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 June 30, 2018
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, 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 July 23, 2018 was 35,089,372 shares.
TABLE OF CONTENTS
|
| |
PART I. FINANCIAL INFORMATION | |
| |
| |
| |
| |
PART II. OTHER INFORMATION | |
| |
| |
| |
| |
| |
| |
| |
| |
| |
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SOUTHSIDE BANCSHARES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (UNAUDITED) (in thousands, except share amounts) |
| | | | | | | | |
| | June 30, 2018 | | December 31, 2017 |
| |
ASSETS | | | | |
Cash and due from banks | | $ | 78,534 |
| | $ | 79,171 |
|
Interest earning deposits | | 138,685 |
| | 111,541 |
|
Federal funds sold | | 14,850 |
| | 7,980 |
|
Total cash and cash equivalents | | 232,069 |
| | 198,692 |
|
Securities available for sale, at estimated fair value | | 2,037,994 |
| | 1,538,755 |
|
Securities held to maturity, at carrying value (estimated fair value of $159,055 and $921,800, respectively) | | 164,276 |
| | 909,506 |
|
FHLB stock, at cost | | 42,994 |
| | 55,729 |
|
Equity investments | | 12,037 |
| | 5,821 |
|
Loans held for sale | | 4,566 |
| | 2,001 |
|
Loans: | | |
| | |
|
Loans | | 3,270,883 |
| | 3,294,356 |
|
Less: Allowance for loan losses | | (25,072 | ) | | (20,781 | ) |
Net loans | | 3,245,811 |
| | 3,273,575 |
|
Premises and equipment, net | | 132,578 |
| | 133,640 |
|
Goodwill | | 201,246 |
| | 201,246 |
|
Other intangible assets, net | | 20,287 |
| | 22,993 |
|
Interest receivable | | 27,100 |
| | 28,491 |
|
Deferred tax asset, net | | 15,377 |
| | 12,204 |
|
Bank owned life insurance | | 97,059 |
| | 100,368 |
|
Other assets | | 16,779 |
| | 15,076 |
|
Total assets | | $ | 6,250,173 |
| | $ | 6,498,097 |
|
| | |
| | |
|
LIABILITIES AND SHAREHOLDERS’ EQUITY | | |
| | |
|
Deposits: | | |
| | |
|
Noninterest bearing | | $ | 1,038,907 |
| | $ | 1,037,401 |
|
Interest bearing | | 3,469,834 |
| | 3,478,046 |
|
Total deposits | | 4,508,741 |
| | 4,515,447 |
|
Federal funds purchased and repurchase agreements | | 8,287 |
| | 9,498 |
|
FHLB borrowings | | 776,467 |
| | 1,017,361 |
|
Subordinated notes, net of unamortized debt issuance costs | | 98,326 |
| | 98,248 |
|
Trust preferred subordinated debentures, net of unamortized debt issuance costs | | 60,243 |
| | 60,241 |
|
Unsettled trades to purchase securities | | 2,279 |
| | — |
|
Other liabilities | | 44,020 |
| | 43,162 |
|
Total liabilities | | 5,498,363 |
| | 5,743,957 |
|
| | |
| | |
|
Off-balance-sheet arrangements, commitments and contingencies (Note 13) | |
|
| |
|
|
| | |
| | |
Shareholders’ equity: | | |
| | |
|
Common stock: ($1.25 par value, 80,000,000 shares authorized and 37,822,784 shares issued at June 30, 2018 and 40,000,000 shares authorized and 37,802,352 shares issued at December 31, 2017) | | 47,278 |
| | 47,253 |
|
Paid-in capital | | 759,562 |
| | 757,439 |
|
Retained earnings | | 48,843 |
| | 32,851 |
|
Treasury stock, at cost (2,738,968 at June 30, 2018 and 2,802,019 at December 31, 2017) | | (46,551 | ) | | (47,105 | ) |
Accumulated other comprehensive loss | | (57,322 | ) | | (36,298 | ) |
Total shareholders’ equity | | 751,810 |
| | 754,140 |
|
Total liabilities and shareholders’ equity | | $ | 6,250,173 |
| | $ | 6,498,097 |
|
The accompanying notes are an integral part of these consolidated financial statements.
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, |
| 2018 | | 2017 | | 2018 | | 2017 |
Interest income | | | | | | | |
Loans | $ | 39,301 |
| | $ | 28,090 |
| | $ | 78,131 |
| | $ | 55,344 |
|
Investment securities – taxable | 51 |
| | 267 |
| | 278 |
| | 644 |
|
Investment securities – tax-exempt | 6,353 |
| | 6,157 |
| | 12,734 |
| | 12,711 |
|
Mortgage-backed securities | 10,210 |
| | 10,818 |
| | 21,104 |
| | 20,863 |
|
FHLB stock and equity investments | 411 |
| | 299 |
| | 825 |
| | 597 |
|
Other interest earning assets | 471 |
| | 378 |
| | 919 |
| | 738 |
|
Total interest income | 56,797 |
| | 46,009 |
| | 113,991 |
| | 90,897 |
|
Interest expense | |
| | |
| | |
| | |
|
Deposits | 8,581 |
| | 5,138 |
| | 16,032 |
| | 9,419 |
|
FHLB borrowings | 3,007 |
| | 3,551 |
| | 6,639 |
| | 7,015 |
|
Subordinated notes | 1,407 |
| | 1,398 |
| | 2,805 |
| | 2,791 |
|
Trust preferred subordinated debentures | 658 |
| | 494 |
| | 1,227 |
| | 961 |
|
Other borrowings | 33 |
| | 4 |
| | 44 |
| | 7 |
|
Total interest expense | 13,686 |
| | 10,585 |
| | 26,747 |
| | 20,193 |
|
Net interest income | 43,111 |
| | 35,424 |
| | 87,244 |
| | 70,704 |
|
Provision for loan losses | 1,281 |
| | 1,346 |
| | 5,016 |
| | 2,444 |
|
Net interest income after provision for loan losses | 41,830 |
| | 34,078 |
| | 82,228 |
| | 68,260 |
|
Noninterest income | |
| | |
| | |
| | |
|
Deposit services | 6,261 |
| | 5,255 |
| | 12,440 |
| | 10,369 |
|
Net (loss) gain on sale of securities available for sale | (332 | ) | | (75 | ) | | (1,159 | ) | | 247 |
|
Gain on sale of loans | 173 |
| | 505 |
| | 288 |
| | 1,206 |
|
Trust income | 1,931 |
| | 899 |
| | 3,691 |
| | 1,789 |
|
Bank owned life insurance income | 1,185 |
| | 635 |
| | 1,817 |
| | 1,269 |
|
Brokerage services | 506 |
| | 682 |
| | 956 |
| | 1,229 |
|
Other | 1,283 |
| | 1,392 |
| | 2,584 |
| | 2,857 |
|
Total noninterest income | 11,007 |
| | 9,293 |
| | 20,617 |
| | 18,966 |
|
Noninterest expense | |
| | |
| | |
| | |
|
Salaries and employee benefits | 16,633 |
| | 14,984 |
| | 35,192 |
| | 30,991 |
|
Occupancy expense | 3,360 |
| | 2,897 |
| | 6,943 |
| | 5,760 |
|
Acquisition expense | 1,026 |
| | 473 |
| | 1,858 |
| | 473 |
|
Advertising, travel & entertainment | 775 |
| | 548 |
| | 1,460 |
| | 1,131 |
|
ATM and debit card expense | 243 |
| | 889 |
| | 589 |
| | 1,816 |
|
Professional fees | 952 |
| | 1,050 |
| | 2,022 |
| | 1,989 |
|
Software and data processing expense | 939 |
| | 688 |
| | 1,962 |
| | 1,413 |
|
Telephone and communications | 478 |
| | 476 |
| | 1,016 |
| | 1,002 |
|
FDIC insurance | 484 |
| | 445 |
| | 981 |
| | 886 |
|
Amortization expense on intangibles | 1,328 |
| | 410 |
| | 2,706 |
| | 841 |
|
Other | 3,056 |
| | 2,677 |
| | 6,212 |
| | 5,093 |
|
Total noninterest expense | 29,274 |
| | 25,537 |
| | 60,941 |
| | 51,395 |
|
Income before income tax expense | 23,563 |
| | 17,834 |
| | 41,904 |
| | 35,831 |
|
Income tax expense | 3,360 |
| | 3,353 |
| | 5,450 |
| | 6,361 |
|
Net income | $ | 20,203 |
| | $ | 14,481 |
| | $ | 36,454 |
| | $ | 29,470 |
|
| | | | | | | |
Earnings per common share – basic | $ | 0.58 |
| | $ | 0.49 |
| | $ | 1.04 |
| | $ | 1.01 |
|
Earnings per common share – diluted | $ | 0.57 |
| | $ | 0.49 |
| | $ | 1.04 |
| | $ | 1.00 |
|
Dividends paid per common share | $ | 0.30 |
| | $ | 0.28 |
| | $ | 0.58 |
| | $ | 0.53 |
|
The accompanying notes are an integral part of these consolidated financial statements.
SOUTHSIDE BANCSHARES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED) (in thousands) |
| | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
| June 30, | | June 30, |
| 2018 | | 2017 | | 2018 | | 2017 |
Net income | $ | 20,203 |
| | $ | 14,481 |
| | $ | 36,454 |
| | $ | 29,470 |
|
Other comprehensive (loss) income: | |
| | |
| | |
| | |
|
Securities available for sale and transferred securities: | | | | | | | |
Change in net unrealized holding (losses) gains on available for sale securities during the period | (10,371 | ) | | 13,221 |
| | (48,154 | ) | | 18,106 |
|
Unrealized net gain on securities transferred from held to maturity to available for sale under the transition guidance enumerated in ASU 2017-12 | — |
| | — |
| | 11,881 |
| | — |
|
Change in net unrealized losses on securities transferred from held to maturity to available for sale | — |
| | — |
| | 401 |
| | — |
|
Reclassification adjustment for net loss on equity investments, reclassified to retained earnings with adoption of ASU 2016-01 | — |
| | — |
| | 107 |
| | — |
|
Reclassification adjustment for amortization related to available for sale and held to maturity debt securities | 1,252 |
| | 213 |
| | 1,390 |
| | 701 |
|
Reclassification adjustment for net loss (gain) on sale of available for sale securities, included in net income | 332 |
| | 75 |
| | 1,159 |
| | (247 | ) |
Derivatives: | | | | | | | |
Change in net unrealized gain (loss) on effective cash flow hedge interest rate swap derivatives | 1,725 |
| | (1,768 | ) | | 5,970 |
| | (1,848 | ) |
Change in net unrealized gains on interest rate swap derivatives terminated during the period | — |
| | — |
| | — |
| | 273 |
|
Reclassification adjustment from other comprehensive income (loss) related to derivatives designated as cash flow hedge | (331 | ) | | 223 |
| | (458 | ) | | 593 |
|
Pension plans: | | | | | | | |
Amortization of net actuarial loss and prior service credit, included in net periodic benefit cost | 618 |
| | 414 |
| | 1,091 |
| | 803 |
|
Other comprehensive (loss) income, before tax | (6,775 | ) | | 12,378 |
| | (26,613 | ) | | 18,381 |
|
Income tax benefit (expense) related to items of other comprehensive income (loss) | 1,423 |
| | (4,332 | ) | | 5,589 |
| | (6,433 | ) |
Other comprehensive (loss) income, net of tax | (5,352 | ) | | 8,046 |
| | (21,024 | ) | | 11,948 |
|
Comprehensive income | $ | 14,851 |
| | $ | 22,527 |
| | $ | 15,430 |
| | $ | 41,418 |
|
The accompanying notes are an integral part of these consolidated financial statements.
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, 2016 | $ | 39,320 |
| | $ | 535,240 |
| | $ | 30,098 |
| | $ | (47,891 | ) | | $ | (38,493 | ) | | $ | 518,274 |
|
Net income | — |
| | — |
| | 29,470 |
| | — |
| | — |
| | 29,470 |
|
Other comprehensive income | — |
| | — |
| | — |
| | — |
| | 11,948 |
| | 11,948 |
|
Issuance of common stock for dividend reinvestment plan (21,474 shares) | 27 |
| | 694 |
| | — |
| | — |
| | — |
| | 721 |
|
Stock compensation expense | — |
| | 913 |
| | — |
| | — |
| | — |
| | 913 |
|
Net issuance of common stock under employee stock plans (60,078 shares) | 60 |
| | 820 |
| | (49 | ) | | 59 |
| | — |
| | 890 |
|
Cash dividends paid on common stock ($0.53 per share) | — |
| | — |
| | (15,151 | ) | | — |
| | — |
| | (15,151 | ) |
Stock dividend declared (719,515 shares) | 899 |
| | 24,061 |
| | (24,960 | ) | | — |
| | — |
| | — |
|
Balance at June 30, 2017 | $ | 40,306 |
| | $ | 561,728 |
| | $ | 19,408 |
| | $ | (47,832 | ) | | $ | (26,545 | ) | | $ | 547,065 |
|
| | | | | | | | | | | |
Balance at December 31, 2017 | $ | 47,253 |
| | $ | 757,439 |
| | $ | 32,851 |
| | $ | (47,105 | ) | | $ | (36,298 | ) | | $ | 754,140 |
|
Net income | — |
| | — |
| | 36,454 |
| | — |
| | — |
| | 36,454 |
|
Other comprehensive loss | — |
| | — |
| | — |
| | — |
| | (21,024 | ) | | (21,024 | ) |
Issuance of common stock for dividend reinvestment plan (20,432 shares) | 25 |
| | 695 |
| | — |
| | — |
| | — |
| | 720 |
|
Stock compensation expense | — |
| | 965 |
| | — |
| | — |
| | — |
| | 965 |
|
Net issuance of common stock under employee stock plans (63,051 shares) | — |
| | 463 |
| | (52 | ) | | 554 |
| | — |
| | 965 |
|
Cash dividends paid on common stock ($0.58 per share) | — |
| | — |
| | (20,325 | ) | | — |
| | — |
| | (20,325 | ) |
Cumulative effect of ASU 2016-01 | — |
| | — |
| | (85 | ) | | — |
| | — |
| | (85 | ) |
Balance at June 30, 2018 | $ | 47,278 |
| | $ | 759,562 |
| | $ | 48,843 |
| | $ | (46,551 | ) | | $ | (57,322 | ) | | $ | 751,810 |
|
The accompanying notes are an integral part of these consolidated financial statements.
SOUTHSIDE BANCSHARES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOW (UNAUDITED) (in thousands) |
| | | | | | | |
| Six Months Ended |
| June 30, |
| 2018 | | 2017 |
OPERATING ACTIVITIES: | | | |
Net income | $ | 36,454 |
| | $ | 29,470 |
|
Adjustments to reconcile net income to net cash provided by operations: | |
| | |
|
Depreciation and net amortization | 7,078 |
| | 4,846 |
|
Securities premium amortization (discount accretion), net | 7,557 |
| | 8,756 |
|
Loan (discount accretion) premium amortization, net | (1,712 | ) | | (677 | ) |
Provision for loan losses | 5,016 |
| | 2,444 |
|
Stock compensation expense | 965 |
| | 913 |
|
Deferred tax expense | 2,438 |
| | 17 |
|
Net loss (gain) on sale of securities available for sale | 1,159 |
| | (247 | ) |
Net loss on premises and equipment | 132 |
| | 55 |
|
Gross proceeds from sales of loans held for sale | 13,578 |
| | 39,582 |
|
Gross originations of loans held for sale | (12,159 | ) | | (34,977 | ) |
Net loss (gain) on other real estate owned | 258 |
| | (1 | ) |
Net change in: | |
| | |
|
Interest receivable | 1,391 |
| | 1,963 |
|
Other assets | 16,612 |
| | 2,479 |
|
Interest payable | 247 |
| | 60 |
|
Other liabilities | (8,484 | ) | | (5,935 | ) |
Net cash provided by operating activities | 70,530 |
| | 48,748 |
|
| | | |
INVESTING ACTIVITIES: | |
| | |
|
Securities available for sale: | | | |
Purchases | (195,005 | ) | | (272,410 | ) |
Sales | 315,656 |
| | 328,854 |
|
Maturities, calls and principal repayments | 78,042 |
| | 62,242 |
|
Securities held to maturity: | |
| | |
|
Purchases | — |
| | (1,521 | ) |
Maturities, calls and principal repayments | 1,767 |
| | 11,316 |
|
Proceeds from redemption of FHLB stock and other investments | 13,377 |
| | 114 |
|
Purchases of FHLB stock and other investments | (914 | ) | | (477 | ) |
Net loan paydowns (originations) | 19,722 |
| | (54,362 | ) |
Purchases of premises and equipment | (5,154 | ) | | (3,926 | ) |
Proceeds from sales of premises and equipment | 1,905 |
| | 5 |
|
Proceeds from sales of other real estate owned | 771 |
| | 134 |
|
Proceeds from sales of repossessed assets | 287 |
| | 272 |
|
Net cash provided by investing activities | 230,454 |
| | 70,241 |
|
| | | |
(continued) | | | |
SOUTHSIDE BANCSHARES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOW (UNAUDITED) (continued) (in thousands) |
| | | | | | | |
| Six Months Ended |
| June 30, |
| 2018 | | 2017 |
FINANCING ACTIVITIES: | | | |
Net change in deposits | $ | (6,866 | ) | | $ | 90,953 |
|
Net (decrease) increase in federal funds purchased and repurchase agreements | (1,211 | ) | | 1,327 |
|
Proceeds from FHLB borrowings | 1,718,000 |
| | 1,631,476 |
|
Repayment of FHLB borrowings | (1,958,890 | ) | | (1,763,027 | ) |
Proceeds from stock option exercises | 1,084 |
| | 1,022 |
|
Cash paid to tax authority related to tax withholding on share-based awards | (119 | ) | | (132 | ) |
Proceeds from the issuance of common stock for dividend reinvestment plan | 720 |
| | 721 |
|
Cash dividends paid | (20,325 | ) | | (15,151 | ) |
Net cash used in financing activities | (267,607 | ) | | (52,811 | ) |
| | | |
Net increase in cash and cash equivalents | 33,377 |
| | 66,178 |
|
Cash and cash equivalents at beginning of period | 198,692 |
| | 169,654 |
|
Cash and cash equivalents at end of period | $ | 232,069 |
| | $ | 235,832 |
|
| | | |
SUPPLEMENTAL DISCLOSURES FOR CASH FLOW INFORMATION: | |
| | |
|
| | | |
Interest paid | $ | 26,499 |
| | $ | 20,134 |
|
Income taxes paid | $ | — |
| | $ | 5,500 |
|
| | | |
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES: | |
| | |
|
| | | |
Loans transferred to other repossessed assets and real estate through foreclosure | $ | 764 |
| | $ | 263 |
|
Loans transferred from portfolio to held for sale | $ | 3,984 |
| | $ | — |
|
Transfer of held to maturity securities to available for sale securities | $ | 743,421 |
| | $ | — |
|
Adjustment to pension liability | $ | (1,091 | ) | | $ | (803 | ) |
Stock dividend (2.5% for 2017) | $ | — |
| | $ | 24,960 |
|
Unsettled trades to purchase securities | $ | (2,279 | ) | | $ | (24,883 | ) |
The accompanying notes are an integral part of these consolidated financial statements.
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, and its wholly-owned subsidiary, OmniAmerican Bank, acquired by Southside on December 17, 2014. “Diboll” refers to Diboll State Bancshares, Inc., a bank holding company and its wholly-owned subsidiary, First Bank & Trust East Texas, acquired by Southside on November 30, 2017.
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.
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, 2017.
Accounting Changes and Reclassifications
Certain prior period amounts have been reclassified to conform to current year presentation.
We adopted Accounting Standards Update (“ASU”) 2014-09, “Revenue from Contracts with Customers (Topic 606)” as modified by subsequently issued ASUs 2015-14, 2016-08, 2016-10, 2016-12 and 2016-20, on January 1, 2018, the effective date of the guidance, using the modified retrospective approach. As the majority of the Company’s revenues are not subject to the new guidance, the adoption of ASU 2014-09 did not have a material impact on the Company’s consolidated financial position, results of operations, equity or cash flows. We did adjust the presentation of revenue received from our brokerage services, merchant services, as well as our interchange income associated with debit card services, which were all deemed to be services offered in an agent capacity. These lines of revenue will now be presented on a net basis with the fee income disclosed net of the related costs in the noninterest income section of the consolidated statements of income. In connection with the adoption, for the three and six months ended June 30, 2018, we netted $988,000 and $1.8 million of debit card expense against deposit services income and $151,000 and $302,000 of brokerage expense against brokerage income, respectively. Due to the implementation of the guidance under the modified retrospective method, prior periods have not been adjusted and are not comparative. Refer to our revenue recognition discussion below and “Note 1 - Summary of Significant Accounting and Reporting Policies” in our Annual Report on Form 10-K for the year ended December 31, 2017 for more information related to our revenue recognition policies.
We adopted ASU 2016-01, “Financial Instruments – Overall (Subtopic 825-10) – Recognition and Measurement of Financial Assets and Financial Liabilities,” on January 1, 2018, the effective date of the guidance. ASU 2016-01, among other things, (i) requires equity investments, with certain exceptions, to be measured at fair value with changes in fair value recognized in net income, (ii) simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment, (iii) eliminates the requirement for public business entities to disclose the methods and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet, (iv) requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes, (v) requires an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments, (vi) requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset on the balance sheet or the accompanying notes to the financial statements and (vii) clarifies that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available for sale (“AFS”) securities in combination with the entity’s other deferred tax assets. The guidance requires companies to apply the requirements in the year of adoption, through cumulative adjustment, while the guidance related to equity securities without readily determinable fair values should be applied prospectively. Adoption of this guidance resulted in a cumulative adjustment to retained earnings of $85,000, net of tax, on January 1, 2018 and an equity security with a carrying value of $5.9 million that was previously recognized in securities AFS, at estimated fair value on our consolidated balance sheet to instead be recognized in equity investments, with subsequent changes in fair value being
recognized in income. Also in conjunction with the adoption, our fair value measurement of financial instruments will be based upon an exit price notion as required in ASC 820. The guidance was applied on a prospective approach resulting in prior periods no longer being comparable.
We adopted ASU 2017-07, “Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost,” on January 1, 2018. 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. 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. The guidance requires companies to apply the requirements retrospectively to all prior periods presented. We elected to use the practical expedient that permits us to use the amounts in our pension plan disclosures in our employee benefit footnote for the prior comparative periods as the estimation basis for applying the retrospective presentation requirements, which resulted in an increase of $69,000 and $157,000 in salaries and employee benefits expense and a decrease of $69,000 and $157,000 in other noninterest expense for the three and six months ended June 30, 2017, respectively.
We early adopted ASU 2017-12, “Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities,” on January 1, 2018. 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. The guidance also permits a transition election to reclassify held to maturity (“HTM”) securities to AFS securities if a portion of those securities would qualify to be hedged under the new “last-of-layer” approach. 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. The guidance did not have an impact on our derivatives that qualified as hedges on the date of adoption and thus no adjustment was made to retained earnings. In conjunction with the adoption of ASU 2017-12, we made the transition election to reclassify approximately $743.4 million in book value of securities from HTM to AFS that qualified for the last-of-layer method described in ASU 2017-12.
During the three months ended June 30, 2018, we entered into partial term fair value hedges, as allowed under the recently adopted ASU 2017-12, for certain of our fixed rate callable AFS municipal securities. These hedges are expected to be effective in offsetting changes in the fair value of the hedged securities. Gains and losses on derivative instruments designated as fair value hedges, as well as the change in fair value on the hedged item, are recorded in interest income in the consolidated statements of income.
Revenue Recognition
Our revenue consists of net interest income on financial assets and financial liabilities and noninterest income. The classifications of our revenue are presented in the consolidated statements of income. On January 1, 2018, we adopted ASU 2014-09, “Revenue from Contracts with Customers (Topic 606)” using the modified retrospective method. The revenue recognition principle in ASU 2014-09 is that an entity should recognize revenue to depict the transfer of 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.
ASU 2014-09 permits an entity to recognize the incremental costs of obtaining a contract as an expense when incurred if the amortization period of the asset would have been one year or less. We generally expense sales commissions when incurred because the amortization period is within one year or less. These costs are recorded within salaries and employee benefits on the consolidated statements of income.
Revenue is recognized when obligations under the terms of a contract with our customer are satisfied; generally this occurs with the transfer of control of goods or services. Under ASU 2014-09’s practical expedient to recognize revenue equal to the amounts for which we have a right to invoice, revenue is measured as the amount of consideration we expect to receive in exchange for the transfer of those goods or services.
The following summarizes our revenue recognition policies as they relate to revenue from contracts with customers under ASU 2014-09:
| |
• | Deposit services. Service charges on deposit accounts include fees for banking services provided, overdrafts and non-sufficient funds. Revenue is generally recognized in accordance with published deposit account agreements for retail accounts or contractual agreements for commercial accounts. Our deposit services also include our ATM and debit card interchange revenue that is presented net of the associated costs. Interchange revenue is generated by our deposit customers’ usage and volume of activity. Interchange rates are not controlled by the Company, which effectively acts as processor that collects and remits payments associated with customer debit card transactions. |
| |
• | Trust income. Trust income includes fees and commissions from investment management, administrative and advisory services primarily for individuals, and to a lesser extent, partnerships and corporations. Revenue is recognized on an accrual basis at the time the services are performed and when we have a right to invoice and are based on either the market value of the assets managed or the services provided. |
| |
• | Brokerage services. Brokerage services income includes fees and commissions charged when we arrange for another party to transfer brokerage services to a customer. The fees and commissions under this agent relationship are based upon stated fee schedules based upon the type of transaction, volume, and value of the services provided. |
| |
• | Other noninterest income. Other noninterest income includes among other things, merchant services income. Merchant services revenue is derived from third party vendors that process credit card transactions on behalf of our merchant customers. Merchant services revenue is primarily comprised of residual fee income based on the referred merchant’s processing volumes and/or margin. |
Securities
Available for Sale (“AFS”). Debt securities that will be held for indefinite periods of time, including securities that may be sold in response to changes in market interest or prepayment rates, needs for liquidity and changes in the availability of and the yield on alternative investments are classified as AFS. These assets are carried at fair value with changes recorded in other comprehensive income. Fair value is determined using quoted market prices as of the close of business on the balance sheet date. If quoted market prices are not available, fair values are based on quoted market prices for similar securities or estimates from independent pricing services. Securities that are hedged with qualifying derivatives are carried at fair value with the change in fair value on both the hedged instrument and the securities recorded in interest income in the consolidated statements of income.
Held to Maturity (“HTM”). Debt securities that management has the positive intent and ability to hold until maturity are classified as HTM and are carried at their remaining unpaid principal balance, net of unamortized premiums or unaccreted discounts.
Equity Investments. Beginning January 1, 2018, upon adoption of ASU 2016-01, equity investments with readily determinable fair values are stated at fair value with unrealized gains and losses reported in income. For periods prior to January 1, 2018, certain equity investments were classified as AFS and stated at fair value with unrealized gains and losses reported as a separate component of accumulated other comprehensive income (“AOCI”), net of tax. Equity investments without readily determinable fair values are recorded at cost less impairment, if any.
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 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 AFS 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. We plan to adopt on January 1, 2020, the effective date. We have developed a project plan and have assigned a project team to complete the analysis needed to implement the guidance. The team is currently completing the gap analysis/data collection and anticipates running parallel models in early 2019.
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 2017-08, “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. We have elected to adopt on January 1, 2019. 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 have evaluated an estimate of the potential impact of the pending adoption of ASU 2017-08 on our consolidated financial statements. Based on our existing municipal securities portfolio, we believe the change to amortizing premiums to the earliest call date will increase amortization expense recorded through interest income for the year ended December 31, 2019 by approximately $3.4 million, net of tax.
2. Acquisition
On November 30, 2017, we acquired 100% of the outstanding stock of Diboll State Bancshares, Inc. and its wholly-owned subsidiary First Bank & Trust East Texas (collectively, “Diboll”) headquartered in Diboll, Texas. Diboll operated 17 banking offices in Diboll and surrounding areas. We acquired Diboll to further expand our presence in the East Texas market. The operations of Diboll were merged into the Company as of the date of the acquisition.
The Diboll acquisition was accounted for using the acquisition method of accounting and accordingly, purchased assets, including identifiable intangible assets and assumed liabilities were recorded at their respective acquisition date fair values. The purchase price allocation is preliminary and is subject to final determination and valuation of the fair value of assets acquired and liabilities assumed. As of December 31, 2017, the Company recognized $109.7 million in initial goodwill associated with the Diboll acquisition. Our consolidated goodwill totaled $201.2 million as of June 30, 2018 and December 31, 2017. For more information concerning the fair value of the assets acquired and liabilities assumed in relation to the acquisition of Diboll, see “Note 2 - Acquisition” in our Annual Report on Form 10-K for the year ended December 31, 2017.
3. Earnings Per Share
Earnings per share on a basic and diluted basis are calculated as follows (in thousands, except per share amounts).
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2018 | | 2017 | | 2018 | | 2017 |
Basic and Diluted Earnings: | | | | | | | |
Net income | $ | 20,203 |
| | $ | 14,481 |
| | $ | 36,454 |
| | $ | 29,470 |
|
Basic weighted-average shares outstanding | 35,062 |
| | 29,318 |
| | 35,042 |
| | 29,303 |
|
Add: Stock awards | 171 |
| | 201 |
| | 175 |
| | 208 |
|
Diluted weighted-average shares outstanding | 35,233 |
| | 29,519 |
| | 35,217 |
| | 29,511 |
|
Basic Earnings Per Share: | | | | | | | |
Net Income | $ | 0.58 |
| | $ | 0.49 |
| | $ | 1.04 |
| | $ | 1.01 |
|
Diluted Earnings Per Share: | | | | | | | |
Net Income | $ | 0.57 |
| | $ | 0.49 |
| | $ | 1.04 |
| | $ | 1.00 |
|
For the three- and six-month periods ended June 30, 2018, there were approximately 53,000 and 47,000 anti-dilutive shares, respectively. For the three- and six-month periods ended June 30, 2017, there were approximately 52,000 and 51,000 anti-dilutive shares, respectively.
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, 2018 |
| | | | 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 | $ | (35,594 | ) | | $ | 9,652 |
| | $ | (134 | ) | | $ | (25,894 | ) | | $ | (51,970 | ) |
Other comprehensive income (loss): | | | | | | | | | |
Other comprehensive (loss) income before reclassifications | (10,371 | ) | | 1,725 |
| | — |
| | — |
| | (8,646 | ) |
Reclassified from accumulated other comprehensive income | 1,584 |
| | (331 | ) | | (2 | ) | | 620 |
| | 1,871 |
|
Income tax benefit (expense) | 1,845 |
| | (293 | ) | | 1 |
| | (130 | ) | | 1,423 |
|
Net current-period other comprehensive (loss) income, net of tax | (6,942 | ) | | 1,101 |
| | (1 | ) | | 490 |
| | (5,352 | ) |
Ending balance, net of tax | $ | (42,536 | ) | | $ | 10,753 |
| | $ | (135 | ) | | $ | (25,404 | ) | | $ | (57,322 | ) |
| | | | | | | | | |
| Six Months Ended June 30, 2018 |
|
| | | 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 | $ | (16,295 | ) | | $ | 6,399 |
| | $ | (133 | ) | | $ | (26,269 | ) | | $ | (36,298 | ) |
Other comprehensive income (loss): | | | | | | | | | |
Other comprehensive (loss) income before reclassifications | (35,872 | ) | | 5,970 |
| | — |
| | — |
| | (29,902 | ) |
Reclassified from accumulated other comprehensive income (1) | 2,656 |
| | (458 | ) | | (4 | ) | | 1,095 |
| | 3,289 |
|
Income tax benefit (expense) | 6,975 |
| | (1,158 | ) | | 2 |
| | (230 | ) | | 5,589 |
|
Net current-period other comprehensive (loss) income, net of tax | (26,241 | ) | | 4,354 |
| | (2 | ) | | 865 |
| | (21,024 | ) |
Ending balance, net of tax | $ | (42,536 | ) | | $ | 10,753 |
| | $ | (135 | ) | | $ | (25,404 | ) | | $ | (57,322 | ) |
| |
(1) | As discussed in “Note 1 – Summary of Significant Accounting and Reporting Policies,” the Company adopted ASU 2016-01 on January 1, 2018. This amount includes a reclassification for the cumulative adjustment to retained earnings of $107,000 ($85,000, net of tax). |
|
| | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 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 | $ | (20,425 | ) | | $ | 4,961 |
| | $ | (134 | ) | | $ | (18,993 | ) | | $ | (34,591 | ) |
Other comprehensive income (loss): | | | | | | | | | |
Other comprehensive income (loss) before reclassifications | 13,221 |
| | (1,768 | ) | | — |
| | — |
| | 11,453 |
|
Reclassified from accumulated other comprehensive income | 288 |
| | 223 |
| | (2 | ) | | 416 |
| | 925 |
|
Income tax (expense) benefit | (4,728 | ) | | 541 |
| | — |
| | (145 | ) | | (4,332 | ) |
Net current-period other comprehensive income (loss), net of tax | 8,781 |
| | (1,004 | ) | | (2 | ) | | 271 |
| | 8,046 |
|
Ending balance, net of tax | $ | (11,644 | ) | | $ | 3,957 |
| | $ | (136 | ) | | $ | (18,722 | ) | | $ | (26,545 | ) |
| | | | | | | | | |
| Six Months Ended June 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 | 18,106 |
| | (1,575 | ) | | — |
| | — |
| | 16,531 |
|
Reclassified from accumulated other comprehensive income | 454 |
| | 593 |
| | (4 | ) | | 807 |
| | 1,850 |
|
Income tax (expense) benefit | (6,496 | ) | | 344 |
| | 1 |
| | (282 | ) | | (6,433 | ) |
Net current-period other comprehensive income (loss), net of tax | 12,064 |
| | (638 | ) | | (3 | ) | | 525 |
| | 11,948 |
|
Ending balance, net of tax | $ | (11,644 | ) | | $ | 3,957 |
| | $ | (136 | ) | | $ | (18,722 | ) | | $ | (26,545 | ) |
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, |
| 2018 | | 2017 | | 2018 | | 2017 |
| | | | | | | |
Unrealized losses on securities transferred: | | | | | | | |
Amortization of unrealized losses (1) | $ | (1,252 | ) | | $ | (213 | ) | | $ | (1,390 | ) | | $ | (701 | ) |
Tax benefit | 263 |
| | 75 |
| | 292 |
| | 245 |
|
Net of tax | $ | (989 | ) | | $ | (138 | ) | | $ | (1,098 | ) | | $ | (456 | ) |
| | | | | | | |
Unrealized gains and losses on available for sale securities: | | | | | | | |
Realized net (loss) gain on sale of securities (2) | $ | (332 | ) | | $ | (75 | ) | | $ | (1,159 | ) | | $ | 247 |
|
Tax benefit (expense) | 70 |
| | 26 |
| | 243 |
| | (86 | ) |
Net of tax | $ | (262 | ) | | $ | (49 | ) | | $ | (916 | ) | | $ | 161 |
|
| | | | | | | |
Derivatives: | | | | | | | |
Realized net gain (loss) on interest rate swap derivatives (3) | $ | 309 |
| | $ | (245 | ) | | $ | 415 |
| | $ | (624 | ) |
Tax (expense) benefit | (65 | ) | | 86 |
| | (87 | ) | | 218 |
|
Net of tax | $ | 244 |
| | $ | (159 | ) | | $ | 328 |
| | $ | (406 | ) |
| | | | | | | |
Amortization of unrealized gains on terminated interest rate swap derivatives (3) | $ | 22 |
| | $ | 22 |
| | $ | 43 |
| | $ | 31 |
|
Tax expense | (5 | ) | | (8 | ) | | (9 | ) | | (11 | ) |
Net of tax | $ | 17 |
| | $ | 14 |
| | $ | 34 |
| | $ | 20 |
|
| | | | | | | |
Amortization of pension plan: | | | | | | | |
Net actuarial loss (4) | $ | (620 | ) | | $ | (416 | ) | | $ | (1,095 | ) | | $ | (807 | ) |
Prior service credit (4) | 2 |
| | 2 |
| | 4 |
| | 4 |
|
Total before tax | (618 | ) | | (414 | ) | | (1,091 | ) | | (803 | ) |
Tax benefit | 129 |
| | 145 |
| | 228 |
| | 281 |
|
Net of tax | (489 | ) | | (269 | ) | | (863 | ) | | (522 | ) |
Total reclassifications for the period, net of tax | $ | (1,479 | ) | | $ | (601 | ) | | $ | (2,515 | ) | | $ | (1,203 | ) |
(1) Included in interest income on the consolidated statements of income.
(2) Listed as net (loss) gain on sale of securities available for sale on the consolidated statements of income.
(3) Included in interest expense for FHLB borrowings 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.” |
5. Securities
Debt securities
The amortized cost, gross unrealized gains and losses, and estimated fair value of investment and mortgage-backed securities available for sale and held to maturity as of June 30, 2018 and December 31, 2017 are reflected in the tables below (in thousands):
|
| | | | | | | | | | | | | | | | |
| | June 30, 2018 |
| | Amortized | | Gross Unrealized | | Gross Unrealized | | Estimated |
AVAILABLE FOR SALE | | Cost | | Gains | | Losses | | Fair Value |
Investment Securities: | | | | | | | | |
State and Political Subdivisions | | $ | 806,824 |
| | $ | 7,064 |
| | $ | 17,880 |
| | $ | 796,008 |
|
Other Stocks and Bonds | | 3,000 |
| | 32 |
| | — |
| | 3,032 |
|
Mortgage-backed Securities: (1) | | |
| | |
| | |
| | |
Residential | | 714,270 |
| | 2,394 |
| | 17,626 |
| | 699,038 |
|
Commercial |
| 551,945 |
| | 522 |
| | 12,551 |
| | 539,916 |
|
Total | | $ | 2,076,039 |
| | $ | 10,012 |
| | $ | 48,057 |
| | $ | 2,037,994 |
|
| | | | | | | | |
HELD TO MATURITY | | | | | | | | |
Investment Securities: | | | | | | | | |
State and Political Subdivisions | | $ | 3,202 |
| | $ | — |
| | $ | 40 |
| | $ | 3,162 |
|
Mortgage-backed Securities: (1) | | | | | | | | |
Residential | | 60,080 |
| | 181 |
| | 2,194 |
| | 58,067 |
|
Commercial | | 100,994 |
| | 128 |
| | 3,296 |
| | 97,826 |
|
Total | | $ | 164,276 |
| | $ | 309 |
| | $ | 5,530 |
| | $ | 159,055 |
|
|
| | | | | | | | | | | | | | | | |
| | December 31, 2017 |
| | Amortized | | Gross Unrealized | | Gross Unrealized | | Estimated |
AVAILABLE FOR SALE | | Cost | | Gains | | Losses | | Fair Value |
Investment Securities: | | | | | | | | |
U.S. Government Agency Debentures | | $ | 108,869 |
| | $ | — |
| | $ | — |
| | $ | 108,869 |
|
State and Political Subdivisions | | 392,760 |
| | 3,895 |
| | 3,991 |
| | 392,664 |
|
Other Stocks and Bonds | | 5,024 |
| | 31 |
| | — |
|
| 5,055 |
|
Other Equity Securities (2) | | 6,027 |
| | — |
| | 107 |
| | 5,920 |
|
Mortgage-backed Securities: (1) | | | | | | |
| | |
Residential | | 720,930 |
| | 4,476 |
| | 7,377 |
|
| 718,029 |
|
Commercial |
| 308,357 |
|
| 761 |
|
| 900 |
|
| 308,218 |
|
Total | | $ | 1,541,967 |
| | $ | 9,163 |
| | $ | 12,375 |
| | $ | 1,538,755 |
|
| | | | | | | | |
HELD TO MATURITY | | | | | | | | |
Investment Securities: | | | | | | | | |
State and Political Subdivisions | | $ | 413,632 |
| | $ | 10,879 |
| | $ | 2,583 |
| | $ | 421,928 |
|
Mortgage-backed Securities: (1) | | | | | | | | |
|
Residential | | 129,044 |
| | 1,631 |
| | 239 |
| | 130,436 |
|
Commercial | | 366,830 |
| | 3,812 |
| | 1,206 |
| | 369,436 |
|
Total | | $ | 909,506 |
| | $ | 16,322 |
| | $ | 4,028 |
| | $ | 921,800 |
|
| |
(1) | All mortgage-backed securities issued and/or guaranteed by U.S. government agencies or U.S. government-sponsored enterprises. |
| |
(2) | See “Note 1 – Summary of Significant Accounting and Reporting Policies” for further information. |
From time to time, we have transferred securities from AFS to HTM due to overall balance sheet strategies. The remaining net unamortized, unrealized loss on the transferred securities included in AOCI in the accompanying balance sheets totaled $15.6 million ($12.4 million, net of tax) at June 30, 2018 and $17.4 million ($13.8 million, net of tax) at December 31, 2017. Any net unrealized gain or loss on the transferred securities included in AOCI 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. Securities transferred with losses included in AOCI 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, 2018 or the year ended December 31, 2017.
On January 1, 2018, we early-adopted ASU 2017-12, “Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities,” and in conjunction with the adoption took the one-time transition election to reclassify approximately $743.4 million book value of securities from HTM to AFS that qualified for hedging under the last-of-layer approach. The unrealized gain of $11.9 million ($9.4 million, net of tax) on the transferred securities was recognized in other comprehensive income on the date of transfer.
The following tables represent the estimated fair value and unrealized loss on investment and mortgage-backed securities AFS and HTM as of June 30, 2018 and December 31, 2017 (in thousands):
|
| | | | | | | | | | | | | | | | | | | | | | | |
| As of June 30, 2018 |
| 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 | $ | 285,278 |
| | $ | 5,260 |
| | $ | 226,698 |
| | $ | 12,620 |
| | $ | 511,976 |
| | $ | 17,880 |
|
Mortgage-backed Securities: | | | | | | | | | | | |
Residential | 518,512 |
| | 10,797 |
| | 107,118 |
| | 6,829 |
| | 625,630 |
| | 17,626 |
|
Commercial | 457,975 |
| | 11,548 |
| | 12,605 |
| | 1,003 |
| | 470,580 |
| | 12,551 |
|
Total | $ | 1,261,765 |
| | $ | 27,605 |
| | $ | 346,421 |
| | $ | 20,452 |
| | $ | 1,608,186 |
| | $ | 48,057 |
|
HELD TO MATURITY | |
| | |
| | |
| | |
| | |
| | |
|
Investment Securities: | | | | | | | | | | | |
State and Political Subdivisions | $ | 2,671 |
| | $ | 40 |
| | $ | — |
| | $ | — |
| | $ | 2,671 |
| | $ | 40 |
|
Mortgage-backed Securities: | | | | | | | | | | | |
Residential | 53,097 |
| | 2,009 |
| | 2,243 |
| | 185 |
| | 55,340 |
| | 2,194 |
|
Commercial | 77,355 |
| | 2,155 |
| | 11,964 |
| | 1,141 |
| | 89,319 |
| | 3,296 |
|
Total | $ | 133,123 |
| | $ | 4,204 |
| | $ | 14,207 |
| | $ | 1,326 |
| | $ | 147,330 |
| | $ | 5,530 |
|
| | | | | | | | | | | |
| As of December 31, 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 | $ | 32,341 |
| | $ | 121 |
| | $ | 172,006 |
| | $ | 3,870 |
| | $ | 204,347 |
| | $ | 3,991 |
|
Other Equity Securities (1) | 5,920 |
| | 107 |
| | — |
| | — |
| | 5,920 |
| | 107 |
|
Mortgage-backed Securities: | | | | | | | | | | | |
Residential | 429,742 |
| | 3,232 |
| | 102,973 |
| | 4,145 |
| | 532,715 |
| | 7,377 |
|
Commercial | 146,796 |
| | 419 |
| | 13,134 |
| | 481 |
| | 159,930 |
| | 900 |
|
Total | $ | 614,799 |
| | $ | 3,879 |
| | $ | 288,113 |
| | $ | 8,496 |
| | $ | 902,912 |
| | $ | 12,375 |
|
HELD TO MATURITY | |
| | |
| | |
| | |
| | |
| | |
|
Investment Securities: | | | | | | | | | | | |
State and Political Subdivisions | $ | 85,608 |
| | $ | 807 |
| | $ | 56,736 |
| | $ | 1,776 |
| | $ | 142,344 |
| | $ | 2,583 |
|
Mortgage-backed Securities: | | | | | | | | | | | |
Residential | 24,707 |
| | 157 |
| | 2,736 |
| | 82 |
| | 27,443 |
| | 239 |
|
Commercial | 136,491 |
| | 782 |
| | 13,552 |
| | 424 |
| | 150,043 |
| | 1,206 |
|
Total | $ | 246,806 |
| | $ | 1,746 |
| | $ | 73,024 |
| | $ | 2,282 |
| | $ | 319,830 |
| | $ | 4,028 |
|
| |
(1) | See “Note 1 – Summary of Significant Accounting and Reporting Policies” for further information. |
We review those securities in an unrealized loss position for significant differences between fair value and the cost basis to evaluate if a classification of other-than-temporary impairment is warranted. In estimating other-than-temporary impairment losses, management considers, among other things, the length of time and the extent to which the fair value has been less than cost and the financial condition and near-term prospects of the issuer. We consider an other-than-temporary impairment to have occurred when there is an adverse change in expected cash flows. When it is determined that a decline in fair value of AFS and HTM securities is other-than-temporary, the carrying value of the security is reduced to its estimated fair value, with a corresponding charge to earnings for the credit portion and a charge to other comprehensive income for the noncredit portion. Based upon the length of time and the extent to which fair value is less than cost, we believe that none of the securities with an unrealized loss have other-than-temporary impairment at June 30, 2018.
The majority of the securities in an unrealized loss position are highly rated Texas municipal securities and U.S. Agency mortgage-backed securities (“MBS”) where the unrealized loss is a direct result of the change in interest rates and spreads. For those securities in an unrealized loss position, we do not currently intend to sell the securities and it is not more likely than not that we will be required to sell the securities before the anticipated recovery of their amortized cost basis. To the best of management’s knowledge and based on our consideration of the qualitative factors associated with each security, there were no securities in our investment and MBS portfolio with an other-than-temporary impairment at June 30, 2018.
Interest income recognized on securities for the periods presented (in thousands):
|
| | | | | | | |
| | | |
| Three Months Ended June 30, |
| 2018 | | 2017 |
U.S. Treasury | $ | 23 |
| | $ | 204 |
|
U.S. Government Agency Debentures | — |
| | — |
|
State and Political Subdivisions | 6,353 |
| | 6,157 |
|
Other Stocks and Bonds | 28 |
| | 35 |
|
Other Equity Securities | — |
| | 28 |
|
Mortgage-backed Securities | 10,210 |
| | 10,818 |
|
Total interest income on securities | $ | 16,614 |
| | $ | 17,242 |
|
|
| | | | | | | |
| Six Months Ended June 30, |
| 2018 | | 2017 |
U.S. Treasury | $ | 131 |
| | $ | 519 |
|
U.S. Government Agency Debentures | 89 |
| | — |
|
State and Political Subdivisions | 12,734 |
| | 12,711 |
|
Other Stocks and Bonds | 58 |
| | 69 |
|
Other Equity Securities (1) | — |
| | 56 |
|
Mortgage-backed Securities | 21,104 |
| | |