903-531-7111

 

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, or an emerging growth company.  See the definitions of “large accelerated filer,” “accelerated filer”filer,” “smaller reporting company,” and “smaller reporting“emerging growth company” in Rule 12b-2 of the Exchange Act.

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

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

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

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 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 have been prepared in accordance with United States (“U.S.”) generally accepted accounting principles (“GAAP”) for interim financial information and with the three-instructions to Form 10-Q and six-month periods ended June 30, 2017 and 2016 are unaudited;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.  All intercompany accounts and transactions are eliminated in consolidation.  The preparation of these consolidated financial statements in conformityaccordance with U.S. generally accepted accounting principles (“GAAP”)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, 2016.2017.  

Accounting Changes and Reclassifications

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

We adopted ASU 2016-09 “Compensation - Stock CompensationAccounting Standards Update (“ASU”) 2014-09, “Revenue from Contracts with Customers (Topic 718): Improvements to Employee Share-Based Payment Accounting,606)” as modified by subsequently issued ASUs 2015-14, 2016-08, 2016-10, 2016-12 and 2016-20, on January 1, 2017 which requires all income tax effects related to settlements2018, the effective date of share-based payment awards be reported in earnings as an increase (or decrease) to income tax expense. Previously, income tax benefits at settlementthe guidance, using the modified retrospective approach. As the majority of an award were reported as an increase (or decrease) to additional paid-in capitalthe Company’s revenues are not subject to the extent that those benefitsnew 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 greater than (or less than)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 tax benefits recognized in earnings during the vesting period or exercisedisclosed net of the award. The requirement to report thoserelated costs in the noninterest income tax effects in earnings has been applied to settlements occurring on or after January 1, 2017, andsection of the impactconsolidated statements of applying that guidance reduced reported income tax expense by $84,000, or less than $0.01 on our diluted earnings per common shareincome. In connection with the adoption, 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 all2018, we netted $988,000 and $1.8 million of debit card expense against deposit services income tax-related cash flows resulting from share-based payments be reported as operating activities in the statementand $151,000 and $302,000 of cash flows. Previously,brokerage expense against brokerage income, tax benefits at settlement of an award were reported as a reduction to operating cash flows and an increase to financing cash flowsrespectively. Due to the extent that those benefits exceeded the income tax benefits reported in earnings during the vesting period or exerciseimplementation of the award. We have elected to apply that change in cash flow on a prospective basis and therefore,guidance under the modified retrospective method, prior periods have not been adjusted. ASU 2016-09 also requires the classificationadjusted and are not comparative. Refer to our revenue recognition discussion below and “Note 1 - Summary of employee taxes paid when an employer withholds shares for tax withholding purposes be classified as a financing activity in the statement of cash flowSignificant Accounting and be applied retrospectively. The requirement to report the employee taxes paid is reflected in prior period presentationReporting Policies” in our consolidated statementAnnual 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 cash flows. In connectionFinancial 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 adoptionimpairment assessment of ASU 2016-09, we have also electedequity investments without readily determinable fair values by requiring a qualitative assessment to recognize forfeitures as they occur.

The existing gainrecognized in accumulated other comprehensive income related toincome. Also in conjunction with the terminated interest rate swap contractsadoption, our fair value measurement of financial instruments will be reclassified into earnings through straight-line accretionbased 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 forecasted transaction affects earnings.

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.

Our revenue consists of net interest income on financial assets and hedging activities is included in “Note 10 - Derivative Financial Instrumentsfinancial liabilities and Hedging Activities.”

Revenue is recognized when obligations under the terms of a contract with customers toour customer are satisfied; generally this occurs with the transfer of control of goods or services or enter into contractsservices. 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 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. goods or services.

The guidance permits companiesfollowing summarizes our revenue recognition policies as they relate 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 tounder ASU 2014-09:

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 noninterest income) which we havecomprehensive income.  Fair value is determined to beusing 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 scopeconsolidated statements of ASU 2014-09.  Theincome.

Equity Investments. Beginning January 1, 2018, upon adoption of ASU 2014-09 is not expected2016-01, equity investments with readily determinable fair values are stated at fair value with unrealized gains and losses reported in income. For periods prior to haveJanuary 1, 2018, certain equity investments were classified as AFS and stated at fair value with unrealized gains and losses reported as a material impact on our financials. Weseparate component of accumulated other comprehensive income (“AOCI”), net of tax. Equity investments without readily determinable fair values are continuing to evaluate the impact of the additional disclosures required by this guidance.recorded at cost less impairment, if any.

In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842).” ASU 2016-02 requires a lessee to recognize assets and liabilities for leases with lease terms of more than 12 months. Consistent with current GAAP, the recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee primarily will depend on its classification as a finance or operating lease. However, unlike current GAAP which requires only capital leases to be recognized on the balance sheet, the new ASU 2016-02 will require both finance (formerly known as “capital”) and operating leases to be recognized on the balance sheet. ASU 2016-02 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted. The guidance requires companies to apply the requirements in the year of adoption using a modified retrospective approach. We are currently evaluating the impact this guidance will have on our consolidated financial statements, and we anticipate our assessment to be completed during the fiscal year 2018. 

In June 2016, the FASB issued ASU 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” ASU 2016-13 introduces an approach based on expected losses to estimate credit losses on certain types of financial instruments. ASU 2016-13 also modifies the impairment model for available for saleAFS 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. Early adoption is permitted.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 are currently evaluatinghave evaluated an estimate of the potential impact of the pending adoption of ASU 2017-08 on our consolidated financial statements.

On June 12,November 30, 2017, we acquired 100% of the Company entered into an Agreement and Planoutstanding stock of Merger (the “Merger Agreement”) with Diboll State Bancshares, Inc., a Texas corporation (“Diboll”) and the holding company forits wholly-owned subsidiary First Bank & Trust East Texas a Texas banking association based(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, 2017, Diboll had $993.8 million2018 and December 31, 2017. For more information concerning the fair value of the assets acquired and liabilities assumed in assets. The Merger Agreement provides that, subjectrelation 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.

Earnings per share on a basic and diluted basis has been adjusted to give retroactive recognition to stock dividends and isare calculated as follows (in thousands, except per share amounts):.

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