Document
Table of Contents


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

FORM 10-Q
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2017
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

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

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

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

Large accelerated filer 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 24, 2017 was 29,343,954 shares.
 


TABLE OF CONTENTS
 
PART I.  FINANCIAL INFORMATION
 
PART II.  OTHER INFORMATION
 

Table of Contents


PART I.   FINANCIAL INFORMATION
ITEM 1.  FINANCIAL STATEMENTS
SOUTHSIDE BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(in thousands, except share amounts)
 
 
June 30,
2017
 
December 31,
2016
ASSETS
 
 
 
 
Cash and due from banks
 
$
56,033

 
$
59,363

Interest earning deposits
 
175,039

 
102,251

Federal funds sold
 
4,760

 
8,040

Total cash and cash equivalents
 
235,832

 
169,654

Securities available for sale, at estimated fair value
 
1,397,811

 
1,479,600

Securities held to maturity, at carrying value (estimated fair value of $943,776 and $944,282, respectively)
 
925,538

 
937,487

FHLB stock, at cost
 
61,561

 
61,084

Other investments
 
5,424

 
5,508

Loans held for sale
 
3,036

 
7,641

Loans:
 
 

 
 

Loans
 
2,610,198

 
2,556,537

Less:  Allowance for loan losses
 
(19,241
)
 
(17,911
)
Net Loans
 
2,590,957

 
2,538,626

Premises and equipment, net
 
105,938

 
106,003

Goodwill
 
91,520

 
91,520

Other intangible assets, net
 
3,767

 
4,608

Interest receivable
 
23,220

 
25,183

Deferred tax asset, net
 
22,428

 
28,891

Bank owned life insurance
 
99,011

 
97,775

Other assets
 
12,439

 
10,187

Total assets
 
$
5,578,482

 
$
5,563,767

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 

 
 

Deposits:
 
 

 
 

Noninterest bearing
 
$
757,353

 
$
704,013

Interest bearing
 
2,866,720

 
2,829,063

Total deposits
 
3,624,073

 
3,533,076

Short-term obligations:
 
 

 
 

Federal funds purchased and repurchase agreements
 
8,424

 
7,097

FHLB advances
 
1,015,833

 
866,518

Total short-term obligations
 
1,024,257

 
873,615

Long-term obligations:
 
 

 
 

FHLB advances
 
162,249

 
443,128

Subordinated notes, net of unamortized debt issuance costs
 
98,171

 
98,100

Long-term debt, net of unamortized debt issuance costs
 
60,238

 
60,236

Total long-term obligations
 
320,658

 
601,464

Unsettled trades to purchase securities
 
24,883

 
160

Other liabilities
 
37,546

 
37,178

Total liabilities
 
5,031,417

 
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, 32,245,251 shares issued at June 30, 2017 and 31,455,951 shares issued at December 31, 2016)
 
40,306

 
39,320

Paid-in capital
 
561,728

 
535,240

Retained earnings
 
19,408

 
30,098

Treasury stock, at cost (2,901,297 shares at June 30, 2017 and 2,913,064 shares at December 31, 2016)
 
(47,832
)
 
(47,891
)
Accumulated other comprehensive loss
 
(26,545
)
 
(38,493
)
Total shareholders’ equity
 
547,065

 
518,274

Total liabilities and shareholders’ equity
 
$
5,578,482

 
$
5,563,767


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

1
Table of Contents


SOUTHSIDE BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(in thousands, except per share data)
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2017
 
2016
 
2017
 
2016
Interest income
 
 
 
 
 
 
 
Loans
$
28,090

 
$
26,233

 
$
55,344

 
$
53,998

Investment securities – taxable
267

 
107

 
644

 
321

Investment securities – tax-exempt
6,157

 
5,137

 
12,711

 
10,492

Mortgage-backed securities
10,818

 
9,366

 
20,863

 
18,757

FHLB stock and other investments
299

 
185

 
597

 
402

Other interest earning assets
378

 
61

 
738

 
131

Total interest income
46,009

 
41,089

 
90,897

 
84,101

Interest expense
 

 
 

 
 

 
 

Deposits
5,138

 
3,515

 
9,419

 
6,771

Short-term obligations
2,480

 
906

 
4,545

 
1,602

Long-term obligations
2,967

 
2,290

 
6,229

 
4,734

Total interest expense
10,585

 
6,711

 
20,193

 
13,107

Net interest income
35,424

 
34,378

 
70,704

 
70,994

Provision for loan losses
1,346

 
3,768

 
2,444

 
6,084

Net interest income after provision for loan losses
34,078

 
30,610

 
68,260

 
64,910

Noninterest income
 

 
 

 
 

 
 

Deposit services
5,255

 
5,099

 
10,369

 
10,184

Net (loss) gain on sale of securities available for sale
(75
)
 
728

 
247

 
3,169

Gain on sale of loans
505

 
873

 
1,206

 
1,516

Trust income
899

 
869

 
1,789

 
1,724

Bank owned life insurance income
635

 
647

 
1,269

 
1,321

Brokerage services
682

 
535

 
1,229

 
1,110

Other
1,392

 
619

 
2,857

 
1,942

Total noninterest income
9,293

 
9,370

 
18,966

 
20,966

Noninterest expense
 

 
 

 
 

 
 

Salaries and employee benefits
14,915

 
14,849

 
30,834

 
32,581

Occupancy expense
2,897

 
2,993

 
5,760

 
6,328

Advertising, travel & entertainment
548

 
722

 
1,131

 
1,407

ATM and debit card expense
889

 
736

 
1,816

 
1,448

Professional fees
1,050

 
1,478

 
1,989

 
2,816

Software and data processing expense
688

 
739

 
1,413

 
1,488

Telephone and communications
476

 
468

 
1,002

 
952

FDIC insurance
445

 
645

 
886

 
1,283

FHLB prepayment fees
—

 
148

 
—

 
148

Other
3,629

 
3,035

 
6,564

 
6,769

Total noninterest expense
25,537

 
25,813

 
51,395

 
55,220

 
 
 
 
 
 
 
 
Income before income tax expense
17,834

 
14,167

 
35,831

 
30,656

Income tax expense
3,353

 
2,772

 
6,361

 
5,745

Net income
$
14,481

 
$
11,395

 
$
29,470

 
$
24,911

Earnings per common share – basic
$
0.49

 
$
0.42

 
$
1.01

 
$
0.92

Earnings per common share – diluted
$
0.49

 
$
0.42

 
$
1.00

 
$
0.92

Dividends paid per common share
$
0.28

 
$
0.24

 
$
0.53

 
$
0.47


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

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Table of Contents


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

June 30,
 
June 30,
 
2017
 
2016
 
2017
 
2016
Net income
$
14,481

 
$
11,395

 
$
29,470

 
$
24,911

Other comprehensive income:
 

 
 

 
 

 
 

Securities available for sale and transferred securities:
 
 
 
 
 
 
 
Change in net unrealized holding gains on available for sale securities during the period
13,221

 
16,247

 
18,106

 
43,991

Reclassification adjustment for amortization of unrealized losses on securities transferred to held to maturity
213

 
87

 
701

 
144

Reclassification adjustment for net loss (gain) on sale of available for sale securities, included in net income
75

 
(728
)
 
(247
)
 
(3,169
)
Derivatives:
 
 
 
 
 
 
 
Change in net unrealized loss on effective cash flow hedge interest rate swap derivatives
(1,768
)
 
(3,594
)
 
(1,848
)
 
(6,195
)
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
245

 
460

 
624

 
817

Reclassification adjustment for amortization of unrealized gains on terminated interest rate swap derivatives
(22
)
 
—

 
(31
)
 
—

Pension plans:
 
 
 
 
 
 
 
Amortization of net actuarial loss, included in net periodic benefit cost
416

 
502

 
807

 
913

Amortization of prior service (credit) cost, included in net periodic benefit cost
(2
)
 
8

 
(4
)
 
4

Other comprehensive income, before tax
12,378

 
12,982

 
18,381

 
36,505

Income tax expense related to items of other comprehensive income
(4,332
)
 
(4,544
)
 
(6,433
)
 
(12,777
)
Other comprehensive income, net of tax
8,046

 
8,438

 
11,948

 
23,728

Comprehensive income
$
22,527

 
$
19,833

 
$
41,418

 
$
48,639


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
—

 
—

 
24,911

 
—

 
—

 
24,911

Other comprehensive income
—

 
—

 
—

 
—

 
23,728

 
23,728

Issuance of common stock for dividend reinvestment plan (23,015 shares)
29

 
619

 
—

 
—

 
—

 
648

Purchase of common stock (443,426 shares)
—

 
—

 
—

 
(10,199
)
 
—

 
(10,199
)
Stock compensation expense
—

 
758

 
—

 
—

 
—

 
758

Tax benefits related to stock awards
—

 
17

 
—

 
—

 
—

 
17

Net issuance of common stock under employee stock plans (23,168 shares)
29

 
145

 
(31
)
 
—

 
—

 
143

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

 
—

 
(11,768
)
 
—

 
—

 
(11,768
)
Stock dividend declared (1,252,353 shares)
1,565

 
33,200

 
(34,765
)
 
—

 
—

 
—

Balance at June 30, 2016
$
36,455

 
$
458,817

 
$
19,874

 
$
(47,891
)
 
$
5,045

 
$
472,300

 
 
 
 
 
 
 
 
 
 
 
 
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


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

4
Table of Contents


SOUTHSIDE BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
(UNAUDITED)
(in thousands)
 
Six Months Ended
 
June 30,
 
2017
 
2016
OPERATING ACTIVITIES:
 
 
 
Net income
$
29,470

 
$
24,911

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

 
 

Depreciation and net amortization
4,846

 
4,328

Securities premium amortization (discount accretion), net
8,756

 
9,366

Loan (discount accretion) premium amortization, net
(677
)
 
(1,680
)
Provision for loan losses
2,444

 
6,084

Stock compensation expense
913

 
758

Deferred tax expense
17

 
506

Net tax benefit related to stock awards
—

 
(17
)
Net gain on sale of securities available for sale
(247
)
 
(3,169
)
Net loss (gain) on premises and equipment
55

 
(19
)
Gross proceeds from sales of loans held for sale
39,582

 
42,602

Gross originations of loans held for sale
(34,977
)
 
(44,674
)
Net (gain) loss on other real estate owned
(1
)
 
147

Net change in:
 

 
 

Interest receivable
1,963

 
506

Other assets
2,479

 
(2,599
)
Interest payable
60

 
378

Other liabilities
(5,935
)
 
(1,872
)
Net cash provided by operating activities
48,748

 
35,556

 
 
 
 
INVESTING ACTIVITIES:
 

 
 

Securities available for sale:
 
 
 
Purchases
(272,410
)
 
(355,720
)
Sales
328,854

 
352,299

Maturities, calls and principal repayments
62,242

 
97,816

Securities held to maturity:
 

 
 

Purchases
(1,521
)
 
(23,542
)
Maturities, calls and principal repayments
11,316

 
9,206

Proceeds from redemption of FHLB stock and other investments
114

 
3,644

Purchases of FHLB stock and other investments
(477
)
 
(235
)
Net loans paydowns (originations)
(54,362
)
 
37,446

Purchases of premises and equipment
(3,926
)
 
(3,327
)
Proceeds from sales of premises and equipment
5

 
51

Proceeds from sales of other real estate owned
134

 
587

Proceeds from sales of repossessed assets
272

 
568

Net cash provided by investing activities
70,241

 
118,793

 
 
 
 
(continued)
 
 
 

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SOUTHSIDE BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
(UNAUDITED) (continued)
(in thousands)
 
Six Months Ended
 
June 30,
 
2017
 
2016
FINANCING ACTIVITIES:
 
 
 
Net change in deposits
$
90,953

 
$
115,428

Net increase in federal funds purchased and repurchase agreements
1,327

 
8,636

Proceeds from FHLB advances
1,631,476

 
3,815,906

Repayment of FHLB advances
(1,763,027
)
 
(4,090,022
)
Tax benefit related to stock awards
—

 
17

Proceeds from stock option exercises
1,022

 
194

Cash paid to tax authority from stock option exercises
(132
)
 
(51
)
Purchase of common stock
—

 
(10,199
)
Proceeds from the issuance of common stock for dividend reinvestment plan
721

 
648

Cash dividends paid
(15,151
)
 
(11,768
)
Net cash used in financing activities
(52,811
)
 
(171,211
)
 
 
 
 
Net increase (decrease) in cash and cash equivalents
66,178

 
(16,862
)
Cash and cash equivalents at beginning of period
169,654

 
80,975

Cash and cash equivalents at end of period
$
235,832

 
$
64,113

 
 
 
 
SUPPLEMENTAL DISCLOSURES FOR CASH FLOW INFORMATION:
 

 
 


 
 
 
Interest paid
$
20,134

 
$
12,727

Income taxes paid
$
5,500

 
$
5,500

 
 
 
 
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES:
 

 
 


 
 
 
Loans transferred to other repossessed assets and real estate through foreclosure
$
263

 
$
764

Adjustment to pension liability
$
(803
)
 
$
(917
)
Stock dividend (2.5% and 5%, respectively)
$
24,960

 
$
34,765

Unsettled trades to purchase securities
$
(24,883
)
 
$
(11,793
)

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


6
Table of Contents


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


1.    Summary of Significant Accounting and Reporting Policies

Basis of Presentation
In this report, the words “the Company,” “we,” “us,” and “our” refer to the combined entities of Southside Bancshares, Inc. and its subsidiaries.  The words “Southside” and “Southside Bancshares” refer to Southside Bancshares, Inc.  The words “Southside Bank” and “the Bank” refer to Southside Bank. “Omni” refers to OmniAmerican Bancorp, Inc., a bank holding company acquired by Southside on December 17, 2014.
The consolidated balance sheet as of June 30, 2017, and the related consolidated statements of income, comprehensive income, changes in shareholders’ equity, cash flows and notes to the financial statements for the three- and six-month periods ended June 30, 2017 and 2016 are unaudited; 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.  All intercompany accounts and transactions are eliminated in consolidation.  The preparation of these consolidated financial statements in conformity with U.S. generally accepted accounting principles (“GAAP”) requires the use of management’s estimates.  These estimates are subjective in nature and involve matters of judgment.  Actual amounts could differ from these estimates.
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 $84,000, or less than $0.01 on our diluted earnings per common share for the three months ended June 30, 2017, and $210,000, or $0.01 on our diluted earnings per common share for the six months ended June 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 accumulated other comprehensive income 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.

7
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The existing gain in accumulated other comprehensive income 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 financials. 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 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 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 capitalization in assets. Employers are required to present the other components of the net periodic benefit cost separately from the line item that includes

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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 2017-04. The guidance requires companies to apply the requirements retrospectively to all prior periods presented. We are currently evaluating the potential impact of the pending adoption of ASU 2017-07 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. 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.

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 June 30, 2017, Diboll had $993.8 million in assets. 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. The merger is expected to close during the fourth quarter of 2017, after receipt of regulatory approvals, the approval of Diboll’s shareholders, 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 stock, subject to adjustment pursuant to the terms of the Merger Agreement.

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
June 30,
 
Six Months Ended
June 30,
 
2017
 
2016
 
2017
 
2016
Basic and Diluted Earnings:
 
 
 
 
 
 
 
Net income
$
14,481

 
$
11,395

 
$
29,470

 
$
24,911

Basic weighted-average shares outstanding
29,318

 
26,890

 
29,303

 
27,002

Add:   Stock awards
201

 
123

 
208

 
97

Diluted weighted-average shares outstanding
29,519

 
27,013

 
29,511

 
27,099

 
 

 
 

 
 

 
 

Basic Earnings Per Share:
 
 
 
 
 
 
 
Net Income
$
0.49

 
$
0.42

 
$
1.01

 
$
0.92

Diluted Earnings Per Share:
 
 
 
 
 
 
 
Net Income
$
0.49

 
$
0.42

 
$
1.00

 
$
0.92


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For the three- and six-month periods ended June 30, 2017, there were approximately 52,000 and 51,000 anti-dilutive shares, respectively. For the three- and six-month periods ended June 30, 2016, there were approximately 23,000 and 54,000 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, 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 (loss)
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 (loss)
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
)


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

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

 
(3,594
)
 
—

 
—

 
12,653

Reclassified from accumulated other comprehensive income (loss)
(641
)
 
460

 
8

 
502

 
329

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

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

 
(2,037
)
 
5

 
326

 
8,438

Ending balance, net of tax
$
26,389

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

 
 
 
 
 
 
 
 
 
 
 
Six Months Ended June 30, 2016
 

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

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

 
(6,195
)
 
—

 
—

 
37,796

Reclassified from accumulated other comprehensive income (loss)
(3,025
)
 
817

 
4

 
913

 
(1,291
)
Income tax (expense) benefit
(14,338
)
 
1,882

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

 
(3,496
)
 
2

 
594

 
23,728

Ending balance, net of tax
$
26,389

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


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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,
 
2017
 
2016
 
2017
 
2016
 
 
 
 
 
 
 
 
Unrealized losses on securities transferred to held to maturity:
 
 
 
 
 
 
 
Amortization of unrealized losses (1)
$
(213
)
 
$
(87
)
 
$
(701
)
 
$
(144
)
Tax benefit
75

 
30

 
245

 
50

Net of tax
$
(138
)
 
$
(57
)
 
$
(456
)
 
$
(94
)
 
 
 
 
 
 
 
 
Unrealized gains and losses on available for sale securities:
 
 
 
 
 
 
 
Realized net (loss) gain on sale of securities (2)
$
(75
)
 
$
728

 
$
247

 
$
3,169

Tax benefit (expense)
26

 
(255
)
 
(86
)
 
(1,109
)
Net of tax
$
(49
)
 
$
473

 
$
161

 
$
2,060

 
 
 
 
 
 
 
 
Derivatives:
 
 
 
 
 
 
 
Realized net loss on interest rate swap derivatives (3)
$
(245
)
 
$
(460
)
 
$
(624
)
 
$
(817
)
Tax benefit
86

 
161

 
218

 
286

Net of tax
$
(159
)
 
$
(299
)
 
$
(406
)
 
$
(531
)
 
 
 
 
 
 
 
 
Amortization of unrealized gains on terminated interest rate swap derivatives (3)
$
22

 
$
—

 
$
31

 
$
—

Tax expense
(8
)
 
—

 
(11
)
 
—

Net of tax
$
14

 
$
—

 
$
20

 
$
—

 
 
 
 
 
 
 
 
Amortization of pension plan:
 
 
 
 
 
 
 
Net actuarial loss (4)
$
(416
)
 
$
(502
)
 
$
(807
)
 
$
(913
)
Prior service credit (cost) (4)
2

 
(8
)
 
4

 
(4
)
Total before tax
(414
)
 
(510
)
 
(803
)
 
(917
)
Tax benefit
145

 
179

 
281

 
321

Net of tax
(269
)
 
(331
)
 
(522
)
 
(596
)
Total reclassifications for the period, net of tax
$
(601
)
 
$
(214
)
 
$
(1,203
)
 
$
839

(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 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 June 30, 2017 and December 31, 2016 are reflected in the tables below (in thousands):
 
 
June 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
 
$
330,155

 
$
3,047

 
$
7,043

 
$
326,159

 
$
—

 
$
—

 
$
326,159

Other Stocks and Bonds
 
5,059

 
85

 
—

 
5,144

 
—

 
—

 
5,144

Other Equity Securities
 
6,034

 
—

 
80

 
5,954

 
—

 
—

 
5,954

Mortgage-backed Securities: (1)
 
 

 
 

 
 

 
 
 
 
 
 
 
 
Residential
 
651,291

 
7,376

 
4,563

 
654,104

 
—

 
—

 
654,104

Commercial

405,217

 
2,467

 
1,234

 
406,450

 
—

 
—

 
406,450

Total
 
$
1,397,756

 
$
12,975

 
$
12,920

 
$
1,397,811

 
$
—

 
$
—

 
$
1,397,811

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
HELD TO MATURITY
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Investment Securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
State and Political Subdivisions
 
$
429,146

 
$
3,196

 
$
12,517

 
$
419,825

 
$
12,529

 
$
2,199

 
$
430,155

Mortgage-backed Securities: (1)
 
 

 
 

 
 

 
 
 
 
 
 
 
 
Residential
 
135,110

 
—

 
5,328

 
129,782

 
2,587

 
249

 
132,120

Commercial
 
379,250

 
983

 
4,302

 
375,931

 
6,364

 
794

 
381,501

Total
 
$
943,506

 
$
4,179

 
$
22,147

 
$
925,538

 
$
21,480

 
$
3,242

 
$
943,776


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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 six months ended June 30, 2017.





14
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The following tables represent the estimated fair value and unrealized loss on securities AFS and HTM as of June 30, 2017 and December 31, 2016 (in thousands):
 
As of June 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
$
211,790

 
$
6,653

 
$
8,285

 
$
390

 
$
220,075

 
$
7,043

   Other Equity Securities
5,954

 
80

 
—

 
—

 
5,954

 
80

Mortgage-backed Securities:
 
 
 
 
 
 
 
 
 
 
 
Residential
232,169

 
3,391

 
22,832

 
1,172

 
255,001

 
4,563

Commercial
98,096

 
1,234

 
—

 
—

 
98,096

 
1,234

Total
$
548,009

 
$
11,358

 
$
31,117

 
$
1,562

 
$
579,126

 
$
12,920

HELD TO MATURITY
 

 
 

 
 

 
 

 
 

 
 

Investment Securities:
 
 
 
 
 
 
 
 
 
 
 
State and Political Subdivisions
$
59,673

 
$
706

 
$
32,490

 
$
1,493

 
$
92,163

 
$
2,199

Mortgage-backed Securities:
 
 
 
 
 
 
 
 
 
 
 
Residential
18,607

 
249

 
—

 
—

 
18,607

 
249

Commercial
49,291

 
794

 
—

 
—

 
49,291

 
794

Total
$
127,571

 
$
1,749

 
$
32,490

 
$
1,493

 
$
160,061

 
$
3,242

 
 
 
 
 
 
 
 
 
 
 
 
 
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:
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury
$
70,069

 
$
3,947

 
$
—

 
$
—

 
$
70,069

 
$
3,947

State and Political Subdivisions
264,485

 
12,069