

Tax benefits related to stock awards
—

 
32

 
—

 
—

 
—

 
32

Net issuance of common stock under employee stock plans
15

 
157

 
(21
)
 
—

 
—

 
151

Cash dividends paid on common stock ($0.46 per share)
—

 
—

 
(11,372
)
 
—

 
—

 
(11,372
)
Stock dividend declared
1,512

 
31,163

 
(32,675
)
 
—

 
—

 
—

Balance at June 30, 2015
$
34,776

 
$
422,392

 
$
31,871

 
$
(37,692
)
 
$
(19,673
)
 
$
431,674

 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2015
$
34,832

 
$
424,078

 
$
41,527

 
$
(37,692
)
 
$
(18,683
)
 
$
444,062

Net income
—

 
—

 
24,911

 
—

 
—

 
24,911

Other comprehensive income
—

 
—

 
—

 
—

 
23,728

 
23,728

Issuance of common stock (23,015 shares)
29

 
619

 
—

 
—

 
—

 
648

Purchase of common stock (443,426 shares)
—

 
—

 
—

 
(10,199
)
 
—

 
(10,199
)
Stock compensation expense
—

 
758

 
—

 
—

 
—

 
758

Tax benefits related to stock awards
—

 
17

 
—

 
—

 
—

 
17

Net issuance of common stock under employee stock plans
29

 
145

 
(31
)
 
—

 
—

 
143

Cash dividends paid on common stock ($0.47 per share)
—

 
—

 
(11,768
)
 
—

 
—

 
(11,768
)
Stock dividend declared
1,565

 
33,200

 
(34,765
)
 
—

 
—

 
—

Balance at June 30, 2016
$
36,455

 
$
458,817

 
$
19,874

 
$
(47,891
)
 
$
5,045

 
$
472,300


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

4
Table of Contents


SOUTHSIDE BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
(UNAUDITED)
(in thousands)
 
Six Months Ended
 
June 30,
 
2016
 
2015
OPERATING ACTIVITIES:
 
 
 
Net income
$
24,911

 
$
20,543

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

 
 

Depreciation and net amortization
4,328

 
4,288

Securities premium amortization (discount accretion), net
9,366

 
11,276

Loan (discount accretion) premium amortization, net
(1,680
)
 
(1,599
)
Provision for loan losses
6,084

 
4,116

Stock compensation expense
758

 
567

Deferred tax expense (benefit)
506

 
(2,019
)
Tax benefit related to stock awards
(17
)
 
(32
)
Net gain on sale of securities available for sale
(3,169
)
 
(2,581
)
Net (gain) loss on premises and equipment
(19
)
 
137

Gross proceeds from sales of loans held for sale
42,602

 
30,572

Gross originations of loans held for sale
(44,674
)
 
(35,104
)
Net loss on other real estate owned
147

 
382

Net change in:
 

 
 

Interest receivable
506

 
(230
)
Other assets
(2,599
)
 
2,070

Interest payable
378

 
(52
)
Other liabilities
(1,872
)
 
(3,601
)
Net cash provided by operating activities
35,556

 
28,733

 
 
 
 
INVESTING ACTIVITIES:
 

 
 

Securities available for sale:
 
 
 
Purchases
(355,720
)
 
(528,964
)
Sales
352,299

 
336,136

Maturities, calls and principal repayments
97,816

 
158,022

Securities held to maturity:
 

 
 

Purchases
(23,542
)
 
(56,752
)
Maturities, calls and principal repayments
9,206

 
11,411

Proceeds from redemption of FHLB stock
3,644

 
5,692

Purchases of FHLB stock and other investments
(235
)
 
(3,594
)
Net loans originated
37,446

 
1,235

Purchases of premises and equipment
(3,327
)
 
(1,828
)
Proceeds from sales of premises and equipment
51

 
6

Proceeds from sales of other real estate owned
587

 
634

Proceeds from sales of repossessed assets
568

 
1,619

Net cash provided by (used in) investing activities
118,793

 
(76,383
)
 
 
 
 
(continued)
 
 
 

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SOUTHSIDE BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
(UNAUDITED) (continued)
(in thousands)
 
Six Months Ended
 
June 30,
 
2016
 
2015
FINANCING ACTIVITIES:
 
 
 
Net change in deposits
$
115,428

 
$
94,908

Net increase (decrease) in federal funds purchased and repurchase agreements
8,636

 
(2,153
)
Proceeds from FHLB advances
3,815,906

 
8,447,303

Repayment of FHLB advances
(4,090,022
)
 
(8,489,458
)
Tax benefit related to stock awards
17

 
32

Net issuance of common stock under employee stock plan
143

 
151

Purchase of common stock
(10,199
)
 
—

Proceeds from the issuance of common stock
648

 
613

Cash dividends paid
(11,768
)
 
(11,372
)
Net cash (used in) provided by financing activities
(171,211
)
 
40,024

 
 
 
 
Net decrease in cash and cash equivalents
(16,862
)
 
(7,626
)
Cash and cash equivalents at beginning of period
80,975

 
84,655

Cash and cash equivalents at end of period
$
64,113

 
$
77,029

 
 
 
 
SUPPLEMENTAL DISCLOSURES FOR CASH FLOW INFORMATION:
 

 
 


 
 
 
Interest paid
$
12,727

 
$
9,713

Income taxes paid
$
5,500

 
$
2,000

 
 
 
 
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES:
 

 
 


 
 
 
Loans transferred to other repossessed assets and real estate through foreclosure
$
764

 
$
1,073

Transfer of available for sale securities to held to maturity securities
$
—

 
$
57,724

Adjustment to pension liability
$
(917
)
 
$
(1,137
)
5% stock dividend
$
34,765

 
$
32,675

Unsettled trades to purchase securities
$
(11,793
)
 
$
(3,453
)

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


6
Table of Contents


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. “Omni” refers to OmniAmerican Bancorp, Inc., a bank holding company acquired by Southside on December 17, 2014. “SFG” refers to SFG Finance, LLC (formerly Southside Financial Group, LLC), which was a wholly-owned subsidiary of the Bank that was dissolved in April 2015.
The consolidated balance sheet as of June 30, 2016, and the related consolidated statements of income, comprehensive income, changes in shareholders’ equity, cash flows and notes to the financial statements for the three- and six-month periods ended June 30, 2016 and 2015 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.
On May 5, 2016, our board of directors declared a 5% stock dividend to common stock shareholders of record as of May 31, 2016, which was paid on June 28, 2016. All share data has been adjusted to give retroactive recognition to stock dividends.
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, 2015.  
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, 2015. The accounting and reporting policies we follow with respect to our derivative instruments and hedging activities are presented below.

Derivative Financial Instruments and Hedging Activities

Derivative financial instruments are carried on the consolidated balance sheets as other assets or other liabilities, as applicable, at estimated fair value. The accounting for changes in the fair value (i.e., gains or losses) of a derivative financial instrument is determined by whether it has been designated and qualifies as part of a hedging relationship and, further, by the type of hedging relationship. We present derivative financial instruments at fair value in the consolidated balance sheets on a net basis when a right of offset exists, based on transactions with a single counterparty and any cash collateral paid to and/or received from that counterparty for derivative contracts that are subject to legally enforceable master netting arrangements.

For derivative instruments that are designated and qualify as cash flow hedges (i.e., hedging the exposure to variability in expected future cash flows that is attributable to a particular risk), the effective portion of the gain or loss on the derivative instrument is reported as a component of other comprehensive income and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. The remaining gain or loss on the derivative instrument in excess of the cumulative change in the present value of future cash flows of the hedged item (i.e., the ineffective portion), if any, is recognized in current earnings during the period of change. For derivative instruments not designated as hedging instruments, the gain or loss is recognized in current earnings during the period of change.

For derivatives designated as hedging instruments at inception, statistical regression analysis is used at inception and for each reporting period thereafter to assess whether the derivative used has been and is expected to be highly effective in offsetting changes in the fair value or cash flows of the hedged item. All components of each derivative instrument’s gain or loss are included in the assessment of hedge effectiveness. Net hedge ineffectiveness is recorded in “other noninterest income” on the consolidated statements of income.

Further information on our derivative instruments and hedging activities is included in “Note 10 - Derivative Financial Instruments and Hedging Activities.”

7
Table of Contents


Accounting Pronouncements
In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842).” ASU 2016-02 requires a lessee to recognize assets and liabilities for leases with lease terms of more than 12 months. Consistent with current GAAP, the recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee primarily will depend on its classification as a finance or operating lease. However, unlike current GAAP which requires only capital leases to be recognized on the balance sheet, the new ASU will require both types of leases to be recognized on the balance sheet. ASU 2016-02 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted. We are currently evaluating the potential impact of ASU 2016-02 on our consolidated financial statements.
In March 2016, the FASB issued ASU 2016-09, “Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting.” ASU 2016-09 simplifies several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification in the statement of cash flows. The ASU requires that all excess tax benefits and tax deficiencies be recognized as income tax expense or benefit in the income statement and should be classified along with other income tax cash flows as an operating activity instead of a financing activity as currently required under GAAP. The ASU also simplifies accounting for forfeitures by allowing an entity to make an entity-wide accounting policy election either to estimate the number of forfeitures expected to occur or to recognize the effects of forfeitures when they occur in compensation cost. Additionally, cash paid by an employer when directly withholding shares for tax-withholding purposes should be classified as a financing activity, and to qualify for equity classification, an employer can now withhold up to the maximum statutory tax rate instead of the minimum statutory tax rate as currently required by GAAP. ASU 2016-09 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. Early adoption is permitted. ASU 2016-09 is not expected to have a significant impact on our consolidated financial statements.
In April 2016, the FASB issued ASU 2016-10, “Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing.” ASU 2016-10 clarifies certain aspects of ASU 2014-09 “Revenue from Contracts with Customers (Topic 606)” related to (i) identifying performance obligations and (ii) the licensing implementation guidance. ASU 2016-10 is effective concurrently with ASU 2014-09 which we are required to adopt in the first quarter of fiscal year 2018. 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 cumulative adjustment. We are currently evaluating the potential impact of ASU 2016-10 on our consolidated financial statements.

In May 2016, the FASB issued ASU 2016-12, “Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients.” ASU 2016-12 clarifies ASU 2014-09 “Revenue from Contracts with Customers (Topic 606)” guidance on (i) assessing collectability, (ii) presenting sales tax, (iii) measuring non-cash consideration and (iv) certain transition matters. ASU 2016-12 is effective concurrently with ASU 2014-09 which we are required to adopt in the first quarter of fiscal year 2018. 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 cumulative adjustment. We are currently evaluating the potential impact of ASU 2016-12 on our consolidated financial statements.

In June 2016, the FASB issued ASU 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” ASU 2016-13 introduces an approach based on expected losses to estimate credit losses on certain types of financial instruments. ASU 2016-13 also modifies the impairment model for available-for-sale debt securities and provides for a simplified accounting model for purchased financial assets with credit deterioration since their origination. ASU 2016-13 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. The guidance requires companies to apply the requirements in the year of adoption through cumulative adjustment with some aspects of the update requiring a prospective transition approach. We are currently evaluating the potential impact of ASU 2016-13 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 total merger consideration for the Omni merger was $298.3 million. The operations of Omni were merged into ours as of the date of the acquisition.
The fair value of assets acquired, adjusted for subsequent measurement period adjustments, excluding goodwill, totaled $1.36 billion, including total loans of $763.5 million and total investment securities of $428.4 million.  Total fair value of the liabilities assumed, adjusted for subsequent measurement period adjustments, totaled $1.13 billion, including deposits of $801.3 million.  We recognized $69.5 million in goodwill associated with the Omni acquisition.  The goodwill resulting from the acquisition represents consideration paid in excess of the net assets acquired and the value expected from the opportunities to strategically grow our franchise in the greater Fort Worth market area and to enhance our operations through customer synergies and efficiencies, thereby providing enhanced customer service.  Goodwill was $91.5 million as of June 30, 2016 and December 31, 2015 and is not expected to be deductible for tax purposes.
We recognized a core deposit intangible of $8.6 million in connection with the Omni acquisition, which will be amortized using an accelerated method over a 10 year period consistent with expected future cash flows.
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.  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, 2015.



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3.     Earnings Per Share
Earnings per share on a basic and diluted basis have been calculated as follows (in thousands, except per share amounts):
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2016
 
2015
 
2016
 
2015
Basic and Diluted Earnings:
 
 
 
 
 
 
 
Net income
$
11,395

 
$
11,164

 
$
24,911

 
$
20,543

Basic weighted-average shares outstanding
26,230

 
26,608

 
26,340

 
26,600

Add:   Stock awards
119

 
93

 
94

 
89

Diluted weighted-average shares outstanding
26,349

 
26,701

 
26,434

 
26,689

 
 

 
 

 
 

 
 

Basic Earnings Per Share:
$
0.43

 
$
0.42

 
$
0.94

 
$
0.77

 
 

 
 

 
 

 
 

Diluted Earnings Per Share:
$
0.43

 
$
0.42

 
$
0.94

 
$
0.77

For the three- and six-month periods ended June 30, 2016, there were approximately 22,000 and 53,000 anti-dilutive shares, respectively. For the three- and six-month periods ended June 30, 2015, there were approximately 13,000 and 12,000 anti-dilutive shares, respectively.


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4.     Accumulated Other Comprehensive Income (Loss)

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

 
Three Months Ended June 30, 2016
 
 
 
 
Pension Plans
 
 
 
Unrealized Gains (Losses) on Securities
 
Unrealized Gains (Losses) on Derivatives
 
Net Prior
 Service
 (Cost)
 Credit
 
Net Gain (Loss)
 
Total
Beginning balance, net of tax
$
16,245

 
$
(1,459
)
 
$
(47
)
 
$
(18,132
)
 
$
(3,393
)
Other comprehensive income (loss):
 
 
 
 
 
 
 
 
 
Other comprehensive income (loss) before reclassifications
16,247

 
(3,134
)
 
—

 
—

 
13,113

Reclassified from accumulated other comprehensive income
(641
)
 
—

 
8

 
502

 
(131
)
Income tax (expense) benefit
(5,462
)
 
1,097

 
(3
)
 
(176
)
 
(4,544
)
Net current-period other comprehensive income (loss), net of tax
10,144

 
(2,037
)
 
5

 
326

 
8,438

Ending balance, net of tax
$
26,389

 
$
(3,496
)
 
$
(42
)
 
$
(17,806
)
 
$
5,045

 
 
 
 
 
 
 
 
 
 
 
Six Months Ended June 30, 2016
 

 
 
Pension Plans
 
 
 
Unrealized Gains (Losses) on Securities
 
Unrealized Gains (Losses) on Derivatives
 
Net Prior
Service
(Cost)
Credit
 
Net Gain (Loss)
 
Total
Beginning balance, net of tax
$
(239
)
 
$
—

 
$
(44
)
 
$
(18,400
)
 
$
(18,683
)
Other comprehensive income (loss):
 
 
 
 
 
 
 
 
 
Other comprehensive income (loss) before reclassifications
43,991

 
(5,378
)
 
—

 
—

 
38,613

Reclassified from accumulated other comprehensive income
(3,025
)
 
—

 
4

 
913

 
(2,108
)
Income tax (expense) benefit
(14,338
)
 
1,882

 
(2
)
 
(319
)
 
(12,777
)
Net current-period other comprehensive income (loss), net of tax
26,628

 
(3,496
)
 
2

 
594

 
23,728

Ending balance, net of tax
$
26,389

 
$
(3,496
)
 
$
(42
)
 
$
(17,806
)
 
$
5,045



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Three Months Ended June 30, 2015
 
 
 
 
Pension Plans
 
 
 
Unrealized Gains (Losses) on Securities
 
Unrealized Gains (Losses) on Derivatives
 
Net Prior
 Service
 (Cost)
 Credit
 
Net Gain (Loss)
 
Total
Beginning balance, net of tax
$
11,000

 
$
—

 
$
4

 
$
(21,470
)
 
$
(10,466
)
Other comprehensive income (loss):
 
 
 
 
 
 
 
 
 
Other comprehensive income (loss) before reclassifications
(14,915
)
 
—

 
—

 
—

 
(14,915
)
Reclassified from accumulated other comprehensive income
139

 
—

 
(4
)
 
614

 
749

Income tax (expense) benefit
5,172

 
—

 
2

 
(215
)
 
4,959

Net current-period other comprehensive income (loss), net of tax
(9,604
)
 
—

 
(2
)
 
399

 
(9,207
)
Ending balance, net of tax
$
1,396

 
$
—

 
$
2

 
$
(21,071
)
 
$
(19,673
)
 
 
 
 
 
 
 
 
 
 
 
Six Months Ended June 30, 2015
 

 
 
Pension Plans
 
 
 
Unrealized Gains (Losses) on Securities
 
Unrealized Gains (Losses) on Derivatives
 
Net Prior
 Service
 (Cost)
 Credit
 
Net Gain (Loss)
 
Total
Beginning balance, net of tax
$
6,238

 
$
—

 
$
7

 
$
(21,815
)
 
$
(15,570
)
Other comprehensive income (loss):
 
 
 
 
 
 
 
 
 
Other comprehensive income (loss) before reclassifications
(5,395
)
 
—

 
—

 
—

 
(5,395
)
Reclassified from accumulated other comprehensive income
(2,055
)
 
—

 
(8
)
 
1,145

 
(918
)
Income tax (expense) benefit
2,608

 
—

 
3

 
(401
)
 
2,210

Net current-period other comprehensive income (loss), net of tax
(4,842
)
 
—

 
(5
)
 
744

 
(4,103
)
Ending balance, net of tax
$
1,396

 
$
—

 
$
2

 
$
(21,071
)
 
$
(19,673
)

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Table of Contents


The reclassifications out of accumulated other comprehensive income (loss) into net income are presented below (in thousands):
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2016
 
2015
 
2016
 
2015
 
 
 
 
 
 
 
 
Unrealized losses on securities transferred to held to maturity:
 
 
 
 
 
 
 
Amortization of unrealized losses (1)
$
(87
)
 
$
(244
)
 
$
(144
)
 
$
(526
)
Tax benefit
30

 
85

 
50

 
184

Net of tax
(57
)
 
(159
)
 
(94
)
 
(342
)
 
 
 
 
 
 
 
 
Unrealized gains and losses on available for sale securities:
 
 
 
 
 
 
 
Realized net gain on sale of securities (2)
$
728

 
$
105

 
$
3,169

 
$
2,581

Tax expense
(255
)
 
(36
)
 
(1,109
)
 
(903
)
Net of tax
473

 
69

 
2,060

 
1,678

 
 
 
 
 
 
 
 
Amortization of pension plan:
 
 
 
 
 
 
 
Net actuarial loss (3)
$
(502
)
 
$
(614
)
 
$
(913
)
 
$
(1,145
)
Prior service credit (3)
(8
)
 
4

 
(4
)
 
8

Total before tax
(510
)
 
(610
)
 
(917
)
 
(1,137
)
Tax benefit
179

 
213

 
321

 
398

Net of tax
(331
)
 
(397
)
 
(596
)
 
(739
)
Total reclassifications for the period, net of tax
$
85

 
$
(487
)
 
$
1,370

 
$
597

(1)    Included in interest income on the consolidated statements of income.
(2)    Listed as net gain on sale of securities available for sale on the consolidated statements of income.
(3)
These accumulated other comprehensive income components are included in the computation of net periodic pension cost (income) 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 June 30, 2016 and December 31, 2015 are reflected in the tables below (in thousands):
 
 
June 30, 2016
 
 
 
 
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:
 
 
 
 
 
 
 
 
 
 
 
 
 

State and Political Subdivisions
 
$
282,422

 
$
15,013

 
$
19

 
$
297,416

 
$
—

 
$
—

 
$
297,416

Other Stocks and Bonds
 
7,774

 
64

 
16

 
7,822

 
—

 
—

 
7,822

Other Equity Securities
 
6,045

 
94

 
—

 
6,139

 
—

 
—

 
6,139

Mortgage-backed Securities: (1)
 
 

 
 

 
 

 
 
 
 
 
 
 
 
Residential
 
660,953

 
15,504

 
155

 
676,302

 
—

 
—

 
676,302

Commercial

409,828

 
18,828

 
—

 
428,656

 
—

 
—

 
428,656

Total
 
$
1,367,022

 
$
49,503

 
$
190

 
$
1,416,335

 
$
—

 
$
—

 
$
1,416,335

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
HELD TO MATURITY
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Investment Securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
State and Political Subdivisions
 
$
385,387

 
$
4,207

 
$
8,899

 
$
380,695

 
$
21,710

 
$
883

 
$
401,522

Mortgage-backed Securities: (1)
 
 

 
 

 
 

 
 
 
 
 
 
 
 
Residential
 
37,493

 
—

 
41

 
37,452

 
2,272

 
3

 
39,721

Commercial
 
370,759

 
1,150

 
5,131

 
366,778

 
20,982

 
—

 
387,760

Total
 
$
793,639

 
$
5,357

 
$
14,071

 
$
784,925

 
$
44,964

 
$
886

 
$
829,003


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Table of Contents


 
 
December 31, 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
 
$
103,906

 
$
61

 
$
380

 
$
103,587

 
$
—

 
$
—

 
$
103,587

State and Political Subdivisions
 
236,534

 
8,323

 
611

 
244,246


—

 
—

 
244,246

Other Stocks and Bonds
 
12,772

 
63

 
45


12,790


—

 
—

 
12,790

Other Equity Securities
 
6,052

 
—

 
36

 
6,016

 
—

 
—

 
6,016

Mortgage-backed Securities: (1)
 
 
 
 
 
 

 
 

 
 
 
 
 
Residential
 
580,621

 
9,120

 
1,239


588,502


—

 
—

 
588,502

Commercial

512,116


466


7,231


505,351


—

 
—

 
505,351

Total
 
$
1,452,001

 
$
18,033

 
$
9,542

 
$
1,460,492

 
$
—

 
$
—

 
$
1,460,492

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
HELD TO MATURITY
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Investment Securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
State and Political Subdivisions
 
$
389,997

 
$
4,772

 
$
9,273

 
$
385,496

 
$
13,061

 
$
1,363

 
$
397,194

Mortgage-backed Securities: (1)
 
 

 
 

 
 

 
 
 
 
 
 
 
 

Residential
 
31,430

 
—

 
51

 
31,379

 
2,018

 
1

 
33,396

Commercial
 
371,727

 
1,233

 
5,539

 
367,421

 
4,232

 
2,480

 
369,173

Total
 
$
793,154

 
$
6,005

 
$
14,863

 
$
784,296

 
$
19,311

 
$
3,844

 
$
799,763


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

From time to time, we may transfer securities from available for sale (“AFS”) to held to maturity (“HTM”) due to overall balance sheet strategies. 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. 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. There were no securities transferred from AFS to HTM during the six months ended June 30, 2016.


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Table of Contents


The following tables represent the fair value and unrealized loss on securities as of June 30, 2016 and December 31, 2015 (in thousands):
 
As of June 30, 2016
 
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
$
3,037

 
$
13

 
$
1,110

 
$
6

 
$
4,147

 
$
19

Other Stocks and Bonds
2,984

 
16

 
—

 
—

 
2,984

 
16

Mortgage-backed Securities:
 
 
 
 
 
 
 
 
 
 
 
Residential
45,178

 
116

 
16,400

 
39

 
61,578

 
155

Total
$
51,199

 
$
145

 
$
17,510

 
$
45

 
$
68,709

 
$
190

HELD TO MATURITY
 

 
 

 
 

 
 

 
 

 
 

Investment Securities:
 
 
 
 
 
 
 
 
 
 
 
State and Political Subdivisions
$
2,925

 
$
21

 
$
38,851

 
$
862

 
$
41,776

 
$
883

Mortgage-backed Securities:
 
 
 
 
 
 
 
 
 
 
 
Residential
5,375

 
3

 
—

 
—

 
5,375

 
3

Total
$
8,300

 
$
24

 
$
38,851

 
$
862

 
$
47,151

 
$
886

 
 
 
 
 
 
 
 
 
 
 
 
 
As of December 31, 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:
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury
$
64,172

 
$
380

 
$
—

 
$
—

 
$
64,172

 
$
380

State and Political Subdivisions
15,550

 
116

 
19,270

 
495

 
34,820

 
611

Other Stocks and Bonds
2,954

 
45

 
—

 
—

 
2,954

 
45

   Other Equity Securities
6,016

 
36

 
—

 
—

 
6,016

 
36

Mortgage-backed Securities:
 
 
 
 
 
 
 
 
 
 
 
Residential
229,514

 
1,215

 
3,817

 
24

 
233,331

 
1,239

Commercial
422,316

 
7,039

 
5,110

 
192

 
427,426

 
7,231

Total
$
740,522

 
$
8,831

 
$
28,197

 
$
711

 
$
768,719

 
$
9,542

HELD TO MATURITY
 

 
 

 
 

 
 

 
 

 
 

Investment Securities:
 
 
 
 
 
 
 
 
 
 
 
State and Political Subdivisions
$
24,340

 
$
214

 
$
62,240

 
$
1,149

 
$
86,580

 
$
1,363

Mortgage-backed Securities:
 
 
 
 
 
 
 
 
 
 
 
Residential
1,717

 
1

 
—

 
—