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 September 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 October 24, 2016 was 26,286,033 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,
2016
 
December 31,
2015
ASSETS
 
 
 
 
Cash and due from banks
 
$
54,255

 
$
54,288

Interest earning deposits
 
144,833

 
26,687

Total cash and cash equivalents
 
199,088

 
80,975

Securities available for sale, at estimated fair value
 
1,622,128

 
1,460,492

Securities held to maturity, at carrying value (estimated fair value of $814,112 and $799,763, respectively)
 
775,682

 
784,296

FHLB stock, at cost
 
51,901

 
51,047

Other investments
 
5,442

 
5,462

Loans held for sale
 
5,301

 
3,811

Loans:
 
 

 
 

Loans
 
2,483,641

 
2,431,753

Less:  Allowance for loan losses
 
(15,993
)
 
(19,736
)
Net Loans
 
2,467,648

 
2,412,017

Premises and equipment, net
 
106,777

 
107,929

Goodwill
 
91,520

 
91,520

Other intangible assets, net
 
5,060

 
6,548

Interest receivable
 
17,458

 
22,700

Deferred tax asset, net
 
9,236

 
19,903

Unsettled trades to sell securities
 
—

 
9,343

Bank owned life insurance
 
97,002

 
95,080

Other assets
 
10,660

 
10,873

TOTAL ASSETS
 
$
5,464,903

 
$
5,161,996

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 

 
 

Deposits:
 
 

 
 

Noninterest bearing
 
$
747,270

 
$
672,470

Interest bearing
 
2,834,117

 
2,782,937

Total deposits
 
3,581,387

 
3,455,407

Short-term obligations:
 
 

 
 

Federal funds purchased and repurchase agreements
 
11,516

 
2,429

FHLB advances
 
709,118

 
645,407

Total short-term obligations
 
720,634

 
647,836

Long-term obligations:
 
 

 
 

FHLB advances
 
463,316

 
502,281

Subordinated notes, net of unamortized debt issuance costs
 
98,089

 
—

Long-term debt, net of unamortized debt issuance costs
 
60,235

 
60,231

Total long-term obligations
 
621,640

 
562,512

Unsettled trades to purchase securities
 
30,214

 
19,350

Other liabilities
 
38,468

 
32,829

TOTAL LIABILITIES
 
4,992,343

 
4,717,934

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


 


 
 
 
 
 
Shareholders’ equity:
 
 

 
 

Common stock ($1.25 par value, 40,000,000 shares authorized, 29,191,241 shares issued at September 30, 2016 and 27,865,798 shares issued at December 31, 2015)
 
36,489

 
34,832

Paid-in capital
 
459,808

 
424,078

Retained earnings
 
26,420

 
41,527

Treasury stock, at cost (2,913,064 at September 30, 2016 and 2,469,638 at December 31, 2015)
 
(47,891
)
 
(37,692
)
Accumulated other comprehensive income (loss)
 
(2,266
)
 
(18,683
)
TOTAL SHAREHOLDERS’ EQUITY
 
472,560

 
444,062

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
 
$
5,464,903

 
$
5,161,996


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

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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,
 
2016
 
2015
 
2016
 
2015
Interest income
 
 
 
 
 
 
 
Loans
$
25,740

 
$
23,787

 
$
79,738

 
$
71,590

Investment securities – taxable
251

 
475

 
572

 
1,171

Investment securities – tax-exempt
5,467

 
5,551

 
15,959

 
17,060

Mortgage-backed securities
9,399

 
8,318

 
28,156

 
24,446

FHLB stock and other investments
186

 
65

 
588

 
223

Other interest earning assets
89

 
15

 
220

 
78

Total interest income
41,132

 
38,211

 
125,233

 
114,568

Interest expense
 

 
 

 
 

 
 

Deposits
3,604

 
2,485

 
10,375

 
7,507

Short-term obligations
1,122

 
354

 
2,724

 
650

Long-term obligations
2,476

 
2,089

 
7,210

 
6,434

Total interest expense
7,202

 
4,928

 
20,309

 
14,591

Net interest income
33,930

 
33,283

 
104,924

 
99,977

Provision for loan losses
1,631

 
2,276

 
7,715

 
6,392

Net interest income after provision for loan losses
32,299

 
31,007

 
97,209

 
93,585

Noninterest income
 

 
 

 
 

 
 

Deposit services
5,335

 
5,213

 
15,519

 
15,122

Net gain on sale of securities available for sale
2,343

 
875

 
5,512

 
3,456

Gain on sale of loans
818

 
305

 
2,334

 
1,504

Trust income
867

 
835

 
2,591

 
2,548

Bank owned life insurance income
656

 
661

 
1,977

 
1,983

Brokerage services
551

 
540

 
1,661

 
1,651

Other
1,162

 
932

 
3,104

 
2,816

Total noninterest income
11,732

 
9,361

 
32,698

 
29,080

Noninterest expense
 

 
 

 
 

 
 

Salaries and employee benefits
15,203

 
15,733

 
47,784

 
50,801

Occupancy expense
4,569

 
3,316

 
10,897

 
9,620

Advertising, travel & entertainment
588

 
642

 
1,995

 
1,982

ATM and debit card expense
868

 
617

 
2,316

 
2,046

Professional fees
1,148

 
825

 
3,964

 
2,360

Software and data processing expense
736

 
819

 
2,224

 
3,087

Telephone and communications
407

 
534

 
1,359

 
1,606

FDIC insurance
643

 
624

 
1,926

 
1,891

FHLB prepayment fees
—

 
—

 
148

 
—

Other
4,263

 
3,525

 
11,032

 
11,126

Total noninterest expense
28,425

 
26,635

 
83,645

 
84,519

 
 
 
 
 
 
 
 
Income before income tax expense
15,606

 
13,733

 
46,262

 
38,146

Income tax expense
2,741

 
1,971

 
8,486

 
5,841

Net income
$
12,865

 
$
11,762

 
$
37,776

 
$
32,305

Earnings per common share – basic
$
0.49

 
$
0.44

 
$
1.43

 
$
1.21

Earnings per common share – diluted
$
0.49

 
$
0.44

 
$
1.43

 
$
1.21

Dividends paid per common share
$
0.24

 
$
0.23

 
$
0.71

 
$
0.69


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

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

September 30,
 
September 30,
 
2016
 
2015
 
2016
 
2015
Net income
$
12,865

 
$
11,762

 
$
37,776

 
$
32,305

Other comprehensive income (loss):
 

 
 

 
 

 
 

Securities available for sale and transferred securities:
 
 
 
 
 
 
 
Net unrealized holding (losses) gains on available for sale securities during the period
(10,960
)
 
13,446

 
33,031

 
6,722

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

 
—

 
—

 
1,329

Reclassification adjustment for amortization of unrealized losses on securities transferred to held to maturity
16

 
220

 
160

 
746

Reclassification adjustment for net gain on sale of available for sale securities, included in net income
(2,343
)
 
(875
)
 
(5,512
)
 
(3,456
)
Derivatives:
 
 
 
 
 
 
 
Change in net unrealized loss on effective cash flow hedge interest rate swap derivatives
1,070

 
—

 
(5,125
)
 
—

Reclassification adjustment for net loss on interest rate swap derivatives, included in net income
521

 
—

 
1,338

 
—

Pension plans:
 
 
 
 
 
 
 
Amortization of net actuarial loss, included in net periodic benefit cost
458

 
691

 
1,371

 
1,836

Amortization of prior service credit, included in net periodic benefit cost
(10
)
 
(4
)
 
(6
)
 
(12
)
Other comprehensive (loss) income, before tax
(11,248
)
 
13,478

 
25,257

 
7,165

Income tax benefit (expense) related to items of other comprehensive income (loss)
3,937

 
(4,718
)
 
(8,840
)
 
(2,508
)
Other comprehensive (loss) income, net of tax
(7,311
)
 
8,760

 
16,417

 
4,657

Comprehensive income
$
5,554

 
$
20,522

 
$
54,193

 
$
36,962


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

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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
—

 
—

 
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

 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2015
$
34,832

 
$
424,078

 
$
41,527

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

Net income
—

 
—

 
37,776

 
—

 
—

 
37,776

Other comprehensive income
—

 
—

 
—

 
—

 
16,417

 
16,417

Issuance of common stock (33,622 shares)
42

 
950

 
—

 
—

 
—

 
992

Purchase of common stock (443,426 shares)
—

 
—

 
—

 
(10,199
)
 
—

 
(10,199
)
Stock compensation expense
—

 
1,156

 
—

 
—

 
—

 
1,156

Tax benefits related to stock awards
—

 
79

 
—

 
—

 
—

 
79

Net issuance of common stock under employee stock plans
50

 
345

 
(49
)
 
—

 
—

 
346

Cash dividends paid on common stock ($0.71 per share)
—

 
—

 
(18,069
)
 
—

 
—

 
(18,069
)
Stock dividend declared
1,565

 
33,200

 
(34,765
)
 
—

 
—

 
—

Balance at September 30, 2016
$
36,489

 
$
459,808

 
$
26,420

 
$
(47,891
)
 
$
(2,266
)
 
$
472,560


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

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SOUTHSIDE BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
(UNAUDITED)
(in thousands)
 
Nine Months Ended
 
September 30,
 
2016
 
2015
OPERATING ACTIVITIES:
 
 
 
Net income
$
37,776

 
$
32,305

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

 
 

Depreciation and net amortization
6,612

 
6,470

Securities premium amortization (discount accretion), net
14,245

 
16,895

Loan (discount accretion) premium amortization, net
(2,113
)
 
(2,065
)
Provision for loan losses
7,715

 
6,392

Stock compensation expense
1,156

 
981

Deferred tax expense (benefit)
1,916

 
(2,714
)
Tax benefit related to stock awards
(79
)
 
(61
)
Net gain on sale of securities available for sale
(5,512
)
 
(3,456
)
Net loss on premises and equipment
235

 
211

Gross proceeds from sales of loans held for sale
67,144

 
51,610

Gross originations of loans held for sale
(68,634
)
 
(53,594
)
Net loss on other real estate owned
224

 
387

Net gain on sale of customer receivables
(144
)
 
—

Net change in:
 

 
 

Interest receivable
5,242

 
5,293

Other assets
(2,094
)
 
2,121

Interest payable
726

 
28

Other liabilities
2,182

 
(1,064
)
Net cash provided by operating activities
66,597

 
59,739

 
 
 
 
INVESTING ACTIVITIES:
 

 
 

Securities available for sale:
 
 
 
Purchases
(761,900
)
 
(697,879
)
Sales
495,011

 
543,456

Maturities, calls and principal repayments
160,676

 
226,125

Securities held to maturity:
 

 
 

Purchases
(29,725
)
 
(80,714
)
Maturities, calls and principal repayments
22,029

 
17,994

Proceeds from redemption of FHLB stock
3,644

 
8,603

Purchases of FHLB stock and other investments
(4,433
)
 
(12,248
)
Net loans originated
(66,633
)
 
(58,658
)
Proceeds from sales of customer receivables
3,314

 
—

Purchases of premises and equipment
(5,189
)
 
(2,524
)
Proceeds from sales of premises and equipment
120

 
10

Proceeds from sales of other real estate owned
1,918

 
634

Proceeds from sales of repossessed assets
767

 
2,008

Net cash used in investing activities
(180,401
)
 
(53,193
)
 
 
 
 
(continued)
 
 
 

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SOUTHSIDE BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
(UNAUDITED) (continued)
(in thousands)
 
Nine Months Ended
 
September 30,
 
2016
 
2015
FINANCING ACTIVITIES:
 
 
 
Net change in deposits
$
126,748

 
$
(45,588
)
Net increase (decrease) in federal funds purchased and repurchase agreements
9,087

 
(1,967
)
Proceeds from FHLB advances
6,548,551

 
13,860,663

Repayment of FHLB advances
(6,523,701
)
 
(13,816,377
)
Net proceeds from issuance of subordinated long-term debt
98,083

 
—

Tax benefit related to stock awards
79

 
61

Net issuance of common stock under employee stock plan
346

 
169

Purchase of common stock
(10,199
)
 
—

Proceeds from the issuance of common stock
992

 
936

Cash dividends paid
(18,069
)
 
(17,204
)
Net cash provided by (used in) financing activities
231,917

 
(19,307
)
 
 
 
 
Net increase (decrease) in cash and cash equivalents
118,113

 
(12,761
)
Cash and cash equivalents at beginning of period
80,975

 
84,655

Cash and cash equivalents at end of period
$
199,088

 
$
71,894

 
 
 
 
SUPPLEMENTAL DISCLOSURES FOR CASH FLOW INFORMATION:
 

 
 


 
 
 
Interest paid
$
19,583

 
$
14,558

Income taxes paid
$
5,700

 
$
5,250

 
 
 
 
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES:
 

 
 


 
 
 
Loans transferred to other repossessed assets and real estate through foreclosure
$
5,434

 
$
1,453

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

 
$
57,724

Adjustment to pension liability
$
(1,365
)
 
$
(1,824
)
5% stock dividend
$
34,765

 
$
32,675

Unsettled trades to purchase securities
$
(30,214
)
 
$
(21,783
)

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. “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 September 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 nine-month periods ended September 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. In connection with the adoption of ASU 2015-03 “Interest - Imputation of Interest (Subtopic 835-30) - Simplifying the Presentation of Debt Issuance Costs,” that requires unamortized debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, our consolidated balance sheet as of December 31, 2015 reflects a decrease of $80,000 in other assets and long-term debt.
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; however, fair value amounts recognized for derivatives and fair value amounts recognized for the right/obligation to reclaim/return cash collateral are not offset for financial reporting purposes.

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

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in the assessment of hedge effectiveness. Net hedge ineffectiveness or losses are 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.”
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 2016-02 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 the pending adoption 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. ASU 2016-09 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. ASU 2016-09 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 the pending adoption of ASU 2016-10 on our consolidated financial statements and we have not yet identified which transition method will be applied upon adoption.

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 the pending adoption 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 the pending adoption of ASU 2016-13 on our consolidated financial statements.

In August 2016, the FASB issued ASU 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (a consensus of the Emerging Issues Task Force).” ASU 2016-15 is intended to reduce diversity in practice in how certain transactions are classified in the statement of cash flows. ASU 2016-15 addresses eight classification issues related

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to the statement of cash flows: (i) debt prepayment or debt extinguishment, (ii) settlement of zero-coupon bonds, (iii) contingent consideration payments made after a business combination, (iv) proceeds from the settlement of insurance claims, (v) proceeds from the settlement of corporate-owned life insurance policies, including bank-owned life insurance policies, (vi) distributions received from equity method invitees, (vii) beneficial interest in securitizations transactions, and (viii) separately identifiable cash flows and application of the predominance principle. ASU 2016-15 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. Early adoption is permitted. The guidance requires companies to apply the requirements retrospectively to all prior periods presented. If it is impracticable for a company to apply ASU 2016-15 retrospectively, requirements may be applied prospectively as of the earliest date practicable. We are currently evaluating the potential impact of the pending adoption of ASU 2016-15 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 September 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
September 30,
 
Nine Months Ended
September 30,
 
2016
 
2015
 
2016
 
2015
Basic and Diluted Earnings:
 
 
 
 
 
 
 
Net income
$
12,865

 
$
11,762

 
$
37,776

 
$
32,305

Basic weighted-average shares outstanding
26,262

 
26,632

 
26,314

 
26,611

Add:   Stock awards
153

 
89

 
111

 
89

Diluted weighted-average shares outstanding
26,415

 
26,721

 
26,425

 
26,700

 
 

 
 

 
 

 
 

Basic Earnings Per Share:
$
0.49

 
$
0.44

 
$
1.43

 
$
1.21

 
 

 
 

 
 

 
 

Diluted Earnings Per Share:
$
0.49

 
$
0.44

 
$
1.43

 
$
1.21

For the three- and nine-month periods ended September 30, 2016, there were approximately 3,000 and 28,000 anti-dilutive shares, respectively. For the three- and nine-month periods ended September 30, 2015, there were approximately 62,000 and 28,000 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 September 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
$
26,389

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

Other comprehensive income (loss):
 
 
 
 
 
 
 
 
 
Other comprehensive (loss) income before reclassifications
(10,960
)
 
1,070

 
—

 
—

 
(9,890
)
Reclassified from accumulated other comprehensive income
(2,327
)
 
521

 
(10
)
 
458

 
(1,358
)
Income tax benefit (expense)
4,650

 
(557
)
 
4

 
(160
)
 
3,937

Net current-period other comprehensive income (loss), net of tax
(8,637
)
 
1,034

 
(6
)
 
298

 
(7,311
)
Ending balance, net of tax
$
17,752

 
$
(2,462
)
 
$
(48
)
 
$
(17,508
)
 
$
(2,266
)
 
 
 
 
 
 
 
 
 
 
 
Nine Months Ended September 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
33,031

 
(5,125
)
 
—

 
—

 
27,906

Reclassified from accumulated other comprehensive income
(5,352
)
 
1,338

 
(6
)
 
1,371

 
(2,649
)
Income tax (expense) benefit
(9,688
)
 
1,325

 
2

 
(479
)
 
(8,840
)
Net current-period other comprehensive income (loss), net of tax
17,991

 
(2,462
)
 
(4
)
 
892

 
16,417

Ending balance, net of tax
$
17,752

 
$
(2,462
)
 
$
(48
)
 
$
(17,508
)
 
$
(2,266
)


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Three Months Ended September 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
$
1,396

 
$
—

 
$
2

 
$
(21,071
)
 
$
(19,673
)
Other comprehensive income (loss):
 
 
 
 
 
 
 
 
 
Other comprehensive income before reclassifications
13,446

 
—

 
—

 
—

 
13,446

Reclassified from accumulated other comprehensive income
(655
)
 
—

 
(4
)
 
691

 
32

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
 

 
 
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 before reclassifications
8,051

 
—

 
—

 
—

 
8,051

Reclassified from accumulated other comprehensive income
(2,710
)
 
—

 
(12
)
 
1,836

 
(886
)
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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The reclassifications out of accumulated other comprehensive income (loss) into net income are presented below (in thousands):
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2016
 
2015
 
2016
 
2015
 
 
 
 
 
 
 
 
Unrealized losses on securities transferred to held to maturity:
 
 
 
 
 
 
 
Amortization of unrealized losses (1)
$
(16
)
 
$
(220
)
 
$
(160
)
 
$
(746
)
Tax benefit
6

 
77

 
56

 
261

Net of tax
(10
)
 
(143
)
 
(104
)
 
(485
)
 
 
 
 
 
 
 
 
Unrealized gains and losses on available for sale securities:
 
 
 
 
 
 
 
Realized net gain on sale of securities (2)
$
2,343

 
$
875

 
$
5,512

 
$
3,456

Tax expense
(820
)
 
(307
)
 
(1,929
)
 
(1,210
)
Net of tax
1,523

 
568

 
3,583

 
2,246

 
 
 
 
 
 
 
 
Derivatives:
 
 
 
 
 
 
 
Realized net loss on interest rate swap derivatives (3)
(521
)
 
—

 
(1,338
)
 
—

Tax benefit
182

 
—

 
468

 
—

Net of tax
(339
)
 
—

 
(870
)
 
—

 
 
 
 
 
 
 
 
Amortization of pension plan:
 
 
 
 
 
 
 
Net actuarial loss (4)
$
(458
)
 
$
(691
)
 
$
(1,371
)
 
$
(1,836
)
Prior service credit (4)
10

 
4

 
6

 
12

Total before tax
(448
)
 
(687
)
 
(1,365
)
 
(1,824
)
Tax benefit
156

 
241

 
477

 
639

Net of tax
(292
)
 
(446
)
 
(888
)
 
(1,185
)
Total reclassifications for the period, net of tax
$
882

 
$
(21
)
 
$
1,721

 
$
576

(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)    Included in interest expense for long-term obligations on the consolidated statements of income.
(4)
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 September 30, 2016 and December 31, 2015 are reflected in the tables below (in thousands):
 
 
September 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:
 
 
 
 
 
 
 
 
 
 
 
 
 

U.S. Treasury
 
$
79,841

 
$
109

 
$
103

 
$
79,847

 
$
—

 
$
—

 
$
79,847

State and Political Subdivisions
 
414,383

 
10,299

 
942

 
423,740

 
—

 
—

 
423,740

Other Stocks and Bonds
 
7,766

 
64

 
—

 
7,830

 
—

 
—

 
7,830

Other Equity Securities
 
6,042

 
69

 
—

 
6,111

 
—

 
—

 
6,111

Mortgage-backed Securities: (1)
 
 

 
 

 
 

 
 
 
 
 
 
 
 
Residential
 
691,406

 
11,732

 
1,652

 
701,486

 
—

 
—

 
701,486

Commercial

386,680

 
16,438

 
4

 
403,114

 
—

 
—

 
403,114

Total
 
$
1,586,118

 
$
38,711

 
$
2,701

 
$
1,622,128

 
$
—

 
$
—

 
$
1,622,128

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
HELD TO MATURITY
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Investment Securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
State and Political Subdivisions
 
$
384,010

 
$
3,867

 
$
8,710

 
$
379,167

 
$
18,018

 
$
1,141

 
$
396,044

Mortgage-backed Securities: (1)
 
 

 
 

 
 

 
 
 
 
 
 
 
 
Residential
 
34,045

 
—

 
39

 
34,006

 
1,971

 
25

 
35,952

Commercial
 
366,325

 
1,109

 
4,925

 
362,509

 
19,607

 
—

 
382,116

Total
 
$
784,380

 
$
4,976

 
$
13,674

 
$
775,682

 
$
39,596

 
$
1,166

 
$
814,112


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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 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 nine months ended September 30, 2016.


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The following tables represent the fair value and unrealized loss on securities as of September 30, 2016 and December 31, 2015 (in thousands):
 
As of September 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:
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury
$
35,058

 
$
103

 
$
—

 
$
—

 
$
35,058

 
$
103

State and Political Subdivisions
139,145

 
941

 
887

 
1

 
140,032

 
942

Mortgage-backed Securities:
 
 
 
 
 
 
 
 
 
 
 
Residential
192,591

 
1,600

 
10,063

 
52

 
202,654

 
1,652

Commercial
5,163

 
4

 
—

 
—

 
5,163

 
4

Total
$
371,957

 
$
2,648

 
$
10,950

 
$
53

 
$
382,907

 
$
2,701

HELD TO MATURITY
 

 
 

 
 

 
 

 
 

 
 

Investment Securities:
 
 
 
 
 
 
 
 
 
 
 
State and Political Subdivisions
$
21,479

 
$
176

 
$
27,610

 
$
965

 
$
49,089

 
$
1,141

Mortgage-backed Securities:
 
 
 
 
 
 
 
 
 
 
 
Residential
8,182

 
25

 
—

 
—

 
8,182

 
25

Total
$
29,661

 
$
201

 
$
27,610

 
$
965

 
$
57,271

 
$
1,166

 
 
 
 
 
 
 
 
 
 
 
 
 
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: