Edgar Filing: SOUTHSIDE BANCSHARES INC

Document

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, 2017



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, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.



Large accelerated filer x	Accelerated filer o
Non-accelerated filer o	(Do not check if a smaller reporting company)
	Smaller reporting company o
	Emerging growth company o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

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 23, 2017 was 29,433,437 shares.

TABLE OF CONTENTS



PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS	1
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	43
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	66
ITEM 4. CONTROLS AND PROCEDURES	67
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS	67
ITEM 1A. RISK FACTORS	67
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	67
ITEM 3. DEFAULTS UPON SENIOR SECURITIES	67
ITEM 4. MINE SAFETY DISCLOSURES	67
ITEM 5. OTHER INFORMATION	67
ITEM 6. EXHIBITS	68
EXHIBIT INDEX	68
SIGNATURES	69

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PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

SOUTHSIDE BANCSHARES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (UNAUDITED) (in thousands, except share amounts)

	September 30, 2017			December 31, 2016
ASSETS
Cash and due from banks	$	57,947		$	59,363
Interest earning deposits	120,996			102,251
Federal funds sold	5,570			8,040
Total cash and cash equivalents	184,513			169,654
Securities available for sale, at estimated fair value	1,292,072			1,479,600
Securities held to maturity, at carrying value (estimated fair value of $928,507 and $944,282, respectively)	909,844			937,487
FHLB stock, at cost	61,845			61,084
Other investments	5,439			5,508
Loans held for sale	2,177			7,641
Loans:
Loans	2,682,766			2,556,537
Less: Allowance for loan losses	(19,871		)	(17,911		)
Net Loans	2,662,895			2,538,626
Premises and equipment, net	107,099			106,003
Goodwill	91,520			91,520
Other intangible assets, net	3,379			4,608
Interest receivable	18,792			25,183
Deferred tax asset, net	21,842			28,891
Unsettled trades to sell securities	11,843			—
Bank owned life insurance	99,616			97,775
Other assets	11,554			10,187
Total assets	$	5,484,430		$	5,563,767
LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits:
Noninterest bearing	$	781,701		$	704,013
Interest bearing	2,782,474			2,829,063
Total deposits	3,564,175			3,533,076
Short-term obligations:
Federal funds purchased and repurchase agreements	9,083			7,097
FHLB advances	990,500			866,518
Total short-term obligations	999,583			873,615
Long-term obligations:
FHLB advances	152,056			443,128
Subordinated notes, net of unamortized debt issuance costs	98,209			98,100
Long-term debt, net of unamortized debt issuance costs	60,240			60,236
Total long-term obligations	310,505			601,464
Unsettled trades to purchase securities	16,673			160
Other liabilities	37,471			37,178
Total liabilities	4,928,407			5,045,493

Off-balance-sheet arrangements, commitments and contingencies (Note 13)

Shareholders’ equity:
Common stock ($1.25 par value, 40,000,000 shares authorized, 32,256,777 shares issued at September 30, 2017 and 31,455,951 shares issued at December 31, 2016)	40,321			39,320
Paid-in capital	563,553			535,240
Retained earnings	25,677			30,098
Treasury stock, at cost (2,823,340 shares at September 30, 2017 and 2,913,064 shares at December 31, 2016)	(47,291		)	(47,891		)
Accumulated other comprehensive loss	(26,237		)	(38,493		)
Total shareholders’ equity	556,023			518,274
Total liabilities and shareholders’ equity	$	5,484,430		$	5,563,767

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,
	2017		2016		2017		2016
Interest income
Loans	$	29,322	$	25,740	$	84,666	$	79,738
Investment securities – taxable	58		251		702		572
Investment securities – tax-exempt	5,670		5,467		18,381		15,959
Mortgage-backed securities	10,567		9,399		31,430		28,156
FHLB stock and other investments	329		186		926		588
Other interest earning assets	527		89		1,265		220
Total interest income	46,473		41,132		137,370		125,233
Interest expense
Deposits	5,420		3,604		14,839		10,375
Short-term obligations	3,382		1,122		7,927		2,724
Long-term obligations	2,711		2,476		8,940		7,210
Total interest expense	11,513		7,202		31,706		20,309
Net interest income	34,960		33,930		105,664		104,924
Provision for loan losses	960		1,631		3,404		7,715
Net interest income after provision for loan losses	34,000		32,299		102,260		97,209
Noninterest income
Deposit services	5,476		5,335		15,845		15,519
Net gain on sale of securities available for sale	627		2,343		874		5,512
Gain on sale of loans	347		818		1,553		2,334
Trust income	873		867		2,662		2,591
Bank owned life insurance income	636		656		1,905		1,977
Brokerage services	561		551		1,790		1,661
Other	888		1,162		3,745		3,104
Total noninterest income	9,408		11,732		28,374		32,698
Noninterest expense
Salaries and employee benefits	14,395		15,203		45,229		47,784
Occupancy expense	2,981		4,569		8,741		10,897
Advertising, travel & entertainment	487		588		1,618		1,995
ATM and debit card expense	1,024		868		2,840		2,316
Professional fees	996		1,148		2,985		3,964
Software and data processing expense	732		736		2,145		2,224
Telephone and communications	459		407		1,461		1,359
FDIC insurance	441		643		1,327		1,926
Other	3,492		4,263		10,056		11,180
Total noninterest expense	25,007		28,425		76,402		83,645

Income before income tax expense	18,401		15,606		54,232		46,262
Income tax expense	3,890		2,741		10,251		8,486
Net income	$	14,511	$	12,865	$	43,981	$	37,776
Earnings per common share – basic	$	0.49	$	0.48	$	1.50	$	1.40
Earnings per common share – diluted	$	0.49	$	0.48	$	1.49	$	1.39
Dividends paid per common share	$	0.28	$	0.24	$	0.81	$	0.71

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,
	2017			2016			2017			2016
Net income	$	14,511		$	12,865		$	43,981		$	37,776
Other comprehensive income:
Securities available for sale and transferred securities:
Change in net unrealized holding gains (losses) on available for sale securities during the period	344			(10,960		)	18,450			33,031
Reclassification adjustment for amortization of unrealized losses on securities transferred to held to maturity	490			16			1,191			160
Reclassification adjustment for net gain on sale of available for sale securities, included in net income	(627		)	(2,343		)	(874		)	(5,512		)
Derivatives:
Change in net unrealized (loss) gain on effective cash flow hedge interest rate swap derivatives	(236		)	1,070			(2,084		)	(5,125		)
Change in net unrealized gains on interest rate swap derivatives terminated during the period	—			—			273			—
Reclassification adjustment for net loss on interest rate swap derivatives, included in net income	122			521			746			1,338
Reclassification adjustment for amortization of unrealized gains on terminated interest rate swap derivatives	(21		)	—			(52		)	—
Pension plans:
Amortization of net actuarial loss, included in net periodic benefit cost	403			458			1,210			1,371
Amortization of prior service credit, included in net periodic benefit cost	(1		)	(10		)	(5		)	(6		)
Other comprehensive income (loss), before tax	474			(11,248		)	18,855			25,257
Income tax (expense) benefit related to items of other comprehensive income	(166		)	3,937			(6,599		)	(8,840		)
Other comprehensive income (loss), net of tax	308			(7,311		)	12,256			16,417
Comprehensive income	$	14,819		$	5,554		$	56,237		$	54,193

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, 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 for dividend reinvestment plan (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 (39,468 shares)	50		345		(49		)	—			—			346
Cash dividends paid on common stock ($0.71 per share)	—		—		(18,069		)	—			—			(18,069		)
Stock dividend declared (1,252,353 shares)	1,565		33,200		(34,765		)	—			—			—
Balance at September 30, 2016	$	36,489	$	459,808	$	26,420		$	(47,891	)	$	(2,266	)	$	472,560

Balance at December 31, 2016	$	39,320	$	535,240	$	30,098		$	(47,891	)	$	(38,493	)	$	518,274
Net income	—		—		43,981			—			—			43,981
Other comprehensive income	—		—		—			—			12,256			12,256
Issuance of common stock for dividend reinvestment plan (33,000 shares)	41		1,057		—			—			—			1,098
Stock compensation expense	—		1,393		—			—			—			1,393
Net issuance of common stock under employee stock plans (138,035 shares)	61		1,802		(73		)	600			—			2,390
Cash dividends paid on common stock ($0.81 per share)	—		—		(23,369		)	—			—			(23,369		)
Stock dividend declared (719,515 shares)	899		24,061		(24,960		)	—			—			—
Balance at September 30, 2017	$	40,321	$	563,553	$	25,677		$	(47,291	)	$	(26,237	)	$	556,023

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,
	2017			2016
OPERATING ACTIVITIES:
Net income	$	43,981		$	37,776
Adjustments to reconcile net income to net cash provided by operations:
Depreciation and net amortization	7,251			6,612
Securities premium amortization (discount accretion), net	13,502			14,245
Loan (discount accretion) premium amortization, net	(818		)	(2,113		)
Provision for loan losses	3,404			7,715
Stock compensation expense	1,393			1,156
Deferred tax expense	453			1,916
Net tax benefit related to stock awards	—			(79		)
Net gain on sale of securities available for sale	(874		)	(5,512		)
Net loss on premises and equipment	77			235
Gross proceeds from sales of loans held for sale	50,689			67,144
Gross originations of loans held for sale	(45,225		)	(68,634		)
Net (gain) loss on other real estate owned	(1		)	224
Net gain on sale of customer receivables	—			(144		)
Net change in:
Interest receivable	6,391			5,242
Other assets	2,696			(2,094		)
Interest payable	(923		)	726
Other liabilities	(4,639		)	2,182
Net cash provided by operating activities	77,357			66,597

INVESTING ACTIVITIES:
Securities available for sale:
Purchases	(371,555		)	(761,900		)
Sales	486,460			495,011
Maturities, calls and principal repayments	87,096			160,676
Securities held to maturity:
Purchases	(1,521		)	(29,725		)
Maturities, calls and principal repayments	25,455			22,029
Proceeds from redemption of FHLB stock and other investments	114			3,644
Purchases of FHLB stock and other investments	(761		)	(4,433		)
Net loan originations	(127,240		)	(66,633		)
Proceeds from sales of customer receivables	—			3,314
Purchases of premises and equipment	(7,090		)	(5,189		)
Proceeds from sales of premises and equipment	8			120
Proceeds from sales of other real estate owned	134			1,918
Proceeds from sales of repossessed assets	341			767
Net cash provided by (used in) investing activities	91,441			(180,401		)

(continued)

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SOUTHSIDE BANCSHARES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOW (UNAUDITED) (continued) (in thousands)

	Nine Months Ended
	September 30,
	2017			2016
FINANCING ACTIVITIES:
Net change in deposits	$	31,031		$	126,748
Net increase in federal funds purchased and repurchase agreements	1,986			9,087
Proceeds from FHLB advances	2,366,476			6,548,551
Repayment of FHLB advances	(2,533,551		)	(6,523,701		)
Net proceeds from issuance of subordinated long-term debt	—			98,083
Tax benefit related to stock awards	—			79
Proceeds from stock option exercises	2,527			418
Cash paid to tax authority from stock option exercises	(137		)	(72		)
Purchase of common stock	—			(10,199		)
Proceeds from the issuance of common stock for dividend reinvestment plan	1,098			992
Cash dividends paid	(23,369		)	(18,069		)
Net cash (used in) provided by financing activities	(153,939		)	231,917

Net increase in cash and cash equivalents	14,859			118,113
Cash and cash equivalents at beginning of period	169,654			80,975
Cash and cash equivalents at end of period	$	184,513		$	199,088

SUPPLEMENTAL DISCLOSURES FOR CASH FLOW INFORMATION:

Interest paid	$	32,629		$	19,583
Income taxes paid	$	8,300		$	5,700

SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES:

Loans transferred to other repossessed assets and real estate through foreclosure	$	407		$	5,434
Adjustment to pension liability	$	(1,205	)	$	(1,365	)
Stock dividend (2.5% and 5%, respectively)	$	24,960		$	34,765
Unsettled trades to purchase securities	$	(16,673	)	$	(30,214	)
Unsettled trades to sell securities	$	11,843		$	—

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.

The accompanying unaudited consolidated financial statements have been prepared in accordance with United States (“U.S.”) generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, not all information required by GAAP for complete financial statements is included in these interim statements. In the opinion of management, all adjustments necessary for a fair presentation of such financial statements have been included. Such adjustments consisted only of normal recurring items. The preparation of these consolidated financial statements in accordance with 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.

On May 4, 2017, our board of directors declared a 2.5% stock dividend to common stock shareholders of record as of May 30, 2017, which was paid on June 27, 2017. 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, 2016.

Accounting Changes and Reclassifications

Certain prior period amounts have been reclassified to conform to current year presentation.

We adopted ASU 2016-09 “Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting,” on January 1, 2017 which requires all income tax effects related to settlements of share-based payment awards be reported in earnings as an increase (or decrease) to income tax expense. Previously, income tax benefits at settlement of an award were reported as an increase (or decrease) to additional paid-in capital to the extent that those benefits were greater than (or less than) the income tax benefits recognized in earnings during the vesting period or exercise of the award. The requirement to report those income tax effects in earnings has been applied to settlements occurring on or after January 1, 2017, and the impact of applying that guidance reduced reported income tax expense by $213,000, or less than $0.01 on our diluted earnings per common share for the three months ended September 30, 2017, and $423,000, or $0.01 on our diluted earnings per common share for the nine months ended September 30, 2017. ASU 2016-09 also requires that all income tax-related cash flows resulting from share-based payments be reported as operating activities in the statement of cash flows. Previously, income tax benefits at settlement of an award were reported as a reduction to operating cash flows and an increase to financing cash flows to the extent that those benefits exceeded the income tax benefits reported in earnings during the vesting period or exercise of the award. We have elected to apply that change in cash flow on a prospective basis and therefore, prior periods have not been adjusted. ASU 2016-09 also requires the classification of employee taxes paid when an employer withholds shares for tax withholding purposes be classified as a financing activity in the statement of cash flow and be applied retrospectively. The requirement to report the employee taxes paid is reflected in prior period presentation in our consolidated statement of cash flows. In connection with the adoption of ASU 2016-09, we have also elected to recognize forfeitures as they occur.

Terminated Derivative Financial Instruments

In accordance with ASC Topic 815, if a hedging item is terminated prior to maturity for a cash settlement, the existing gain or loss within accumulated other comprehensive income (“AOCI”) will continue to be reclassified into earnings during the period or periods in which the hedged forecasted transaction affects earnings unless it is probable that the forecasted transaction will not occur by the end of the originally specified time period. If the forecasted transaction is deemed probable to not occur, the derivative gain or loss reported in AOCI shall be reclassified into earnings immediately. During the first quarter of 2017, we terminated two interest rate swap contracts designated as cash flow hedges of forecasted transactions. At the time of termination, we determined that the underlying hedged forecasted transactions were still probable of occurring. These transactions are reevaluated on a monthly basis thereafter, to determine if the hedged forecasted transactions are still probable of occurring. If at a subsequent evaluation, it is determined that the transactions will not occur, any related gains or losses recorded in AOCI are immediately recognized in earnings.

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The existing gain in AOCI related to the terminated interest rate swap contracts will be reclassified into earnings through straight-line accretion in the same periods the hedged forecasted transaction affects earnings.

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

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, 2016.

Accounting Pronouncements

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, the FASB issued ASU 2015-14, “Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date,” which defers the effective date of the previously issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606) until the interim and annual reporting periods beginning after December 15, 2017. 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 anticipate adopting the new standard using the modified retrospective method beginning January 1, 2018. Our revenue consists of net interest income on financial assets and financial liabilities, which is explicitly excluded from the scope of ASU 2014-09, and noninterest income. We have evaluated the impact this guidance will have in relation to our noninterest income derived from contracts with our customers as it relates to deposit services, trust income, brokerage services, and merchant services (included in other noninterest income) which we have determined to be in the scope of ASU 2014-09. The adoption of ASU 2014-09 is not expected to have a material impact on our consolidated financial statements. We are continuing to evaluate the impact of the additional disclosures required by this guidance.

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 finance (formerly known as “capital”) and operating 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. The guidance requires companies to apply the requirements in the year of adoption using a modified retrospective approach. We are currently evaluating the impact this guidance will have on our consolidated financial statements, and we anticipate our assessment to be completed during the fiscal year 2018.

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 January 2017, the FASB issued ASU 2017-04, “Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment.” ASU 2017-04 is intended to simplify goodwill impairment testing by eliminating the second step of the analysis which requires the calculation of the implied fair value of goodwill to measure a goodwill impairment charge. The update requires entities to compare the fair value of a reporting unit with its carrying amount and recognize an impairment charge for any amount by which the carrying amount exceeds the reporting unit’s fair value, to the extent that the loss recognized does not exceed the amount of goodwill allocated to that reporting unit. ASU 2017-04 is effective for annual and interim goodwill impairment tests performed in periods beginning after December 15, 2019. Early adoption is permitted for annual and interim goodwill impairment testing dates after January 1, 2017. The guidance requires companies to apply the requirements prospectively in the year of adoption. ASU 2017-04 is not expected to have a significant impact on our consolidated financial statements.

In March 2017, the FASB issued ASU 2017-07, “Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost.” ASU 2017-07 requires employers to present the service cost component of net periodic postretirement benefit cost in the same income statement line item as other employee compensation costs arising from services rendered during the period. Only the service cost component will be eligible for

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capitalization in assets. Employers are required to present the other components of the net periodic benefit cost separately from the line item that includes the service cost and outside of any subtotal of operating income, if one is presented. ASU 2017-07 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. Early adoption is permitted as of the beginning of an annual period for which financial statements (interim or annual) have not been issued or made available for issuance. We did not early adopt ASU 2017-07. The guidance requires companies to apply the requirements retrospectively to all prior periods presented. ASU 2017-07 is not expected to have a significant impact on our consolidated financial statements.

In March 2017, the FASB issued ASU 2017-08, “Receivables - Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities.” Under current GAAP, premiums on callable debt securities are generally amortized over the contractual life of the security. ASU 2017-08 requires the premium on callable debt securities to be amortized to the earliest call date. If the debt security is not called at the earliest call date, the holder of the debt security would be required to reset the effective yield on the debt security based on the payment terms required by the debt security. ASU 2017-08 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted. The guidance requires companies to apply the requirements on a modified retrospective basis through a cumulative adjustment directly to retained earnings as of the beginning of the period of adoption. We are currently evaluating the potential impact of the pending adoption of ASU 2017-08 on our consolidated financial statements.

In May 2017, the FASB issued ASU 2017-09, “Compensation - Stock Compensation (Subtopic 718): Scope of Modification Accounting.” ASU 2017-09 clarifies when changes to terms or conditions of a share-based payment award must be accounted for as a modification. Under the new guidance, an entity will not apply modification accounting to a share-based payment award if all of the following are the same immediately before and after the change: (i) the fair value of the award, (ii) the vesting conditions of the award, and (iii) the classification of the award as either an equity or liability instrument. ASU 2017-09 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. Early adoption is permitted. We did not early adopt ASU 2017-09. The guidance requires companies to apply the requirements prospectively to awards modified on or after the adoption date. ASU 2017-09 is not expected to have a significant impact on our consolidated financial statements.

In August 2017, the FASB issued ASU 2017-12, “Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities.” ASU 2017-12 (i) expands hedge accounting for nonfinancial and financial risk components and amends measurement methodologies to more closely align hedge accounting with a company’s risk management activities, (ii) decreases the complexity of preparing and understanding hedge results by eliminating the separate measurement and reporting of hedge ineffectiveness, (iii) enhances transparency, comparability, and understanding of hedge results through enhanced disclosures and changing the presentation of hedge results to align the effects of the hedging instrument and the hedged item, and (iv) reduces the cost and complexity of applying hedge accounting by simplifying the manner in which assessments of hedge effectiveness may be performed. ASU 2017-12 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted. The guidance requires companies to apply the requirements to existing hedging relationships on the date of adoption, and the effect of the adoption should be reflected as of the beginning of the fiscal year of adoption. We are currently evaluating the potential impact of the pending adoption of ASU 2017-12 on our consolidated financial statements.

2. Pending Acquisition

On June 12, 2017, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Diboll State Bancshares, Inc., a Texas corporation (“Diboll”) and the holding company for First Bank & Trust East Texas, a Texas banking association based in Diboll, Texas. As of September 30, 2017, Diboll had $1.01 billion in assets and $908.7 million in deposits The Merger Agreement provides that, subject to the terms and conditions thereof, Diboll will merge with and into the Company, with the Company as the surviving corporation. On October 17, 2017, Diboll’s shareholders approved the Merger Agreement and the merger at a special meeting of shareholders. The merger of Southside Bank and Diboll’s subsidiary bank has previously received the approval of the Federal Deposit Insurance Corporation and the Texas Department of Banking. The merger is expected to close during the fourth quarter of 2017, subject to receipt of regulatory approval from the Federal Reserve Board and the satisfaction of other customary closing conditions.

Pursuant to the Merger Agreement, the Company will issue 5,535,000 shares of Company common stock and up to $25.0 million in cash for all outstanding shares of Diboll common stock, subject to adjustment pursuant to the terms of the Merger Agreement.

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3. Earnings Per Share

Earnings per share on a basic and diluted basis has 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,
	2017		2016		2017		2016
Basic and Diluted Earnings:
Net income	$	14,511	$	12,865	$	43,981	$	37,776
Basic weighted-average shares outstanding	29,370		26,923		29,326		26,976
Add: Stock awards	200		157		205		115
Diluted weighted-average shares outstanding	29,570		27,080		29,531		27,091

Basic Earnings Per Share:
Net Income	$	0.49	$	0.48	$	1.50	$	1.40
Diluted Earnings Per Share:
Net Income	$	0.49	$	0.48	$	1.49	$	1.39

For the three- and nine-month periods ended September 30, 2017, there were approximately 45,000 and 49,000 anti-dilutive shares, respectively. For the three- and nine-month periods ended September 30, 2016, there were approximately 3,000 and 29,000 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, 2017
							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	$	(11,644	)	$	3,957		$	(136	)	$	(18,722	)	$	(26,545	)
Other comprehensive income (loss):
Other comprehensive income (loss) before reclassifications	344			(236		)	—			—			108
Reclassified from accumulated other comprehensive (loss) income	(137		)	101			(1		)	403			366
Income (expense) tax benefit	(72		)	47			—			(141		)	(166		)
Net current-period other comprehensive income (loss), net of tax	135			(88		)	(1		)	262			308
Ending balance, net of tax	$	(11,509	)	$	3,869		$	(137	)	$	(18,460	)	$	(26,237	)

	Nine Months Ended September 30, 2017
							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	$	(23,708	)	$	4,595		$	(133	)	$	(19,247	)	$	(38,493	)
Other comprehensive income (loss):
Other comprehensive income (loss) before reclassifications	18,450			(1,811		)	—			—			16,639
Reclassified from accumulated other comprehensive income (loss)	317			694			(5		)	1,210			2,216
Income tax (expense) benefit	(6,568		)	391			1			(423		)	(6,599		)
Net current-period other comprehensive income (loss), net of tax	12,199			(726		)	(4		)	787			12,256
Ending balance, net of tax	$	(11,509	)	$	3,869		$	(137	)	$	(18,460	)	$	(26,237	)

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	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 (loss) income	(2,327		)	521			(10		)	458			(1,358		)
Income tax benefit (expense)	4,650			(557		)	4			(160		)	3,937
Net current-period other comprehensive (loss) income, 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 (loss) 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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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,
	2017			2016			2017			2016

Unrealized losses on securities transferred to held to maturity:
Amortization of unrealized losses ⁽¹⁾	$	(490	)	$	(16	)	$	(1,191	)	$	(160	)
Tax benefit	172			6			417			56
Net of tax	$	(318	)	$	(10	)	$	(774	)	$	(104	)

Unrealized gains and losses on available for sale securities:
Realized net gain on sale of securities ⁽²⁾	$	627		$	2,343		$	874		$	5,512
Tax expense	(220		)	(820		)	(306		)	(1,929		)
Net of tax	$	407		$	1,523		$	568		$	3,583

Derivatives:
Realized net loss on interest rate swap derivatives ⁽³⁾	$	(122	)	$	(521	)	$	(746	)	$	(1,338	)
Tax benefit	43			182			261			468
Net of tax	$	(79	)	$	(339	)	$	(485	)	$	(870	)

Amortization of unrealized gains on terminated interest rate swap derivatives ⁽³⁾	$	21		$	—		$	52		$	—
Tax expense	(7		)	—			(18		)	—
Net of tax	$	14		$	—		$	34		$	—

Amortization of pension plan:
Net actuarial loss ⁽⁴⁾	$	(403	)	$	(458	)	$	(1,210	)	$	(1,371	)
Prior service credit ⁽⁴⁾	1			10			5			6
Total before tax	(402		)	(448		)	(1,205		)	(1,365		)
Tax benefit	141			156			422			477
Net of tax	(261		)	(292		)	(783		)	(888		)
Total reclassifications for the period, net of tax	$	(237	)	$	882		$	(1,440	)	$	1,721

(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 available for sale and held to maturity as of September 30, 2017 and December 31, 2016 are reflected in the tables below (in thousands):



	September 30, 2017
			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	$	340,790	$	2,757	$	6,387	$	337,160	$	—	$	—	$	337,160
Other Stocks and Bonds	5,042		73		—		5,115		—		—		5,115
Other Equity Securities	6,031		—		71		5,960		—		—		5,960
Mortgage-backed Securities: ⁽¹⁾
Residential	617,860		6,319		4,484		619,695		—		—		619,695
Commercial	322,577		2,320		755		324,142		—		—		324,142
Total	$	1,292,300	$	11,469	$	11,697	$	1,292,072	$	—	$	—	$	1,292,072

HELD TO MATURITY
Investment Securities:
State and Political Subdivisions	$	424,729	$	2,812	$	12,299	$	415,242	$	13,019	$	2,039	$	426,222
Mortgage-backed Securities: ⁽¹⁾
Residential	132,426		—		5,143		127,283		2,513		181		129,615
Commercial	370,167		941		3,789		367,319		5,925		574		372,670
Total	$	927,322	$	3,753	$	21,231	$	909,844	$	21,457	$	2,794	$	928,507

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	December 31, 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	$	74,016	$	—	$	3,947	$	70,069	$	—	$	—	$	70,069
State and Political Subdivisions	394,050		3,217		12,070		385,197		—		—		385,197
Other Stocks and Bonds	6,587		64		—		6,651		—		—		6,651
Other Equity Securities	6,039		—		119		5,920		—		—		5,920
Mortgage-backed Securities: ⁽¹⁾
Residential	630,603		6,434		9,529		627,508		—		—		627,508
Commercial	386,109		1,201		3,055		384,255		—		—		384,255
Total	$	1,497,404	$	10,916	$	28,720	$	1,479,600	$	—	$	—	$	1,479,600

HELD TO MATURITY
Investment Securities:
State and Political Subdivisions	$	435,080	$	3,987	$	13,257	$	425,810	$	7,595	$	3,493	$	429,912
Mortgage-backed Securities: ⁽¹⁾
Residential	142,060		—		5,748		136,312		1,534		950		136,896
Commercial	379,016		1,067		4,718		375,365		4,372		2,263		377,474
Total	$	956,156	$	5,054	$	23,723	$	937,487	$	13,501	$	6,706	$	944,282


(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 2016, the Company transferred securities with a fair value of $157.1 million from AFS to HTM. The unrealized loss on the securities transferred from AFS to HTM was $10.2 million ($6.7 million, 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 to 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, 2017.

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The following tables represent the estimated fair value and unrealized loss on securities AFS and HTM as of September 30, 2017 and December 31, 2016 (in thousands):



	As of September 30, 2017
	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	$	67,886	$	991	$	153,073	$	5,396	$	220,959	$	6,387
Other Equity Securities	5,960		71		—		—		5,960		71
Mortgage-backed Securities:
Residential	161,949		710		110,503		3,774		272,452		4,484
Commercial	36,549		258		13,122		497		49,671		755
Total	$	272,344	$	2,030	$	276,698	$	9,667	$	549,042	$	11,697
HELD TO MATURITY
Investment Securities:
State and Political Subdivisions	$	52,088	$	643	$	41,006	$	1,396	$	93,094	$	2,039
Mortgage-backed Securities:
Residential	3,795		57		2,922		124		6,717		181
Commercial	36,340		561		895		13		37,235		574
Total	$	92,223	$	1,261	$	44,823	$	1,533	$	137,046	$	2,794

	As of December 31, 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: