2015 ANNUAL REPORT
3/14/16 3:14 PM
Letter to the Shareholders ............................................ 2-3
Area Map & Branches ...................................................5
Directors & Officers of Southside Bancshares, Inc. .......... 6-7
Directors and Officers of Southside Bank ..................... 9-13
Financial Highlights .....................................................14
Annual Report to Shareholders .....................................17
45428cov.indd 2
Mission stateMent
It is Southside Bank’s mission:
To create lasting
banking relationships
through exceptional
people delivering
extraordinary service.
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Dear Fellow
shareholDers,
CustoMers
& FrienDs
I am pleased to report 2015 was an
extraordinary year for Southside
Bancshares. Over the course of the
last year we skillfully executed on our
business plan which yielded outstanding
results for our company. At the end
of 2015, we had:
• successfully completed the integration of
OmniAmerican (Omni) into Southside;
• achieved loan growth of 11.5%;
• increased our cash dividend 9.3%;
• reported net income of $44 million; and
Sam Dawson
Chief Executive Officer
• produced a return on average shareholders’ equity of 10.04%.
I feel privileged to work for a company like Southside with such talented people. Our
management team and our employee team members do a tremendous job every single
day while dealing in a positive manner with ever increasing complex regulatory challenges
and customer issues. These individuals, along with the relationships they manage and foster,
are what set Southside apart from other community banks.
In 2015, we believe we continued to deliver for our shareholders. We are delighted with the
financial results that were achieved. Our net income for 2015 of $44 million was net of $3.6
million of after tax merger related expense. The efficiency of the Omni integration surpassed
expectations and merger related cost synergies exceeded original projections. Increases in
revenue from the merger, resulting primarily from loan growth, were especially evident during
the second half of the year. After evaluating the positive results during the year, management
recommended a special fourth quarter dividend that resulted in the 9.3% increase in our
overall cash dividend.
The dynamic markets we operate in continue to offer enormous opportunities for growing our
franchise. Despite the decline in oil prices, the Austin and Fort Worth markets are still
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SSB.2015.Annual_Report.Insides.3.10.16.ƒ.indd 2
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experiencing meaningful job and population growth and offer opportunities to further expand
and enhance our franchise. East Texas, our home market, remains solid. Tyler and Smith County,
our largest East Texas market, continues to experience steady growth. We expanded our
intellectual assets in Austin and Fort Worth during 2015. In 2016, we anticipate impressive loan
growth once again. We will also look to further add to our lending teams in the markets where
our greatest future opportunities exist.
Gaining market share, improving customer satisfaction, fostering innovation, simplifying
delivery systems and other business processes, along with expense discipline and monitoring
capital requirements, will be primary areas of focus for our management team during 2016.
Enhancing our customer’s financial experience remains at the core of that focus. During
this year we will begin making changes at many of our East Texas traditional branches,
enhancing technology, delivery systems and convenience. Customers demanding the ultimate
convenience of banking anywhere, at any time are embracing Southside’s mobile banking
and electronic transactions in increasing numbers. Due to the increasing demand in this
area we continue to allocate significant resources to electronic customer delivery systems.
We are well positioned for the long-term in historically growth oriented and dynamic markets
to provide for loan and deposit growth. Our balance sheet provides us the options and
liquidity to fund this potential new loan growth and our capital ratios exceed all regulatory
minimums, providing room for growth. Our management team is well balanced with both
seasoned and younger, highly skilled professional bankers ready to meet the challenges in
2016 and for many years to come.
Thank you for your continued support of Southside.
Sam Dawson
Chief Executive Officer
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southsiDe Bank loCations
Page 4
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FORT
WORTH
35W
Flower Mound
Watauga
Grapevine
820
Fort Worth
121
Euless
30
30
35W
Arlington
20
Weatherford
20
Granbury
Cleburne
North Texas
Region
75
35E
183
Las Colinas
80
45
20
AUSTIN
Central Texas
Region
175
Gun Barrel
City
Athens
35
183
29
Mopac
79
Westlake
45
130
35
TYLER
East Texas
Region
69
110
Hawkins
Lindale
Tyler
Chandler
31
49
110
155
Longview
20
31
64
Whitehouse
Gresham
69
Bullard
Palestine
155
175
Jacksonville
Tyler • 1201 South Beckham Ave.
Whitehouse • 901 Hwy. 110 North
East Texas Region
East Texas Region
Athens
• 807 East Tyler St.
(Brookshire’s)
Bullard
• 213 N. Doctor M.
Roper Pkwy.
(Brookshire’s)
Chandler
• 703 State Hwy. 31 East
(Brookshire’s)
• 16691 FM 2493
Gresham
Gun Barrel • 901 West Main St.
City
Hawkins
• 1477 Beaulah St.
(Brookshire’s)
Jacksonville • 1015 South Jackson St.
Lindale
• 2510 South Main St.
• 521 South Main St.
Longview
(Brookshire’s)
• 2001 Judson Rd.
• 701 West Marshall Ave.
(Kroger)
• 1217 East Marshall Ave.
(Super 1 Foods)
• 2301 West Loop 281
(Super 1 Foods)
Palestine
• 2107 South Loop 256
(Brookshire’s)
SSB.2015.Annual_Report.Insides.3.10.16.ƒ.indd 5
(Corporate Office)
• 1305 South Beckham Ave.
(Trust & Investment Services)
• 1010 East 1st St.
(Motor Bank)
• 113 West Ferguson St.
• 2121 West Gentry Pkwy.
• 2111 West Gentry Pkwy.
(Motor Bank)
• 6201 South Broadway Ave.
• 6019 South Broadway Ave.
(Motor Bank)
• 3815 State Hwy. 64 West
• 6991 Old Jacksonville Hwy.
(Fresh by Brookshire’s)
• 2020 Roseland Blvd.
(Brookshire’s)
• 20100 Hwy. 155 South
(Brookshire’s)
• 113 NNW Loop 323
(Super 1 Foods)
• 100 Rice Rd. (Brookshire’s)
• 2734 East 5th St. (Brookshire’s)
• 3828 Troup Hwy.
(Super 1 Foods)
• 6801 South Broadway Ave.
(Wal-Mart)
• 601 Hwy. 110 North (Brookshire’s)
North Texas Region
North Texas Region
Arlington
• 2831 West Park Row
• 950 West Arbrook Blvd.
• 1204 West Henderson St.
• 2311 West Euless Blvd.
• 2341 Justin Rd. (FM 407)
Cleburne
Euless
Flower
Mound
Fort Worth • 9516 Clifford St.
• 1320 South University Dr.
• 7800 White Settlement Rd.
• 6001 Bryant Irvin Rd.
• 1000 Pennsylvania Ave.
• 2330 East Rosedale St.
• 1030 East Hwy. 377, Suite 138
Granbury
Grapevine • 1616 West Northwest Hwy.
Las Colinas • 1401 Walnut Hill Lane
• 8024 Denton Hwy.
Watauga
Weatherford • 318 South Main St.
Central Texas Region
Central Texas Region
Austin
• 8200 North Mopac Expy., Ste.100
• 1250 South Capital of Texas Hwy.
Bldg. 1, Ste.101
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DireCtors oF southsiDe BanCshares, inC.
Pierre de Wet, Don Thedford
and Preston L. Smith
Lawrence L. Anderson, M. D.,
Paul W. Powell and Alton Cade
Joe Norton, Herbert C. Buie
and John (Bob) Garrett
Patti Callan, Melvin B. Lovelady,
William Sheehy and Elaine Anderson, CPA
Lee R. Gibson, CPA
President and Chief Financial Officer
Sam Dawson
Chief Executive Officer
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oFFiCers oF southsiDe BanCshares, inC.
Joe Norton
Chairman of the Board
Joe Norton has served on the Board of Directors of Southside Bancshares, Inc. since
1988 and Southside Bank since 1977. Before he was elected Chairman of the Board,
he was Vice Chairman of the Southside Bancshares, Inc. Board of Directors from May
2014 to December 2014.
Mr. Norton owns W. D. Norton, Inc. and Norton Equipment Company and is a general
partner in Norton Leasing Ltd., LLP. He is past Vice Chairman of the Board of Regents,
East Texas State University (Texas A&M - Commerce) and serves as Vice President of
Development on the Board of Trustees for All Saints Episcopal School of Tyler.
John (Bob) Garrett
Vice Chairman of the Board
Sam Dawson
Chief Executive Officer
Lee R. Gibson, CPA
President and Chief Financial Officer
Brian K. McCabe
Executive Vice President and Secretary
Julie Shamburger, CPA
Executive Vice President and
Chief Accounting Officer
Anne Martinez
Executive Vice President and
Senior Loan Review Officer
Vonna Crowley, CRCM
Senior Vice President and Compliance Officer
Sandi Hegwood, CPA, CIA
Senior Vice President and Chief Audit Executive
April Pugh, CPA
Senior Vice President and Controller
Katherine Clover, CPA
Vice President and Auditor
Susan Hill
Vice President and Investor Relations and
Assistant Secretary
Adam McElroy
Assistant Vice President and Auditor
Trent Wilson
Assistant Vice President and Loan Review Officer
B. G. Hartley
Chairman Emeritus
B. G. Hartley, the bank’s founder, became Chairman of the Board of
Southside Bancshares, Inc. in 1982. He previously served as Chief
Executive Officer of Southside Bancshares, Inc., until he retired in 2012.
In addition, Mr. Hartley was Chairman of the Board of Southside Bank.
He served as the bank’s Chief Executive Officer from its opening in
1960 until his retirement.
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DireCtors oF southsiDe Bank
Tim Alexander*
Regional President, East Texas
Lawrence L. Anderson, M. D.
Physician
Hoyt N. Berryman, Jr.*
Oil and Gas Investments
Michael Bosworth
President, Bosworth & Associates
Peter M. Boyd*
Regional President, Central Texas
Robert Y. Brown, Jr.*
Robert Y. Brown Architects, Inc.
Herbert C. Buie
President, Tyler Packing Co., Inc.
Alton Cade
Cade Building Materials – Retired
Tim Carter*
Regional President, North Texas
Bill Clawater*
Executive Vice President and
Chief Credit Officer
Jane Hartley Coker*
Executive Vice President
Sam Dawson
Chief Executive Officer
Pierre de Wet
Founder and President
Kiepersol Enterprises
John (Bob) Garrett
Vice Chairman of the Board
President, Fair Oil Company
Lee R. Gibson, CPA
President and
Chief Financial Officer
George T. Hall*
Executive Vice President
B. G. Hartley
Chairman Emeritus
Melvin B. Lovelady, CPA
Investments, Financial Planning
Brian K. McCabe*
Executive Vice President and
Chief Analytics Officer
Joe Norton
Chairman of the Board
Owner, W. D. Norton, Inc. and
Norton Equipment Company
Paul W. Powell
Dean Emeritus
Truett Theological Seminary
John Sammons, Jr.
Chairman and CEO
Mid-States Services, Inc.
William Sheehy
Attorney – Retired
Preston L. Smith
PSI Production, Inc.
William C. Smyth, M. D.*
Physician – Retired
Ben Sutton*
Independent Petroleum Interests
Don Thedford
Don’s TV & Appliance, Inc.
Lonny R. Uzzell*
Executive Vice President
John F. Walker, M. D.*
Physician
H. Andy Wall*
Banker – Retired
John B. White, III*
Investments
* Advisory Directors
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oFFiCers oF southsiDe Bank, east texas region
Sam Dawson
Chief Executive Officer
Lee R. Gibson, CPA
President and
Chief Financial Officer
Tim Alexander
Regional President,
East Texas
Executive Vice Presidents
Joel Adams
Doug Bolles
Bill Clawater
Jane Hartley Coker
Pam Cunningham
Brian Foster
Jared Green
George T. Hall
Kathy Hayden, CPA
Stephen T. Manley
Brian McCabe
Julie Shamburger, CPA
Greg Sims
Lonny Uzzell
Senior Vice Presidents
Krystyna Alexander
Shannon Bejcek
Jason Cathey
Kim Colquitt
Raymond W. Cozby, III
Vonna Crowley
Michael Custer
Cindy Davis
Suni Davis, CPA
Trent Dawson
Myra Everhart
H. Barham Fulmer, II
Christy Gibson, CPA
Glen Greeney
Zelton Harvey
Susan Hill
Jill Kinsley
Ron Marshall
Mary McLarry
Brian Merritt
Donnie Miliara
Kim Partin, CPA
Jack Peppard
Michael Phea
April Pugh, CPA
Mel Reynolds, CPA
Leigh Anne Rozell
Debra Rutledge
Steve Sellers
Cindy Walker, CPA
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Dorcas Maples
Misty McName
Tanya Merritt
Cindy Miller
Roberto Monsivais
Tracie Murlin
Lesa Owens
Jill Payne
Terri Pruitt
Karla Richardson
Julie Ridgeway
Scott Sanders
Katie Smith
Martina Stanley
Kristin Trammell
Penny Turner
Gerri Warren
Melissa Weenink
Kari Wilson
Banking
Officers
Karen Allen
Benita Branham
Kelli Channel
Tana Cockrell
Letishia Cross
Tonya Dean
Elva Estrada
Amy Green
Whitney Henry
Amberr Hester
Wendy Holder
Nathan Holt
Niki Hughes
Elizabeth Hutcheson
Dawn Jones
Stephanie Malone
Robin Phelps
Sharon Sherrill
Jordan Sims
David Suarez
Mitzi Thompson
Martha Tims
Judie Wheeler
Cindy Willis
Elizabeth Wright
Vice
Presidents
Andrew Adams
Susan Ashley
David Braswell, CPA
Dixie Burton
Russell Estrada
Jerry Fridie
Kyle Gibson
Jay Graham
Alex Hammond
Justin Hargrove
Teresa Harper
Connie Hayati
Ginger Hines
Marilyn Johnson
Carole Jones
Chris Jones
Lesley Jones
Jody Kea
Nathan Kelley
Robin Kerby
Cheyenne Lyons
Glenda Malone
Josh McElroy
Emily Moore, CPA
Brooke Mott
Vicky Nick
Jeff Quesenberry
Amanda Reagan, CPA
Matt Renick
Patty Rivers
Gordon Roberts
Amy Saenz
Jana Simmons
Greg Simpkins
Daniel Sitton
Amanda Stanley
Lora Stockhammer
Tara Suttle
Terrie Timmons
Assistant
Vice Presidents
Ana Alanis
Deborah Allen
David Aycock
Michelle Balfay
Sallie Black
Kim Borrelli
Andressa Boyd
Julie Brown
Charleta Burton
Alex Caballero
Ramon Cocolan
Gabadiel Cornelio
Eddie Crawford
Derrick Crosby
Cherish Davis
Alma Dear
Bobbie Durham
Ashley Fettig
Arturo Figueroa
Mary Fletcher
Christopher Gaw
Shanna Gilliam
Kelli Grant
Marisa Gunstanson
Lucy Gutierrez
Beth Hadfield
Christie Hale
C. J. Hammonds
Terry Henderson
Justin Hutcheson
Johnna Hutchins
Lee’ah Joseph
Brandi Jones
Carol Kelley
Kristopher Kelley
Lynn Kenney
Bryan Lentz
Amber Malone
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oFFiCers oF southsiDe Bank, north texas region
Tim Carter
Regional President,
North Texas
Executive
Vice Presidents
T. L. Arnold
Faye Bond
Mark Cundiff
David Wilcox
Deborah Wilkinson
Senior
Vice Presidents
Shannon Bettis
Stephen Brittain
Landon Brim
Douglas Cassidy
Steve Dalri
R. Lynn Davis
Robert Duffy
David Geeslin
Deborah Hoagland
Mark Jackson
Keith Leonhardt
Tony Pruitt
Russell Pulliam
Page 12
Banking
Officers
Sharon Byrd
Raymond Chaney
Lorie Dean
Jeannie Delorenzo
Saundra Densmore
Christine
Derengowski
Stephanie Felan
Joann Fisher
Staci Hubenak
Brian Murphy
Traci Read
Michael Ramirez
Bryan Thomas
John Wood
Brenda Vetten
Cara Wallace
Stephen Windham
Vice
Presidents
Dianne Arcement
Barbara Burns
Michelle Cole
Jeffery Cosand
Angela Dryfhout
Annette Elizondo
Cary Farmer
Gina Heppel
Julie Hunter
Michael Ingraham
Christopher Katri
Michael Kerr
Laura Latora
Shawn McCage
Jose Ortega
William Regian
Frank Rivas
Michael Starks
Assistant
Vice Presidents
Shannon Adams
Brad Atkinson
Jose Baez
Joann Baskin
Dee Chilson
Jeremy Dean
Carol Durham
Keishi High
Ashley Hubbard
Beatrice Marshall
Alejandro Martinez,
CPA
Allison Miller
Patrick Pilkington
Nancy Schneider
Christopher
Stephens
Matthew Zohfeld
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oFFiCers oF southsiDe Bank, Central texas region
Peter M. Boyd
Regional President,
Central Texas
Jim Alfred
President,
North Austin
Senior
Vice Presidents
Phyllis Milstead
Randy Peschel
Cabrina Seuthe
Vice
Presidents
Chris Miller
Craig Snow
Banking
Officer
Miranda Garcia
John Miller
President,
West Austin
Executive
Vice President
Dean Taylor
Senior
Vice Presidents
David Mellenbruch
Rafa Valiente
Vice
President
Michael Arellano
Banking
Officer
Lauren Galindo
SSB.2015.Annual_Report.Insides.3.10.16.ƒ.indd 13
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southsiDe BanCshares, inC., FinanCial highlights
(dollars in thousands, except per share data)
Cash and cash equivalents
$
80,975
$
84,655
$
54,431
December 31,
2015
2014
2013
Securities
Loans
Allowance for loan losses
Total assets
Demand deposits
Interest bearing deposits
Total deposits
Total liabilities
Total shareholders’ equity
2,301,297
2,431,753
19,736
5,162,076
672,470
2,782,937
3,455,407
4,718,014
444,062
2,134,898
2,181,133
13,292
4,807,261
661,014
2,713,403
3,374,417
4,382,018
425,243
1,880,938
1,351,273
18,877
3,445,663
529,897
1,997,911
2,527,808
3,186,145
259,518
Years Ended December 31,
Total interest income
Total interest expense
Net interest income
Provision for loan losses
Total noninterest income
Total noninterest expense
Net income
Earnings per common share - basic
Earnings per common share - diluted
$
$
2015
2014
2013
$
154,532
$
123,778
$
119,602
19,854
134,678
8,343
37,895
112,954
43,997
1.74
1.73
16,956
106,822
14,938
24,489
97,704
20,833
1.04
1.04
$
$
17,968
101,634
8,879
35,245
81,713
41,190
2.09
2.09
$
$
Page 14
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
(Mark One)
(cid:58)(cid:3)
(cid:134)(cid:3)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2015
or
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
(State or other jurisdiction of incorporation or organization)
75-1848732
(I.R.S. Employer Identification No.)
1201 S. Beckham Avenue, Tyler, Texas
(Address of Principal Executive Offices)
75701
(Zip Code)
Registrant's telephone number, including area code: (903) 531-7111
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
COMMON STOCK, $1.25 PAR VALUE
Name of each exchange
on which registered
NASDAQ Global Select Market
Securities registered pursuant to Section 12(g) of the Act:
NONE
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes (cid:134) No (cid:58)
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes (cid:134) No (cid:58)
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 (cid:58) No (cid:134)
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 (cid:58) No (cid:134)
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will
not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. (cid:58)
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. (Check one):
Large accelerated filer (cid:134)
Non-accelerated filer (cid:134) (Do not check if a smaller reporting company)
Accelerated filer (cid:95)
Smaller reporting company (cid:134)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes (cid:134) No (cid:58)
The aggregate market value of the common stock held by non-affiliates of the registrant as of June 30, 2015 was $681,597,633.
As of March 7, 2016, 24,974,348 shares of common stock of Southside Bancshares, Inc. were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the Registrant's proxy statement to be filed for the Annual Meeting of Shareholders to be held May 11, 2016 are incorporated by
reference into Part III of this Annual Report on Form 10-K. Other than those portions of the proxy statement specifically incorporated by reference pursuant
to Items 10-14 of Part III hereof, no other portions of the proxy statement shall be deemed so incorporated.
IMPORTANT INFORMATION ABOUT THIS REPORT
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. “FWBS” refers to Fort Worth Bancshares, Inc., a bank holding company acquired by
Southside. “SFG” refers to SFG Finance, LLC (formerly Southside Financial Group, LLC) which was a wholly-owned subsidiary of
the Bank as of July 15, 2011. SFG is consolidated in our financial statements and was dissolved in April 2015. “Omni” refers to
OmniAmerican Bancorp, Inc., a bank holding company acquired by Southside on December 17, 2014. For additional information
concerning the effect of the merger and the fair value of assets assumed in relation to the merger, see “Note 2 - Acquisition.”
In the second quarter of 2013, we closed our broker-dealer subsidiary, Southside Securities, Inc.
PART I
ITEM 1. BUSINESS
FORWARD-LOOKING INFORMATION
The disclosures set forth in this item are qualified by the section captioned “Cautionary Notice Regarding Forward-Looking
Statements” in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this Annual
Report on Form 10-K and other cautionary statements set forth elsewhere in this report.
GENERAL
Southside Bancshares, Inc., incorporated in Texas in 1982, is a bank holding company for Southside Bank, a Texas state
bank headquartered in Tyler, Texas that was formed in 1960. We operate through 60 banking centers, 18 of which are located in
grocery stores, and 26 motor bank facilities.
At December 31, 2015, our total assets were $5.16 billion, total loans were $2.43 billion, deposits were $3.46 billion, and
total equity was $444.1 million. For the years ended December 31, 2015 and 2014, our net income was $44.0 million and $20.8
million and diluted earnings per common share were $1.73 and $1.04, respectively. We have paid a cash dividend every year since
1970 (including dividends paid by Southside Bank prior to the incorporation of Southside Bancshares).
We are a community-focused financial institution that offers a full range of financial services to individuals, businesses,
municipal entities, and nonprofit organizations in the communities that we serve. These services include consumer and commercial
loans, deposit accounts, trust services, safe deposit services and brokerage services.
Our consumer loan services include 1-4 family residential loans, home equity loans, home improvement loans, automobile
loans and other installment loans. Commercial loan services include short-term working capital loans for inventory and accounts
receivable, short and medium-term loans for equipment or other business capital expansion, commercial real estate loans and
municipal loans. We also offer construction loans for 1-4 family residential and commercial real estate.
We offer a variety of deposit accounts with a wide range of interest rates and terms, including savings, money market,
interest and noninterest bearing checking accounts and certificates of deposit (“CDs”). Our trust services include investment
management, administration and advisory services, primarily for individuals and, to a lesser extent, partnerships and
corporations. At December 31, 2015, our trust department managed approximately $878.3 million of trust assets.
Our business strategy includes evaluating expansion opportunities through acquisitions of financial institutions in market
areas that could complement our existing franchise. We generally seek merger partners that are culturally similar, have experienced
management and possess either significant market presence or have potential for improved profitability through financial
management, economies of scale and expanded services. During 2014, we acquired OmniAmerican Bancorp, Inc., a bank holding
company traded on the NASDAQ Global Market and the holding company for OmniAmerican Bank, a federal savings association,
headquartered in Fort Worth, Texas. See "Note 2 - Acquisition" in the accompanying notes to consolidated financial statements
included elsewhere in this report.
We and our subsidiaries are subject to comprehensive regulation, examination and supervision by the Board of Governors
of the Federal Reserve System (the “Federal Reserve”), the Texas Department of Banking (the “TDB”) and the Federal Deposit
Insurance Corporation (the “FDIC”) and are subject to numerous laws and regulations relating to internal controls, the extension of
credit, making of loans to individuals, deposits, and all other facets of our operations.
Our administrative offices are located at 1201 South Beckham Avenue, Tyler, Texas 75701, and our telephone number is
903-531-7111. Our website can be found at www.southside.com. Our public filings with the Securities and Exchange Commission
1
(the “SEC”) may be obtained free of charge on either our website, https://www.southside.com/about/investor-relations under the
topic Documents, or the SEC’s website, www.sec.gov, as soon as reasonably practicable after filing with the SEC.
RECENT DEVELOPMENTS
During April 2015, we dissolved SFG. During the year ended December 31, 2015, we closed one of our leased grocery
store branches in Seven Points and branch locations in Ft. Worth and Forney, both of which were leased.
MARKET AREA
We are headquartered in Tyler, Texas. The Tyler metropolitan area has a population of approximately 210,000 and is
located approximately 90 miles east of Dallas, Texas and 90 miles west of Shreveport, Louisiana.
We consider our primary market areas to be East Texas, the greater Fort Worth, Texas area and the greater Austin, Texas
area. Our expectation is that our presence in all of the market areas we serve should grow in the future. In addition, we continue to
explore new markets in which we believe we can expand successfully.
The principal economic activities in our market areas include retail, distribution, manufacturing, medical services,
education, government and oil and gas industries. Additionally, the industry base includes conventions and tourism, as well as
retirement relocation. These economic activities support a growing regional system of medical service, retail and education
centers. Tyler, Longview, Fort Worth, Austin and Arlington are home to several nationally recognized health care systems that
represent all major specialties.
Our 60 branches and 26 motor bank facilities are located in and around Tyler, Longview, Lindale, Gresham, Jacksonville,
Bullard, Chandler, Hawkins, Palestine, Gun Barrel City, Athens, Whitehouse, Fort Worth, Arlington, Cleburne, Euless, Flower
Mound, Granbury, Grapevine, Irving, Watauga, Weatherford and Austin. Our advertising is designed to target the market areas we
serve. The type and amount of advertising in each market area is directly attributable to our market share in that market area
combined with overall cost.
Additionally, our customers may access various banking services through a network of over 74 automated teller machines
(“ATMs”) and ATMs owned by others, through debit cards, and through our automated telephone, internet and electronic banking
products. These products allow our customers to apply for loans from their computers, access account information and conduct
various other transactions from their telephones, smart phones and computers.
THE BANKING INDUSTRY IN TEXAS
The banking industry is affected by general economic conditions such as interest rates, inflation, recession, unemployment
and other factors beyond our control. During the last thirty years the Texas economy has continued to diversify, decreasing the
overall impact of fluctuations in oil and gas prices; however, the oil and gas industry is still a significant component of the Texas
economy. Since 2010, economic growth and business activity across a wide range of industries and regions in the U.S. has been
slow and uneven. During a majority of that time economic growth and business activity in Texas exceeded the U.S. average.
However in 2014, decisions by certain members of the Organization of Petroleum Exporting Countries (“OPEC”) to maintain higher
crude oil production levels, combined with increased production levels in the United States led to increased global oil supplies which
has resulted in significant declines in market oil prices. Decreased market oil prices have compressed margins for many U.S. and
Texas-based oil producers, particularly those that utilize higher-cost production technologies such as hydraulic fracking and
horizontal drilling, as well as oilfield service providers, energy equipment manufacturers and transportation suppliers, among others.
As of December 31, 2015, the price per barrel of crude oil was approximately $37 compared to approximately $98 as of December
31, 2013. A prolonged period of low oil prices could have a negative impact on the U.S. economy and, in particular, the economies
of energy-dominant states such as Texas. We cannot predict whether current economic conditions will improve, remain the same or
decline.
2
COMPETITION
The activities we are engaged in are highly competitive. Financial institutions such as credit unions, consumer finance
companies, insurance companies, brokerage companies and other financial institutions with varying degrees of regulatory
restrictions compete vigorously for a share of the financial services market. During 2015, the number of financial institutions in our
market areas increased, a trend that we expect will continue. Brokerage and insurance companies continue to become more
competitive in the financial services arena and pose an ever-increasing challenge to banks. Legislative changes also greatly affect
the level of competition we face. Federal legislation allows credit unions to use their expanded membership capabilities, combined
with tax-free status, to compete more fiercely for traditional bank business. The tax-free status granted to credit unions provides
them with a significant competitive advantage. Many of the largest banks operating in Texas, including some of the largest banks in
the country, have offices in our market areas with capital resources, broader geographic markets, and legal lending limits
substantially in excess of those available to us. We face competition from institutions that offer products and services we do not or
cannot currently offer. Some institutions we compete with offer interest rate levels on loan and deposit products that we are
unwilling to offer due to interest rate risk and overall profitability concerns. We expect the level of competition to continue to
increase.
EMPLOYEES
At February 19, 2016, we employed approximately 683 full time equivalent persons. None of our employees are
represented by any unions or similar groups, and we have not experienced any type of strike or labor dispute. We consider the
relationship with our employees to be good.
SUPERVISION AND REGULATION
General
Banking is a complex, highly regulated industry. As a bank holding company under federal law, the Company is subject to
regulation, supervision and examination by the Federal Reserve. In addition, under state law, as the parent company of a Texas-
chartered state bank that is not a member of the Federal Reserve System, the Company is subject to supervision and examination by
the TDB. As a Texas-chartered state bank, Southside Bank is subject to regulation, supervision and examination by the TDB, as its
chartering authority, and by the FDIC, as its primary federal regulator and deposit insurer. This system of regulation and supervision
applicable to us establishes a comprehensive framework for our operations and is intended primarily for the protection of bank
depositors, the FDIC’s Deposit Insurance Fund (“DIF”) and the public, rather than our shareholders and creditors.
In addition to the system of regulation and supervision outlined above, the Dodd-Frank Wall Street Reform and Consumer
Protection Act (the “Dodd-Frank Act”), which is discussed in greater detail below, created the Consumer Financial Protection
Bureau (the “Bureau”), a federal regulatory body with broad authority to regulate the offering and provision of consumer financial
products. The Bureau officially came into being on July 21, 2011, and rulemaking authority for a range of consumer financial
protection laws (such as the Truth in Lending Act, the Electronic Fund Transfer Act and the Real Estate Settlement Procedures Act,
among others) transferred from the federal prudential banking regulators to the Bureau on that date. The Dodd-Frank Act gives the
Bureau authority to supervise and examine depository institutions with more than $10 billion in assets for compliance with these
federal consumer laws. The authority to supervise and examine depository institutions with $10 billion or less in assets for
compliance with federal consumer laws will remain largely with those institutions’ primary regulators. However, the Bureau may
participate in examinations of these smaller institutions on a “sampling basis” and may refer potential enforcement actions against
such institutions to their primary regulators. The Bureau will also have supervisory and examination authority over certain nonbank
institutions that offer consumer financial products. The Dodd-Frank Act identifies a number of covered nonbank institutions, and
also authorizes the Bureau to identify additional institutions that will be subject to its jurisdiction. Accordingly, the Bureau may
participate in examinations of Southside Bank, and could supervise and examine other direct or indirect subsidiaries of the Company
that offer consumer financial products.
The earnings of Southside Bank and, therefore, the earnings of the Company, are affected by general economic conditions,
changes in federal and state laws and regulations and actions of various regulatory authorities, including those referenced
above. Additional changes to the laws and regulations applicable to us are frequently proposed at both the federal and state
levels. As a result of the Dodd-Frank Act, which was enacted on July 21, 2010, the regulatory framework under which we operate
has changed and will continue to change substantially over the next several years. The Dodd-Frank Act represents a significant
overhaul of many aspects of the regulation of the financial services industry, addressing, among other things, systemic risk, capital
adequacy, deposit insurance assessments, consumer financial protection, interchange fees, derivatives, lending limits, mortgage
lending practices, registration of investment advisors and changes among the bank regulatory agencies. Among the provisions that
have impacted or are likely to affect the operations of the Company and Southside Bank are the following:
3
• Creation of the Bureau with centralized authority, including supervisory, examination and enforcement authority, for
consumer protection in the banking industry;
• New limitations on federal preemption;
• New prohibitions and restrictions on the ability of a banking entity and nonbank financial company to engage in
proprietary trading and have certain interests in, or relationships with, a hedge fund or private equity fund;
• Application of new regulatory capital requirements, including changes to leverage and risk-based capital standards and
changes to the components of permissible tiered capital;
• Requirement that holding companies and their subsidiary banks be well capitalized and well managed in order to engage in
activities permitted for financial holding companies;
• Changes to the assessment base for deposit insurance premiums;
•
Permanently raising the FDIC’s standard maximum deposit insurance amount to $250,000;
• Repeal of the prohibition on the payment of interest on demand deposits, thereby permitting depository institutions to pay
interest on business transaction and other accounts;
• Restrictions on compensation, including a prohibition on incentive-based compensation arrangements that encourage
inappropriate risk taking by covered financial institutions and are deemed to be excessive, or that may lead to material
losses;
• Requirement that sponsors of asset-backed securities retain a percentage of the credit risk underlying the securities;
and
• Requirement that banking regulators remove references to and requirements of reliance upon credit ratings from their
regulations and replace them with appropriate alternatives for evaluating creditworthiness.
Some of these and other major changes could materially impact the profitability of our business, the value of assets we hold or
the collateral available for our loans, require changes to business practices, or force us to discontinue businesses and expose us to
additional costs, taxes, liabilities, enforcement actions and reputational risk. Many of these provisions became effective upon
enactment of the Dodd-Frank Act, while others were subject to further study, rulemaking, and the discretion of regulatory bodies and
have only recently taken effect or will take effect in the coming years. In light of these significant changes and the discretion
afforded to federal regulators, we cannot fully predict the effect that compliance with the Dodd-Frank Act or any implementing
regulations will have on the Company or Southside Bank’s businesses or their ability to pursue future business
opportunities. Additional regulations resulting from the Dodd-Frank Act may materially adversely affect the Company’s business,
financial condition or results of operations.
The likelihood, timing, and scope of any such change and the impact any such change may have on us are impossible to
determine with any certainty. Also, additional changes to the laws and regulations applicable to us are frequently proposed at both
the federal and state levels. We cannot predict whether new legislation or regulations will be enacted and, if enacted, the effect that
it, or any regulations, would have on our business, financial condition or results of operations. Set forth below is a brief description
of the significant federal and state laws and regulations to which we are currently subject. These descriptions do not purport to be
complete and are qualified in their entirety by reference to the particular statutory or regulatory provision.
Holding Company Regulation
As a bank holding company regulated under the Bank Holding Company Act of 1956 (“BHCA”), as amended, the Company
is registered with and subject to regulation, supervision and examination by the Federal Reserve. The Company is required to file
annual and other reports with, and furnish information to, the Federal Reserve, which makes periodic inspections of the Company.
Permitted Activities. Under the BHCA, a bank holding company is generally permitted to engage in, or acquire direct or
indirect control of more than five percent of the voting shares of any company engaged in, the following activities:
•
•
•
banking or managing or controlling banks;
furnishing services to or performing services for our subsidiaries; and
any activity that the Federal Reserve determines to be so closely related to banking as to be a proper incident to the
business of banking, including:
4
factoring accounts receivable;
leasing personal or real property;
performing trust company functions;
operating a nonbank depository institution, such as a savings association;
(cid:405)
(cid:405) making, acquiring, brokering or servicing loans and usual related activities;
(cid:405)
(cid:405)
(cid:405)
(cid:405)
(cid:405)
(cid:405)
(cid:405)
(cid:405)
(cid:405)
providing specified management consulting and counseling activities;
performing selected data processing services and support services;
conducting financial and investment advisory activities;
conducting discount securities brokerage activities;
underwriting and dealing in government obligations and money market instruments;
acting as agent or broker in selling credit life insurance and other types of insurance in connection with credit
transactions;
(cid:405)
(cid:405)
(cid:405)
performing selected insurance underwriting activities;
providing certain community development activities (such as making investments in projects designed primarily
to promote community welfare); and
issuing and selling money orders and similar consumer-type payment instruments.
The Federal Reserve has the authority to order a bank holding company or its subsidiaries to terminate any of these activities
or to terminate its ownership or control of any subsidiary when the Federal Reserve has reasonable cause to believe that the bank
holding company’s continued ownership, activity or control constitutes a serious risk to the financial safety, soundness or stability of
it or any of its bank subsidiaries.
Under the BHCA, a bank holding company meeting certain eligibility requirements may elect to become a “financial holding
company,” which is a form of bank holding company with authority to engage in additional activities. Specifically, a financial
holding company and companies under its control may engage in activities that are “financial in nature,” as defined by the Gramm-
Leach-Bliley Act (“GLBA”) and Federal Reserve interpretations, and therefore may engage in a broader range of activities than
those permitted for bank holding companies and their subsidiaries. Financial activities specifically include insurance brokerage and
underwriting, securities underwriting and dealing, merchant banking, investment advisory and lending activities. Financial holding
companies and their subsidiaries also may engage in additional activities that are determined by the Federal Reserve, in consultation
with the U.S. Department of the Treasury, to be “financial in nature or incidental to” a financial activity or are determined by the
Federal Reserve unilaterally to be “complementary” to financial activities.
In order to offer broker-dealer services through our subsidiary, Southside Securities, Inc., on February 8, 2011, we filed with
the Federal Reserve Bank of Dallas a declaration of financial holding company status and were granted financial holding company
status on March 22, 2011. Election of financial holding company status is not automatic and it was granted based upon
consideration of a number of factors, including that all of our depository institution subsidiaries satisfy the Federal Reserve’s
“well capitalized” and “well managed” standards and have at least a satisfactory rating under the Community Reinvestment Act
(“CRA”) (discussed below). Now that we have succeeded in attaining financial holding company status, that status could be
impacted by the condition of Southside Bank and/or other factors. For example, if Southside Bank ceases to be “well capitalized” or
“well managed” under applicable regulatory standards, the Federal Reserve may, among other things, place limitations on our ability
to conduct broader financial activities or, if the deficiencies persist, require us to divest Southside Bank. In addition, if Southside
Bank were to receive a rating of less than satisfactory under the CRA, we would be prohibited from engaging in any additional
activities other than those permissible for bank holding companies that are not financial holding companies. If we undertake
expanded financial activities (that are not permissible for a bank holding company) and we fail to continue to meet any of the
prerequisites for “financial holding company” status, including those described above, the financial holding company would be
required to enter into an agreement with the Federal Reserve to comply with all applicable capital and management requirements. If
we do not return to compliance within 180 days, the Federal Reserve may order the financial holding company to divest its Bank or
the Company may discontinue or divest investments in companies engaged in activities permissible only for a bank holding
company that has elected to be treated as a financial holding company. We began engaging in broker-dealer activities through
Southside Securities, Inc. on June 16, 2011. In early 2013, to further concentrate on our primary business of banking, a management
decision was made to close Southside Securities, Inc. We ceased engaging in broker-dealer activities through Southside Securities,
Inc. in the second quarter of 2013. However, our financial holding company status has been maintained.
5
Capital Adequacy. Each of the federal banking agencies, including the Federal Reserve and the FDIC, has issued
substantially similar risk-based and leverage capital guidelines applicable to the banking organizations they supervise. As a result of
new regulations, we were required to begin complying with higher minimum capital requirements as of January 1, 2015. The new
capital rules (“Updated Capital Rules”), which are discussed below, implement certain provisions of the Dodd-Frank Act and a
separate, international regulatory capital initiative known as “Basel III.” These Updated Capital Rules also make important changes
to the “prompt corrective action” framework discussed below in Bank Regulation - Prompt Corrective Action and
Undercapitalization.
The agencies’ prior risk-based guidelines, applicable to the Company before January 1, 2015, defined a three-tier capital
framework. Risk-based capital ratios were calculated by dividing, as appropriate, total capital and Tier 1 capital by risk-weighted
assets. Assets and off-balance sheet exposures were assigned to one of four categories of risk weights, based primarily on relative
credit risk. Under these prior risk-based capital requirements, the Company and Southside Bank were each generally required to
maintain a minimum ratio of total capital to risk-weighted assets of at least 8% and a minimum ratio of Tier 1 capital to risk-
weighted assets of at least 4%. To the extent we engaged in trading activities, we were required to adjust our risk-based capital
ratios to take into consideration market risks that may result from movements in market prices of covered trading positions in trading
accounts, or from foreign exchange or commodity positions, whether or not in trading accounts, including changes in interest rates,
equity prices, foreign exchange rates or commodity prices.
Each of the federal bank regulatory agencies, including the Federal Reserve and the FDIC, also had established minimum
leverage capital requirements for the banking organizations they supervise. These requirements provided that banking organizations
that met certain criteria, including excellent asset quality, high liquidity, low interest rate exposure and good earnings, and that had
received the highest regulatory rating must maintain a ratio of Tier 1 capital to total adjusted average assets of at least
3%. Institutions not meeting these criteria, as well as institutions with supervisory, financial or operational weaknesses, were
expected to maintain a minimum Tier 1 capital to total adjusted average assets ratio equal to 100 to 200 basis points above this stated
minimum. Holding companies experiencing internal growth or making acquisitions were expected to maintain strong capital
positions substantially above the minimum supervisory levels without significant reliance on intangible assets. The Federal Reserve
also considered a “tangible Tier 1 capital leverage ratio” (deducting all intangibles) and other indicators of capital strength in
evaluating proposals for expansion or new activity.
The Updated Capital Rules, which became applicable to the Company and the Bank on January 1, 2015, made substantial
changes to these previous standards. Among other things, the new regulations (i) introduced a new capital requirement known as
“Common Equity Tier 1” (“CET1”), (ii) stated that Tier 1 capital consists of CET1 and “Additional Tier 1 capital” instruments
meeting certain requirements, (iii) defined CET1 to require that most deductions and adjustments to regulatory capital measures be
made to CET1 and not to the other components of capital and (iv) revised the scope of the deductions and adjustments from capital
as compared to regulations that previously applied to the Company and other banking organizations.
The Updated Capital Rules also established the following minimum capital ratios: 4.5 percent CET1 to risk-weighted assets;
6.0 percent Tier 1 capital to risk-weighted assets; 8.0 percent total capital to risk-weighted assets; and 4.0 percent Tier 1 leverage
ratio to average consolidated assets. In addition, the Updated Capital Rules also introduced a minimum “capital conservation buffer”
equal to 2.5% of an organization’s total risk-weighted assets, which exists in addition to these new required minimum CET1, Tier 1,
and total capital ratios. The “capital conservation buffer,” which must consist entirely of CET1, is designed to absorb losses during
periods of economic stress. The Updated Capital Rules provide for a number of deductions from and adjustments to CET1, which
include the requirement that mortgage servicing rights, deferred tax assets arising from temporary differences that could not be
realized through net operating loss carrybacks and significant investments in non-consolidated financial entities be deducted from
CET1 to the extent that any one such category exceeds 10% of CET1 or all such categories in the aggregate exceed 15% of CET1.
Certain regulatory capital ratios of the Company and Southside Bank, as of December 31, 2015, are shown in the following
table.
Capital Adequacy Ratios
Regulatory
Minimums
Regulatory
Minimums
to be Well
Capitalized
Southside
Bancshares,
Inc.
Southside
Bank
Common Equity Tier 1 risk-based capital ratio .......................................
Tier 1 risk-based capital ratio ...............................................................
Total risk-based capital ratio ................................................................
Leverage ratio ....................................................................................
4.50%
6.00%
8.00%
4.00%
6.50%
8.00%
10.00%
5.00%
12.71%
14.56%
15.27%
8.61%
14.36%
14.36%
15.07%
8.49%
6
Under the previous capital framework, the effects of accumulated other comprehensive income items included in
shareholders’ equity under U.S. generally accepted accounting principles ("GAAP ") were excluded for the purposes of determining
capital ratios. However, the effects of certain accumulated other comprehensive items are not excluded under the Updated Capital
Rules. The Updated Capital Rules permitted most banking organizations, including the Company and Southside Bank, to make a
one-time permanent election on the institution’s first call report filed after January 1, 2015 to continue to exclude these items, which
Southside Bank did in its March 31, 2015 call report.
Under the Updated Capital Rules, certain hybrid securities, such as trust preferred securities, do not qualify as Tier 1 capital.
However, for bank holding companies like us that had assets of less than $15 billion as of December 31, 2009, trust preferred
securities issued prior to May 19, 2010 can be treated as Tier 1 capital to the extent that they do not exceed 25% of Tier 1 capital
after the application of capital deductions and adjustments.
In addition, reflecting the importance that regulators place on managing capital and other risks, in May 2012 the banking
agencies also issued guidance on stress testing for banking organizations with more than $10 billion in total consolidated assets.
This guidance outlines four “high-level” principles for stress testing practices that should be a part of a banking organization’s stress-
testing framework. Specifically, the guidance calls for the framework to (i) include activities and exercises that are tailored to and
sufficiently capture the banking organization’s exposures, activities and risks; (ii) employ multiple conceptually sound stress testing
activities and approaches; (iii) be forward-looking and flexible; and (iv) be clear, actionable, well-supported, and used in the
decision-making process. Moreover, the federal bank regulators have issued a series of guidance and rulemakings applicable to
“large banks.” While many of these do not currently apply to us due to our asset size, these issuances could impact industry capital
standards and practices in many, potentially unforeseeable, ways.
Source of Strength. Federal Reserve policy requires a bank holding company to act as a source of financial strength and to
take measures to preserve and protect bank subsidiaries in situations where additional investments in a troubled bank may not
otherwise be warranted. As a result, a bank holding company may be required to contribute additional capital to its subsidiaries in
the form of capital notes or other instruments which qualify as capital under regulatory rules. Any loans from the holding company
to its subsidiary banks likely will be unsecured and subordinated to the bank’s depositors and perhaps to other creditors of the
bank. Notably, the Dodd-Frank Act codified the Federal Reserve’s “source of strength” policy; this statutory change became
effective July 21, 2011. In addition to the foregoing requirements, the Dodd-Frank Act’s provisions authorize the Federal Reserve
and other federal banking regulators to require a company that directly or indirectly controls a bank to submit reports that are
designed both to assess the ability of such company to comply with its “source of strength” obligations and to enforce the company’s
compliance with these obligations. As of December 31, 2015 the Federal Reserve and other federal banking regulators have not yet
issued rules implementing this requirement.
In addition, if a bank holding company enters into bankruptcy or becomes subject to the orderly liquidation process
established by the Dodd-Frank Act, any commitment by the bank holding company to a federal bank regulatory agency to maintain
the capital of a subsidiary bank would be assumed by the bankruptcy trustee or the FDIC, as appropriate, and entitled to a priority of
payment. In addition, the FDIC provides that any insured depository institution generally will be liable for any loss incurred by the
FDIC in connection with the default of, or any assistance provided by the FDIC to, a commonly controlled insured depository
institution. Southside Bank is an FDIC-insured depository institution and thus subject to these requirements. See also Bank
Regulation - Prompt Corrective Action and Undercapitalization.
Dividends. The principal source of our liquidity at the parent company level is dividends from Southside Bank. Southside
Bank is subject to federal and state restrictions on its ability to pay dividends to the Company. We must pay essentially all of our
operating expenses from funds we receive from Southside Bank. Therefore, shareholders may receive dividends from us only to the
extent that funds are available after payment of our operating expenses. Consistent with its “source of strength” policy, the Federal
Reserve discourages bank holding companies from paying dividends except out of operating earnings and prefers that dividends be
paid only if, after the payment, the prospective rate of earnings retention appears consistent with the bank holding company’s capital
needs, asset quality and overall financial condition.
Among other things, the ability of banks and bank holding companies to pay dividends, and the contents of their respective
dividend policies, could be impacted by a range of changes imposed by the Dodd-Frank Act, many of which will require
implementing rules to become effective. See also Bank Regulation - Dividends for additional information.
Change in Control. Subject to certain exceptions, under the BHCA and the Change in Bank Control Act (“CBCA”), and the
regulations promulgated thereunder, persons who intend to acquire direct or indirect control of a depository institution or a bank
holding company are required to obtain the approval of the Federal Reserve prior to acquiring control. With respect to the Company,
“control” is conclusively presumed to exist where an acquiring party directly or indirectly owns, controls or has the power to vote at
least 25% of our voting securities. Under the Federal Reserve’s CBCA regulations, a rebuttable presumption of control would arise
with respect to an acquisition where, after the transaction, the acquiring party owns, controls or has the power to vote at least 10%
7
(but less than 25%) of our voting securities. In certain cases, a company may also be presumed to have control under the BHCA if it
acquires five percent or more of any class of voting securities.
On September 22, 2008, the Federal Reserve issued a policy statement on minority equity investments in banks and bank
holding companies, that permits investors to (1) acquire up to 33 percent of the total equity of a target bank or bank holding
company, subject to certain conditions, including that the acquiring investor does not acquire 15 percent or more of any class of
voting securities, and (2) designate at least one director, without triggering the various regulatory requirements associated with
control.
Acquisitions. The BHCA provides that a bank holding company must obtain the prior approval of the Federal Reserve (i) for
the acquisition of more than five percent of the voting stock in any bank or bank holding company, (ii) for the acquisition of
substantially all the assets of any bank or bank holding company, or (iii) in order to merge or consolidate with another bank holding
company.
Regulatory Examination. Federal and state banking agencies require the Company and Southside Bank to prepare annual
reports on financial condition and to conduct an annual audit of financial affairs in compliance with minimum standards and
procedures. Southside Bank, and in some cases the Company and any nonbank affiliates, must undergo regular on-site examinations
by the appropriate regulatory agency, which will examine for adherence to a range of legal and regulatory compliance
responsibilities. A bank regulator conducting an examination has complete access to the books and records of the examined
institution, and the results of the examination are confidential. The cost of examinations may be assessed against the examined
organization as the agency deems necessary or appropriate. The FDIC has developed a method for insured depository institutions to
provide supplemental disclosure of the estimated fair value of assets and liabilities, to the extent feasible and practicable, in any
balance sheet, financial statement, report of condition or any other report.
Enforcement Authority. The Federal Reserve has broad enforcement powers over bank holding companies and their nonbank
subsidiaries, as well as “institution-affiliated parties,” including management, employees, agents, independent contractors and
consultants, such as attorneys and accountants and others who participate in the conduct of the institution’s affairs, and has authority
to prohibit activities that represent unsafe or unsound banking practices or constitute knowing or reckless violations of laws or
regulations. These powers may be exercised through the issuance of cease and desist orders, civil money penalties or other
actions. Civil money penalties can be as high as $1,000,000 for each day the activity continues and criminal penalties for some
financial institution crimes may include imprisonment for 20 years. Regulators have flexibility to commence enforcement actions
against institutions and institution-affiliated parties, and the FDIC has the authority to terminate deposit insurance. When issued by
a banking agency, cease and desist and similar orders may, among other things, require affirmative action to correct any harm
resulting from a violation or practice, including restitution, reimbursement, indemnifications or guarantees against loss. A financial
institution may also be ordered to restrict its growth, dispose of certain assets, rescind agreements or contracts, or take other actions
determined to be appropriate by the ordering agency. The federal banking agencies also may remove a director or officer from an
insured depository institution (or bar them from the industry) if a violation is willful or reckless.
Bank Regulation
Southside Bank is a Texas-chartered commercial bank, the deposits of which are insured up to the applicable limits by the DIF
of the FDIC. Southside Bank is not a member of the Federal Reserve System. The Bank is subject to extensive regulation,
examination and supervision by the TDB, as its chartering authority, and by the FDIC, as its primary federal regulator and deposit
insurer. In addition, the Bureau could participate in examinations of the Bank (as described above) in the near term regarding the
Bank’s offering of consumer financial products and services. The federal and state laws applicable to banks regulate, among other
things, the scope of their business and investments, lending and deposit-taking activities, borrowings, maintenance of retained
earnings and reserve accounts, distribution of earnings and payment of dividends.
Permitted Activities and Investments. Under the Federal Deposit Insurance Act (“FDIA”), the activities and investments of
state nonmember banks are generally limited to those permissible for national banks, notwithstanding state law. With FDIC
approval, a state nonmember bank may engage in activities not permissible for a national bank if the FDIC determines that the
activity does not pose a significant risk to the DIF and that the bank meets its minimum capital requirements. Similarly, under Texas
law, a state bank may engage in those activities permissible for national banks domiciled in Texas. The TDB may permit a Texas
state bank to engage in additional activities so long as the performance of the activity by the bank would not adversely affect the
safety and soundness of the bank.
On December 10, 2013, federal regulators, including the Federal Reserve and the FDIC, issued final rules to implement
Section 619 of the Dodd-Frank Act, known as the “Volcker Rule,” to prohibit insured depository institutions, such as Southside
Bank, and their affiliates, such as the Company, from proprietary trading and acquiring certain interests in hedge or private equity
funds. The final rules contain certain exemptions from the prohibition and permit the retention of certain ownership interests.
8
Insured depository institutions were generally required to conform their activities and investments to the requirements by July 21,
2015, though the conformance period for legacy investments in and relationships with a covered fund will end on July 21, 2016.
Brokered Deposits. Southside Bank also may be restricted in its ability to accept, renew or roll over brokered deposits,
depending on its capital classification. Only “well-capitalized” banks are permitted to accept, renew or roll over brokered
deposits. The FDIC may, on a case-by-case basis, permit banks that are adequately capitalized to accept brokered deposits if the
FDIC determines that acceptance of such deposits would not constitute an unsafe or unsound banking practice with respect to the
bank. Undercapitalized banks generally may not accept, renew or roll over brokered deposits.
Loans to One Borrower. Under Texas law, without the approval of the TDB and subject to certain limited exceptions, the
maximum aggregate amount of loans that Southside Bank is permitted to make to any one borrower is 25% of Tier 1 capital.
Insider Loans. Under Regulation O of the Federal Reserve, as made applicable to state nonmember banks by section 18(j)(2)
of the FDIA, Southside Bank is subject to quantitative restrictions on extensions of credit to its executive officers and directors, the
executive officers and directors of the Company, any owner of 10% or more of its stock or the stock of Southside Bancshares, Inc.
and certain entities affiliated with any such persons. In general, any such extensions of credit must (i) not exceed certain dollar
limitations, (ii) be made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for
comparable transactions with third parties, and (iii) not involve more than the normal risk of repayment or present other unfavorable
features. Additional restrictions are imposed on extensions of credit to executive officers. Certain extensions of credit also require
the approval of a bank’s board of directors.
Deposit Insurance and Assessments. The deposits of Southside Bank are insured by the DIF of the FDIC, up to the applicable
limits established by law and are subject to the deposit insurance premium assessments of the DIF. The Dodd-Frank Act amended
the statutory regime governing the DIF. Among other things, the Dodd-Frank Act established a minimum designated reserve ratio
(“DRR”) of 1.35 percent of estimated insured deposits (which the FDIC has set at 2.0 percent each year since 2010), required that
the fund reserve ratio reach 1.35 percent by September 30, 2020 and directed the FDIC to amend its regulations to redefine the
assessment base used for calculating deposit insurance assessments. Specifically, the Dodd-Frank Act requires the assessment base
to be an amount equal to the average consolidated total assets of the insured depository institution during the assessment period,
minus the sum of the average tangible equity of the insured depository institution during the assessment period and an amount the
FDIC determines is necessary to establish assessments consistent with the risk-based assessment system found in the FDIA.
Furthermore, on February 7, 2011, the FDIC issued a final rule changing its assessment system from one based on domestic
deposits to one based on the average consolidated total assets of a bank minus its average tangible equity during each quarter. This
rule modified two adjustments added to the risk-based pricing system in 2009 (an unsecured debt adjustment and a brokered deposit
adjustment), discontinued a third adjustment added in 2009 (the secured liability adjustment), and added an adjustment for long-term
debt held by an insured depository institution where the debt is issued by another insured depository institution. Under these
revisions to the DIF rules, the total base assessment rates will vary depending on the DIF reserve ratio. For example, for banks in
the best risk category, the initial total base assessment rates will be between 2.5 and 9 basis points when the DIF reserve ratio is
below 1.15 percent, between 1.5 and 7 basis points when the DIF reserve ratio is between 1.15 percent and 2 percent, between 1 and
6 basis points when the DIF reserve ratio is between 2 percent and 2.5 percent and between 0.5 and 5 basis points when the DIF
reserve ratio is 2.5 percent or higher. On June 16, 2015, the FDIC issued a notice of proposed rulemaking that would refine the
deposit insurance assessment system for small insured depository institutions that have been federally insured for at least five years.
The proposed rule would revise the financial ratios method, update the financial measures used, and eliminate risk categories for
such banks.
In addition, all FDIC-insured institutions are required to pay a pro rata portion of the interest due on bonds issued by the
Financing Corporation (“FICO”) to fund the closing and disposal of failed thrift institutions by the Resolution Trust
Corporation. FICO assessment rates, which are calculated off the assessment base established by the Dodd-Frank Act, are set
quarterly. The rate was .600 (annual) basis points for the first, second, and fourth quarters of 2015 and .580 (annual) basis points for
the third quarter of 2015. It was 0.580 (annual) basis points for the first quarter of 2016. These assessments will continue until the
FICO bonds mature in 2017 through 2019.
Capital Adequacy.
See Holding Company Regulation - Capital Adequacy.
Prompt Corrective Action and Undercapitalization. The Federal Deposit Insurance Corporation Improvement Act (the
“FDICIA”) established a system of prompt corrective action to resolve the problems of undercapitalized insured depository
institutions. Under this system, the federal banking regulators are required to rate insured depository institutions on the basis of five
capital categories as described below. The federal banking regulators are also required to take mandatory supervisory actions and
are authorized to take other discretionary actions, with respect to insured depository institutions in the three undercapitalized
9
categories, the severity of which will depend upon the capital category in which the insured depository institution is
assigned. Generally, subject to a narrow exception, the FDICIA requires the banking regulator to appoint a receiver or conservator
for an insured depository institution that is critically undercapitalized. The federal banking agencies have specified by regulation the
relevant capital level for each category. The thresholds for each of these categories were recently revised pursuant to the Basel III
Capital Rules, which are discussed above in “Holding Company Regulation - Capital Adequacy.” These revised categories started to
apply to Southside Bank on January 1, 2015.
Under the regulations, all insured depository institutions are assigned to one of the following capital categories:
• Well Capitalized - The insured depository institution exceeds the required minimum level for each relevant capital
measure. Under the Updated Capital Rules, a well-capitalized insured depository institution is one (1) having a total risk-
based capital ratio of 10 percent or greater, (2) having a Tier 1 risk-based capital ratio of 8 percent or greater, (3) having a
CET1 capital ratio of 6.5 percent or greater, (4) having a leverage capital ratio of 5 percent or greater and (5) that is not
subject to any order or written directive to meet and maintain a specific capital level for any capital measure.
• Adequately Capitalized - The insured depository institution meets the required minimum level for each relevant capital
measure. Under the Updated Capital Rules, an adequately-capitalized depository institution is one having (1) a total risk
based capital ratio of 8 percent or more, (2) a Tier 1 capital ratio of 6 percent or more, (3) a CET1 capital ratio of 4.5
percent or more, and (4) a leverage ratio of 4 percent or more.
• Undercapitalized - The insured depository institution fails to meet the required minimum level for any relevant capital
measure. Under the Updated Capital Rules, an undercapitalized depository institution is one having (1) a total capital
ratio of less than 8 percent, (2) a Tier 1 capital ratio of less than 6 percent, (3) a CET1 capital ratio of less than 4.5 percent,
or (4) a leverage ratio of less than 4 percent.
•
Significantly Undercapitalized - The insured depository institution is significantly below the required minimum level for
any relevant capital measure. Under the Updated Capital Rules, a significantly undercapitalized institution is one having
(1) a total risk-based capital ratio of less than 6 percent (2) a Tier 1 capital ratio of less than 4 percent, (3) a CET1 ratio of
less than 3 percent or (4) a leverage capital ratio of less than 3 percent.
• Critically Undercapitalized - The insured depository institution fails to meet a critical capital level set by the appropriate
federal banking agency. A critically undercapitalized institution is one having a ratio of tangible equity to total assets that
is equal to or less than 2 percent.
The prompt corrective action regulations permit the appropriate federal banking regulator to downgrade an institution to the
next lower category if the regulator determines after notice and opportunity for hearing or response that (1) the institution is in an
unsafe or unsound condition or (2) that the institution has received and not corrected a less-than-satisfactory rating for any of the
categories of asset quality, management, earnings or liquidity in its most recent examination. Supervisory actions by the appropriate
federal banking regulator depend upon an institution’s classification within the five categories. Our management believes that we
and our Bank subsidiary have the requisite capital levels to qualify as well-capitalized institutions under the FDICIA regulations.
If an institution fails to remain well capitalized, it will be subject to a variety of enforcement remedies that increase as the
capital condition worsens. For instance, the FDICIA generally prohibits a depository institution from making any capital
distribution, including payment of a dividend, or paying any management fee to its holding company if the depository institution
would thereafter be undercapitalized as a result. Undercapitalized depository institutions are subject to restrictions on borrowing
from the Federal Reserve System. In addition, adequately-capitalized depository institutions may not accept brokered deposits
absent a waiver from the FDIC and undercapitalized depository institutions may not accept brokered deposits, are subject to growth
limitations and are required to submit capital restoration plans for regulatory approval. A depository institution’s holding company
must guarantee any required capital restoration plan, up to an amount equal to the lesser of 5 percent of the depository institution’s
assets at the time it becomes undercapitalized or the amount of the capital deficiency when the institution fails to comply with the
plan. Federal banking agencies may not accept a capital plan without determining, among other things, that the plan is based on
realistic assumptions and is likely to succeed in restoring the depository institution’s capital. If a depository institution fails to
submit an acceptable plan, it is treated as if it is significantly undercapitalized.
Significantly undercapitalized depository institutions may be subject to a number of requirements and restrictions, including
orders to sell sufficient voting stock to become adequately capitalized, requirements to reduce total assets and cessation of receipt of
deposits from correspondent banks. Critically undercapitalized depository institutions are subject to appointment of a receiver or
conservator.
In addition to the “prompt corrective action” directives, failure to meet capital guidelines may subject a banking organization
to a variety of other enforcement remedies, including additional substantial restrictions on its operations and activities, termination
of deposit insurance by the FDIC and, under certain conditions, the appointment of a conservator or receiver.
10
Standards for Safety and Soundness. The FDIA also requires the federal banking regulatory agencies to prescribe, by
regulation or guideline, operational and managerial standards for all insured depository institutions relating to: (i) internal controls;
(ii) information systems and internal audit systems; (iii) loan documentation; (iv) credit underwriting; (v) interest rate risk exposure;
and (vi) asset quality. The agencies also must prescribe standards for asset quality, earnings, and stock valuation, as well as
standards for compensation, fees and benefits. The federal banking agencies have adopted regulations and Interagency Guidelines
Prescribing Standards for Safety and Soundness (“Guidelines”) to implement these required standards. The Guidelines set forth the
safety and soundness standards that the federal banking agencies use to identify and address problems at insured depository
institutions before capital becomes impaired. Under the regulations, if the FDIC determines that Southside Bank fails to meet any
standards prescribed by the Guidelines, it may require Southside Bank to submit an acceptable plan to achieve compliance,
consistent with deadlines for the submission and review of such safety and soundness compliance plans. Notably, the Dodd-Frank
Act contains separate requirements relating to compensation arrangements. Specifically, the Dodd-Frank Act requires federal
banking regulators to issue regulations or guidelines to prohibit incentive-based compensation arrangements that encourage
inappropriate risk taking by providing excessive compensation or that may lead to material loss at certain financial institutions with
$1 billion or more in assets. A proposed rule was published in the Federal Register on April 14, 2011; however, regulators have yet
to issue the final rule on the topic.
Dividends. All dividends paid by Southside Bank are paid to the Company, as the sole shareholder of Southside Bank. The
ability of Southside Bank, as a Texas state bank, to pay dividends is restricted under federal and state law and regulations. As an
initial matter, the FDICIA and the regulations of the FDIC generally prohibit an insured depository institution from making a capital
distribution (including payment of dividend) if, thereafter, the institution would not be at least adequately capitalized. Under Texas
law, Southside Bank generally may not pay a dividend reducing its capital and surplus without the prior approval of the Texas
Banking Commissioner. All dividends must be paid out of net profits then on hand, after deducting expenses, including losses and
provisions for loan losses.
Southside Bank’s general dividend policy is to pay dividends at levels consistent with maintaining liquidity and preserving
applicable capital ratios and servicing obligations. Southside Bank’s dividend policies are subject to the discretion of its board of
directors and will depend upon such factors as future earnings, financial conditions, cash needs, capital adequacy, compliance with
applicable statutory and regulatory requirements and general business conditions. The exact amount of future dividends paid by
Southside Bank will be a function of its general profitability (which cannot be accurately estimated or assured), applicable tax rates
in effect from year to year and the discretion of its board of directors.
As described above under Holding Company Regulation - Dividends, the ability of banks and bank holding companies to pay
dividends, and the contents of their respective dividend policies, could be impacted by a range of changes imposed by the Dodd-
Frank Act, many of which will require implementing rules to become effective.
Transactions with Affiliates. Southside Bank is subject to sections 23A and 23B of the Federal Reserve Act (“FRA”) and the
Federal Reserve’s Regulation W, as made applicable to state nonmember banks by section 18(j) of the FDIA. Sections 23A and 23B
of the FRA restrict a bank’s ability to engage in certain transactions with its affiliates. An affiliate of a bank is any company or
entity that controls, is controlled by or is under common control with the bank. In a holding company context, the parent bank
holding company and any companies controlled by such parent bank holding company are generally affiliates of the bank.
Specifically, section 23A places limits on the amount of “covered transactions,” which include loans or extensions of credit to,
and investments in or certain other transactions with, affiliates. It also limits the amount of any advances to third parties that are
collateralized by the securities or obligations of affiliates. The aggregate of all covered transactions is limited to 10 percent of the
bank’s capital and surplus for any one affiliate and 20 percent for all affiliates. Additionally, within the foregoing limitations, each
covered transaction must meet specified collateral requirements ranging from 100 to 130 percent of the loan amount, depending on
the type of collateral. Further, banks are prohibited from purchasing low quality assets from an affiliate. Section 608 of the Dodd-
Frank Act broadened the definition of “covered transactions” to include derivative transactions and the borrowing or lending of
securities if the transaction will cause a bank to have credit exposure to an affiliate. The revised definition also includes the
acceptance of debt obligations of an affiliate as collateral for a loan or extension of credit to a third party. Furthermore, reverse
repurchase transactions are viewed as extensions of credit (instead of asset purchases) and thus become subject to collateral
requirements. The expanded definition of “covered transactions” took effect on July 21, 2012.
Section 23B, among other things, prohibits a bank from engaging in certain transactions with affiliates unless the transactions
are on terms substantially the same, or at least as favorable to the bank, as those prevailing at the time for comparable transactions
with non-affiliated companies. Except for limitations on low quality asset purchases and transactions that are deemed to be unsafe
or unsound, Regulation W generally excludes affiliated depository institutions from treatment as affiliates.
Anti-Tying Regulations. Under the BHCA and the Federal Reserve’s regulations, a bank is prohibited from engaging in
certain tying or reciprocity arrangements with its customers. In general, a bank may not extend credit, lease, sell property, or furnish
any services or fix or vary the consideration for these products or services on the condition that either: (i) the customer obtain or
11
provide some additional credit, property, or services from or to the bank, the bank holding company or subsidiaries thereof or (ii) the
customer not obtain credit, property, or service from a competitor, except to the extent reasonable conditions are imposed to assure
the soundness of the credit extended. A bank may, however, offer combined-balance products and may otherwise offer more
favorable terms if a customer obtains two or more traditional bank products. Also, certain foreign transactions are exempt from the
general rule.
Community Reinvestment Act. Under the CRA, Southside Bank has a continuing and affirmative obligation, consistent with
safe and sound banking practices, to help meet the needs of our entire community, including low- and moderate-income
neighborhoods. The CRA does not establish specific lending requirements or programs for banks nor does it limit a bank’s
discretion to develop the types of products and services that it believes are best suited to its particular community.
On a periodic basis, the FDIC is charged with preparing a written evaluation of our record of meeting the credit needs of the
entire community and assigning a rating - outstanding, satisfactory, needs to improve or substantial noncompliance. Banks are rated
based on their actual performance in meeting community credit needs. The FDIC will take that rating into account in its evaluation
of any application made by the bank for, among other things, approval of the acquisition or establishment of a branch or other
deposit facility, an office relocation, a merger or the acquisition of shares of capital stock of another financial institution. A bank’s
CRA rating may be used as the basis to deny or condition an application. In addition, as discussed above, a bank holding company
may not become a financial holding company unless each of its subsidiary banks has a CRA rating of at least “satisfactory.” As of
January 1, 2014, the most recent exam date, Southside Bank has a CRA rating of “outstanding.”
Branch Banking. Pursuant to the Texas Finance Code, all banks located in Texas are authorized to branch
statewide. Accordingly, a bank located anywhere in Texas has the ability, subject to regulatory approval, to establish branch
facilities near any of our facilities and within our market area. If other banks were to establish branch facilities near our facilities, it
is uncertain whether these branch facilities would have a material adverse effect on our business.
The Dodd-Frank Act substantially amended the legal framework that had previously governed interstate branching
activities. Formerly, under the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994, a bank’s ability to branch into
a particular state was largely dependent upon whether the state “opted in” to de novo interstate branching. Many states did not “opt
in,” which resulted in branching restrictions in those states. The Dodd-Frank Act removed the “opt-in” concept and permits banks to
engage in de novo branching outside of their home states, provided that the laws of the target state permit banks chartered in that
state to branch within that state. Accordingly, de novo interstate branching by Southside Bank is subject to these new standards. All
branching in which Southside Bank may engage remains subject to regulatory approval and adherence to applicable legal and
regulatory requirements.
Consumer Protection Regulation. The activities of Southside Bank are subject to a variety of statutes and regulations
designed to protect consumers. Interest and other charges collected or contracted for by the banks are subject to state usury laws and
federal laws concerning interest rates. Loan operations are also subject to federal laws and regulations applicable to credit
transactions, such as:
•
•
•
•
•
•
the Truth In Lending Act and Regulation Z, governing disclosures of credit terms to consumer borrowers;
the Home Mortgage Disclosure Act and Regulation C, requiring financial institutions to provide information to enable
the public and public officials to determine whether a financial institution is fulfilling its obligation to help meet the
housing needs of the community it serves;
the Equal Credit Opportunity Act and Regulation B, prohibiting discrimination on the basis of race, creed or other
prohibited factors in extending credit;
the Fair Credit Reporting Act and Regulation V, governing the use and provision of information to consumer reporting
agencies;
the Fair Debt Collection Act, governing the manner in which consumer debts may be collected by collection agencies;
and
the guidance of the various federal agencies charged with the responsibility of implementing such federal laws.
Deposit and other operations also are subject to:
•
•
the Truth in Savings Act and Regulation DD, governing disclosure of deposit account terms to consumers;
the Right to Financial Privacy Act, which imposes a duty to maintain confidentiality of consumer financial records and
prescribes procedures for complying with administrative subpoenas of financial records; and
•
the Electronic Fund Transfer Act and Regulation E, which governs automatic deposits to and withdrawals from deposit
accounts and customers’ rights and liabilities arising from the use of ATMs and other electronic banking services, which
12
the Bureau has expanded to include a new compliance regime that governs consumer-initiated cross border electronic
transfers.
Many of the foregoing laws and regulations have recently changed and are subject to further change resulting from the
provisions in the Dodd-Frank Act and other developments. In addition to numerous new disclosure requirements, the Dodd-Frank
Act imposed new standards for mortgage loan originations on all lenders, including banks, in an effort to encourage lenders to verify
a borrower’s ability to repay. The Bureau issued a rule, which took effect on January 10, 2014, to implement this “ability-to-repay”
requirement and provide lenders with protection from liability for “qualified mortgages,” as required by the Dodd-Frank Act. The
rule has impacted our residential mortgage lending practices, and the residential mortgage market generally. Most significantly, the
new “qualified mortgage” standards generally limit the total points and fees that financial institutions and/or a broker may charge on
conforming and jumbo loans to 3 percent of the total loan amount. Also, the Dodd-Frank Act, in conjunction with the Federal
Reserve’s final rule on loan originator compensation issued August 16, 2010 and effective April 1, 2011, prohibits certain
compensation payments to loan originators and steering consumers to loans not in their interest because it will result in greater
compensation for a loan originator. In addition, the Bureau recently issued additional rules pertaining to loan originator
compensation, and that established qualification, registration and licensing requirements for loan originators. These standards will
result in a myriad of new system, pricing, and compensation controls in order to ensure compliance and to decrease repurchase
requests and foreclosure defenses. In addition, the Dodd-Frank Act generally requires lenders or securitizers to retain an economic
interest in the credit risk relating to loans the lender sells and other asset-backed securities that the securitizer issues if the loans have
not complied with the ability to repay standards. The final rule, which took effect on December 24, 2015 for residential mortgage-
backed securitizations, generally requires the securitizer to retain not less than 5 percent of the credit risk.
Moreover, the Bureau has republished the transferred regulations in a new section of the Code of Federal Regulations and has
requested comments regarding an effort to “streamline” these regulations. It is also anticipated that the Bureau will be making
substantive changes to a number of consumer protection regulations and associated disclosures in the near term including significant
changes to certain requirements related to lending. The Bureau has also established a series of mechanisms to collect, track and
make public consumer complaints, including complaints against individual financial institutions and is using this, and other
information it has gathered, in connection with a variety of initiatives to address issues in markets for consumer financial products
and services. The Bureau also has broad authority to prohibit unfair, deceptive and abusive acts and practices (“UDAAP”) and to
investigate and penalize financial institutions that violate this prohibition.
We cannot predict the effect that being regulated by a new, additional regulatory authority focused on consumer financial
protection, or any new implementing regulations or revisions to existing regulations that may result from the establishment of this
new authority, will have on our businesses. Additional regulations resulting from the Dodd-Frank Act may materially adversely
affect our business, financial condition or results of operations. In addition, Southside Bank also may be subject to certain state laws
and regulations designed to protect consumers.
Commercial Real Estate Lending. Lending operations that involve concentration of commercial real estate loans are subject
to enhanced scrutiny by federal banking regulators. The regulators have issued guidance with respect to the risks posed by
commercial real estate lending concentrations. Real estate loans generally include land development, construction loans, land and
lot loans to individuals, loans secured by multi-family property and nonfarm nonresidential real property where the primary source
of repayment is derived from rental income associated with the property. The guidance prescribes the following guidelines for
examiners to help identify institutions that are potentially exposed to concentration risk and may warrant greater supervisory
scrutiny:
•
total reported loans for construction, land development and other land represent 100 percent or more of the institution’s
total capital, or
•
total commercial real estate loans represent 300 percent or more of the institution’s total capital and the outstanding
balance of the institution’s commercial real estate loan portfolio has increased by 50 percent or more during the prior 36
months.
In October 2009, the federal banking agencies issued additional guidance on real estate lending that emphasizes these
considerations.
In addition, the Dodd-Frank Act contains provisions that may impact our business by reducing the amount of our commercial
real estate lending and increasing the cost of borrowing, including rules relating to risk retention of securitized assets. Section 941
of the Dodd-Frank Act requires, among other things, a loan originator or a securitizer of asset-backed securities to retain a
percentage of the credit risk of securitized assets. The banking agencies have jointly issued a final rule to implement these
requirements, which will become effective on December 24, 2016 for classes of asset-backed securities other than residential
mortgage-backed securitizations.
13
Anti-Money Laundering. Southside Bank is subject to the regulations of the Financial Crimes Enforcement Network
(“FinCEN”), a bureau of the U.S. Department of the Treasury, which implement the Bank Secrecy Act, as amended by the Uniting
and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (the “USA
PATRIOT Act”). The USA PATRIOT Act gives the federal government the power to address terrorist threats through enhanced
domestic security measures, expanded surveillance powers, increased information sharing, and broadened anti-money laundering
requirements. Title III of the USA PATRIOT Act includes measures intended to encourage information sharing among banks,
regulatory agencies and law enforcement bodies. Further, certain provisions of Title III impose affirmative obligations on a broad
range of financial institutions, including state-chartered banks like Southside Bank.
The USA PATRIOT Act and the related FinCEN regulations impose certain requirements with respect to financial institutions,
including the following:
•
•
•
•
•
•
establishment of anti-money laundering programs, including adoption of written procedures and an ongoing employee
training program, designation of a compliance officer and auditing of the program;
establishment of a program specifying procedures for obtaining information from customers seeking to open new accounts,
including verifying the identity of customers within a reasonable period of time;
establishment of enhanced due diligence policies, procedures and controls designed to detect and report money laundering,
for financial institutions that administer, maintain or manage private bank accounts or correspondent accounts for non-U.S.
persons;
prohibitions on correspondent accounts for foreign shell banks and compliance with recordkeeping obligations with respect
to correspondent accounts of foreign banks;
filing of suspicious activities reports if a bank believes a customer may be violating U.S. laws and regulations; and
requirements that bank regulators consider bank holding company or bank compliance in connection with merger or
acquisition transactions.
Bank regulators routinely examine institutions for compliance with these obligations and have been active in imposing cease
and desist and other regulatory orders and money penalty sanctions against institutions found to be violating these obligations. In
addition, FinCEN issued a Notice of Proposed Rulemaking on August 4, 2014 that would require financial institutions to obtain
beneficial ownership information for certain accounts, however, it has yet to issue a final rule on this topic.
The Federal Bureau of Investigation can send bank regulatory agencies lists of the names of persons suspected of involvement
in terrorist activities. Southside Bank can be requested to search its records for any relationships or transactions with persons on
those lists and required to report any identified relationships or transactions.
OFAC. The U.S. Department of the Treasury’s Office of Foreign Assets Control (“OFAC”) is responsible for helping to
insure that U.S. entities do not engage in transactions with certain prohibited parties, as defined by various Executive Orders and
Acts of Congress. OFAC publishes, and routinely updates, lists of names of persons and organizations suspected of aiding,
harboring or engaging in terrorist acts, including the Specially Designated Nationals List. If we find a name on any transaction,
account or wire transfer that is on an OFAC list, we must undertake certain specified activities, which could include blocking or
freezing the account or transaction requested, and we must notify the appropriate authorities.
Privacy and Data Security. Under federal law, financial institutions are generally prohibited from disclosing consumer
information to non-affiliated third parties unless the consumer has been given the opportunity to object and has not objected to such
disclosure. Financial institutions are further required to disclose their privacy policies to consumers annually. To the extent state
laws are more protective of consumer privacy, financial institutions must comply with state law privacy provisions.
14
In addition, federal and state banking agencies have prescribed standards for maintaining the security and confidentiality of
consumer information. Southside Bank is subject to such standards, as well as standards for notifying consumers in the event of a
security breach. Under existing federal law, Southside Bank must disclose its privacy policy for collecting and protecting
confidential customer information to consumers, permit consumers to “opt out” of having nonpublic customer information disclosed
to non-affiliated third parties, with some exceptions, and allow customers to opt out of receiving marketing solicitations based on
information about the customer received from another subsidiary. On October 28, 2014, the Bureau amended the annual privacy
notice requirement to permit a financial institution to provide the annual privacy notice through posting the annual notice on its
website if the financial institution meets certain conditions. On December 4, 2015, the GLBA was amended to provide additional
circumstances under which a financial institution is not required to provide an annual notice. States may adopt more extensive
privacy protections. Southside Bank is similarly required to have an information security program to safeguard the confidentiality
and security of customer information and to ensure proper disposal. Customers must be notified when unauthorized disclosure
involves sensitive customer information that may be misused.
Regulatory Examination.
See Holding Company Regulation - Regulatory Examination.
Enforcement Authority. Southside Bank and its “institution-affiliated parties,” including management, employees, agents,
independent contractors and consultants, such as attorneys and accountants and others who participate in the conduct
of the institution’s affairs, are subject to potential civil and criminal penalties for violations of law, regulations or written orders of a
government agency. Violations can include failure to timely file required reports, filing false or misleading information or
submitting inaccurate reports. Civil penalties may be as high as $1,000,000 a day for such violations, and criminal penalties for
some financial institution crimes may include imprisonment for 20 years. Regulators have flexibility to commence enforcement
actions against institutions and institution-affiliated parties, and the FDIC has the authority to terminate deposit insurance. When
issued by a banking agency, cease and desist orders may, among other things, require affirmative action to correct any harm resulting
from a violation or practice, including restitution, reimbursement, indemnifications or guarantees against loss. A financial institution
may also be ordered to restrict its growth, dispose of certain assets, rescind agreements or contracts, or take other actions determined
to be appropriate by the ordering agency. The federal banking agencies also may remove a director or officer from an insured
depository institution (or bar them from the industry) if a violation is willful or reckless.
Governmental Monetary Policies. The commercial banking business is affected not only by general economic conditions but
also by the monetary policies of the Federal Reserve. Changes in the discount rate on member bank borrowings, control of
borrowings, open market operations, the imposition of and changes in reserve requirements against member banks, deposits and
assets of foreign branches, the imposition of and changes in reserve requirements against certain borrowings by banks and their
affiliates and the placing of limits on interest rates which member banks may pay on time and savings deposits are some of the
instruments of monetary policy available to the Federal Reserve. These monetary policies influence to a significant extent the
overall growth of all bank loans, investments and deposits and the interest rates charged on loans or paid on time and savings
deposits. In response to the financial crisis, the Federal Reserve established several innovative programs to stabilize certain financial
institutions and to ensure the availability of credit, which the Federal Reserve has begun to modify as a result of improving
economic conditions. The nature of future monetary policies and the effect of such policies on Southside Bank’s future business and
earnings, therefore, cannot be predicted accurately.
Evolving Legislation and Regulatory Action. Proposals for new statutes and regulations are frequently circulated at both the
federal and state levels, and may include wide-ranging changes to the structures, regulations and competitive relationships of
financial institutions. We cannot predict whether new legislation or regulations will be enacted and, if enacted, the effect that it, or
any regulations, would have on our business, financial condition or results of operations.
Other Regulatory Matters. The Company and its affiliates are subject to oversight by the SEC, the NASDAQ Stock Market,
various state securities regulators and other regulatory authorities. The Company and its subsidiaries have from time to time
received requests for information from regulatory authorities in various states, including state attorneys general, securities regulators
and other regulatory authorities, concerning their business practices. Such requests are considered incidental to the normal conduct
of business.
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ITEM 1A. RISK FACTORS
Set forth below are the material risks and uncertainties that, if they were to occur, could materially and adversely affect our
business, financial condition, results of operations and the trading price of our common stock. Additional risks and uncertainties that
management is not aware of or focused on or that management currently deems immaterial may also impair our financial condition
and business operations.
RISKS RELATED TO OUR BUSINESS
We are subject to an uneven economic environment that could adversely affect our financial condition and results of operations.
We continue to operate in a challenging and uncertain economic environment. In the last three to five years, economic growth
and business activity across a wide range of industries and regions in the U.S. has been slow and uneven. There can be no assurance
that economic conditions will continue to improve, and these conditions could worsen. In addition, declining oil prices, the
implementation of the employer mandate under the Patient Protection and Affordable Care Act and the level of U.S. debt may have a
destabilizing effect on our financial markets. Declines in real estate values, home sales volumes and financial stress on borrowers as
a result of the uncertain economic environment, including unemployment and new job losses, could have an adverse effect on our
borrowers or their customers, which could adversely affect our financial condition and results of operations. In addition, should we
see a decline in national or regional economic conditions, the residual deterioration in local economic conditions in our markets
could drive losses beyond those which are provided for in our allowance for loan losses and result in the following consequences:
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increases in loan delinquencies;
increases in nonperforming assets and foreclosures;
decreases in demand for our products and services, which could adversely affect our liquidity position;
decreases in the value of the collateral securing our loans, especially real estate, which could reduce customers’
borrowing power;
decreases in the credit quality of our non-U.S. Government and non-U.S. agency investment securities, corporate and
municipal securities;
an adverse or unfavorable resolution of the Fannie Mae or Freddie Mac receivership; and
decreases in the real estate values subject to ad-valorem taxes by municipalities that impact such municipalities’ ability
to repay their debt, which could adversely affect our municipal loans or debt securities.
Any of the foregoing could adversely affect our financial condition and results of operation.
We continue to face market volatility, which could adversely impact our results of operations and access to capital.
The capital and credit markets experienced volatility and disruption from 2008 to 2010. While volatility in, and disruption of,
these markets no longer remain at unprecedented levels, any future escalated levels of market volatility and disruption could produce
downward pressure on stock prices and credit capacity without regard to an issuer’s underlying financial strength. If levels of
market disruption and volatility worsen, there can be no assurance that we will not experience adverse effects, which may be
material, on our ability to access capital and on our results of operations and financial condition, including our liquidity position.
We are subject to interest rate risk.
Our earnings and cash flows are largely dependent upon our net interest income. Net interest income is the difference
between interest income earned on interest earning assets such as loans and securities and interest expense paid on interest bearing
liabilities such as deposits and borrowed funds. Interest rates are highly sensitive to many factors that are beyond our control,
including general economic conditions and policies of various governmental and regulatory agencies and, in particular, the Board of
Governors of the Federal Reserve System. Changes in monetary policy, interest rates, the yield curve, or market risk spreads, or a
prolonged inverted yield curve could influence not only the interest we receive on loans and securities and the amount of interest we
pay on deposits and borrowings, but such changes could also affect:
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our ability to originate loans and obtain deposits;
our ability to retain deposits in a rising rate environment;
net interest rate spreads and net interest rate margins;
our ability to enter into instruments to hedge against interest rate risk;
the fair value of our financial assets and liabilities; and
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the average duration of our loan and mortgage-backed securities portfolio.
If the interest rates paid on deposits and other borrowings increase at a faster rate than the interest rates received on loans and
other investments, our net interest income, and therefore earnings, could be adversely affected. Earnings could also be adversely
affected if the interest rates received on loans and other investments fall more quickly than the interest rates paid on deposits and
other borrowings.
Any substantial, unexpected or prolonged change in market interest rates could have a material adverse effect on our financial
condition and results of operations. See the section captioned “Net Interest Income” in “Item 7. Management’s Discussion and
Analysis of Financial Condition and Results of Operations” for further discussion related to our management of interest rate risk.
We are subject to the risk that our U.S. agency mortgage-backed securities (“MBS”) could prepay faster than we have projected.
We have and continue to purchase MBS at premiums due to the low interest rate environment. Our prepayment assumptions
take into account Bloomberg consensus speeds, current trends and past experience. If actual prepayments exceed our projections,
the amortization expense associated with these MBS will increase, thereby decreasing our net income. The increase in amortization
expense and the corresponding decrease in net income could have a material adverse effect on our financial condition and results of
operations.
We are subject to credit quality risks and our credit policies may not be sufficient to avoid losses.
We are subject to the risk of losses resulting from the failure of borrowers, guarantors and related parties to pay interest and
principal amounts on their loans. Although we maintain well-defined credit policies and credit underwriting and monitoring and
collection procedures, these policies and procedures may not prevent losses, particularly during periods in which the local, regional
or national economy suffers a general decline. If borrowers fail to repay their loans, our financial condition and results of operations
would be adversely affected.
Our interest rate risk, liquidity, fair value of securities and profitability are subject to risks associated with the successful
management of our balance sheet strategy.
We implemented a balance sheet strategy for the purpose of enhancing overall profitability by maximizing the use of our
capital. The effectiveness of our balance sheet strategy, and therefore our profitability, may be adversely affected by a number of
factors, including reduced net interest margin and spread, adverse changes in the market liquidity and fair value of our investment
securities and U.S. agency MBS, incorrect modeling results due to the unpredictable nature of MBS prepayments, the length of
interest rate cycles and the slope of the interest rate yield curve. In addition, we may not be able to obtain wholesale funding to
profitably and properly fund our balance sheet strategy. If our balance sheet strategy is flawed or poorly implemented, we may incur
significant losses. See the section captioned “Balance Sheet Strategy” in “Item 7. Management’s Discussion and Analysis of
Financial Condition and Results of Operations.”
We have a high concentration of loans secured by real estate and a decline in the real estate market, for any reason, could result in
losses and materially and adversely affect our business, financial condition, results of operations and future prospects.
A significant portion of our loan portfolio is dependent on real estate. In addition to the importance of the financial strength
and cash flow characteristics of the borrower, loans are also often secured with real estate collateral. At December 31, 2015,
approximately 71.1% of our loans have real estate as a primary or secondary component of collateral. The real estate in each case
provides an alternate source of repayment in the event of default by the borrower and may deteriorate in value during the time the
credit is extended. Beginning in the third quarter of 2007 and continuing until 2010, there were well-publicized developments in the
credit markets, beginning with a decline in the sub-prime mortgage lending market, which later extended to the markets for
collateralized mortgage obligations, MBS and the lending markets generally. This decline resulted in restrictions in the resale
markets during 2011 and 2012 for non-conforming loans and has had an adverse effect on retail mortgage lending operations in
many markets. Beginning in 2014, the price per barrel of crude oil began to decline significantly from a high during 2014 of over
$100 to approximately $37 as of December 31, 2015. A prolonged period of low oil prices could have a negative impact on energy-
dominant states such as Texas, including real estate values. A further decline in the credit markets generally could adversely affect
our financial condition and results of operations if we are unable to extend credit or sell loans in the secondary market. An adverse
change in the economy affecting real estate values generally or in our primary markets specifically could significantly impair the
value of collateral underlying certain of our loans and our ability to sell the collateral upon foreclosure. Furthermore, it is likely that,
in a declining real estate market, we would be required to further increase our allowance for loan losses. If we are required to
liquidate the collateral securing a loan to satisfy the debt during a period of reduced real estate values or to increase our allowance
for loan losses, our profitability and financial condition could be adversely impacted.
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We have a high concentration of loans directly related to the medical community in our market areas. A negative change adversely
impacting the medical community, for any reason, could result in losses and materially and adversely affect our business, financial
condition, results of operations and future prospects.
A significant portion of our loan portfolio is dependent on the medical community. The primary source of repayment for
loans in the medical community is cash flow from continuing operations. However, changes in the amount the government pays the
medical community through the various government health insurance programs could adversely impact their profitability, which in
turn could result in higher default rates by borrowers in the medical industry. Healthcare reform or increased regulation of the
medical community could also negatively impact profitability and cash flow in the medical community. It is likely that, should there
be any significant adverse impact to the medical community, our profitability and financial condition would also be adversely
impacted.
Our allowance for probable loan losses may be insufficient.
We maintain an allowance for probable loan losses, which is a reserve established through a provision for probable loan losses
charged to expense. This allowance represents management’s best estimate of probable losses that may exist within the existing
portfolio of loans. The allowance, in the judgment of management, is necessary to reserve for estimated loan losses and risks
inherent in the loan portfolio. The level of the allowance reflects management’s continuing evaluation of industry concentrations;
specific credit risks; loan loss experience; current loan portfolio quality; present economic, political and regulatory conditions; and
unidentified losses inherent in the current loan portfolio. The determination of the appropriate level of the allowance for probable
loan losses inherently involves a high degree of subjectivity and requires us to make significant estimates and assumptions regarding
current credit risks and future trends, all of which may undergo material changes. Changes in economic conditions affecting the
value of properties used as collateral for loans, problems affecting the credit of borrowers, new information regarding existing loans,
identification of additional problem loans and other factors, both within and outside our control, may require an increase in the
allowance for probable loan losses. In addition, bank regulatory agencies periodically review our allowance for loan losses and may
require an increase in the provision for probable loan losses or the recognition of further loan charge-offs (in accordance with
GAAP), based on judgments different than those of management. In addition, if charge-offs in future periods exceed the allowance
for probable loan losses, we may need additional provisions to increase the allowance for probable loan losses. Any increases in the
allowance for probable loan losses will result in a decrease in net income and capital, and may have a material adverse effect on our
financial condition and results of operations. See the section captioned “Loan Loss Experience and Allowance for Loan Losses” in
“Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” for further discussion related to
our process for determining the appropriate level of the allowance for probable loan losses.
We may be adversely affected by declining crude oil prices.
Beginning in 2014, decisions by certain members of OPEC to maintain higher crude oil production levels combined with
increased production levels in the United States led to increased global oil supplies which has resulted in significant declines in
market oil prices. Decreased market oil prices have compressed margins for many U.S. and Texas-based oil producers, particularly
those that utilize higher-cost production technologies such as hydraulic fracking and horizontal drilling, as well as oilfield service
providers, energy equipment manufacturers and transportation suppliers, among others. As of December 31, 2015, energy loans
comprised approximately 1.34% of our loan portfolio. Energy production and related industries represent a significant part of the
economies in our primary markets. As of December 31, 2015, the price per barrel of crude oil was approximately $37 compared to
approximately $98 as of December 31, 2013. If oil prices remain at these low levels for an extended period, we could experience
weaker loan demand from the energy industry and increased losses within our energy portfolio. A prolonged period of low oil prices
could also have a negative impact on the U.S. economy and, in particular, the economies of energy-dominant states such as Texas,
which in turn could have a material adverse effect on our business, financial condition and results of operations.
If we fail to maintain an effective system of disclosure controls and procedures, including internal control over financial reporting,
we may not be able to accurately report our financial results or prevent fraud, which could have a material adverse effect on our
business, results of operation and financial condition. In addition, current and potential shareholders could lose confidence in
our financial reporting, which could harm the trading price of our common stock.
Management regularly reviews and updates our disclosure controls and procedures, including our internal control over
financial reporting. Any system of controls, however well designed and operated, is based in part on certain assumptions and can
provide only reasonable, not absolute, assurances that the objectives of the system are met. Any failure or circumvention of our
controls and procedures or failure to comply with regulations related to controls and procedures could have a material adverse effect
on our business, results of operations and financial condition.
Failure to achieve and maintain an effective internal control environment could result in us not being able to accurately report
our financial results, prevent or detect fraud, or provide timely and reliable financial information pursuant to our reporting
obligations, which could have a material adverse effect on our business, financial condition, and results of operations. Further, it
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could cause our investors to lose confidence in the financial information we report, which could affect the trading price of our
common stock.
We are subject to environmental liability risk associated with lending activities.
A significant portion of our loan portfolio is secured by real property. During the ordinary course of business, we may
foreclose on and take title to properties securing certain loans. There is a risk that hazardous or toxic substances could be found on
these properties. If hazardous or toxic substances are found, we may be liable for remediation costs, as well as for personal injury
and property damage. Environmental remediation may require us to incur substantial expenses and may materially reduce the
affected property’s value or limit our ability to use or sell the affected property. In addition, future laws or more stringent
interpretations or enforcement policies with respect to existing laws may increase our exposure to environmental liability. Although
we have policies and procedures to perform an environmental review before initiating any foreclosure action on nonresidential real
property, these reviews may not be sufficient to detect all potential environmental hazards. The remediation costs and any other
financial liabilities associated with an environmental hazard could have a material adverse effect on our financial condition and
results of operations.
Our profitability depends significantly on economic conditions in the State of Texas.
Our success depends primarily on the general economic conditions of the State of Texas and the specific local markets in
which we operate. Unlike larger national or other regional banks that are more geographically diversified, we provide banking and
financial services to customers primarily in the State of Texas and the local markets in which we operate. The local economic
conditions in these areas have a significant impact on the demand for our products and services, as well as the ability of our
customers to repay loans, the value of the collateral securing loans and the stability of our deposit funding sources. Moreover,
virtually all of the securities in our municipal bond portfolio were issued by political subdivisions and agencies within the State of
Texas. A significant decline in general economic conditions, caused by inflation, recession, crude oil prices, acts of terrorism,
outbreak of hostilities or other international or domestic occurrences, unemployment, plant or business closings or downsizing,
changes in securities markets or other factors could impact these local economic conditions and, in turn, have a material adverse
effect on our financial condition and results of operations.
We operate in a highly competitive industry and market area.
We face substantial competition in all areas of our operations from a variety of different competitors, many of which are
larger and may have more financial resources. Such competitors primarily include national, regional, and community banks within
the various markets we operate. Additionally, various out-of-state banks have entered or have announced plans to enter the market
areas in which we currently operate. We also face competition from many other types of financial institutions, including, without
limitation, credit unions, finance companies, brokerage firms, insurance companies, factoring companies and other financial
intermediaries. The financial services industry could become even more competitive as a result of legislative, regulatory and
technological changes, continued consolidation and recent trends in the credit and mortgage lending markets. Banks, securities
firms and insurance companies can merge under the umbrella of a financial holding company, which can offer virtually any type of
financial service, including banking, securities underwriting, insurance (both agency and underwriting) and merchant banking. Also,
technology has lowered barriers to entry and made it possible for nonbanks to offer products and services traditionally provided by
banks, such as automatic transfer and automatic payment systems. Many of our competitors have fewer regulatory constraints and
may have lower cost structures. Additionally, due to their size, many competitors may be able to achieve economies of scale and, as
a result, may offer a broader range of products and services as well as better pricing for those products and services than we can.
Our ability to compete successfully depends on a number of factors, including, among other things:
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the ability to develop, maintain and build upon long-term customer relationships based on top quality service, high
ethical standards and safe, sound assets;
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the ability to expand our market position;
the scope, relevance and pricing of products and services offered to meet customer needs and demands;
the rate at which we introduce new products and services relative to our competitors;
customer satisfaction with our level of service; and
industry and general economic trends.
Failure to perform in any of these areas could significantly weaken our competitive position, which could adversely affect our
growth and profitability, which, in turn, could have a material adverse effect on our financial condition and results of operations.
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New lines of business or new products and services may subject us to additional risks.
From time to time, we may implement new delivery systems, such as internet banking, or offer new products and services
within existing lines of business. In developing and marketing new delivery systems and/or new products and services, we may
invest significant time and resources. Initial timetables for the introduction and development of new lines of business and/or new
products or services may not be achieved and price and profitability targets may not prove feasible. External factors, such as
compliance with regulations, competitive alternatives, and shifting market preferences, may also impact the successful
implementation of a new line of business or a new product or service. Furthermore, any new line of business and/or new product or
service could have a significant impact on the effectiveness of our system of internal controls. Failure to successfully manage these
risks in the development and implementation of new lines of business or new products or services could have a material adverse
effect on our business, results of operations and financial condition.
We rely on dividends from our subsidiary for most of our revenue.
Southside Bancshares, Inc. is a separate and distinct legal entity from our subsidiaries. We receive substantially all of our
revenue from dividends from our subsidiary, Southside Bank. These dividends are the principal source of funds to pay dividends on
our common stock and interest and principal on our debt. Various federal and/or state laws and regulations limit the amount of
dividends that Southside Bank, and certain nonbank subsidiaries may pay to us. Also, Southside Bancshares, Inc.’s right to
participate in a distribution of assets upon a subsidiary’s liquidation or reorganization is subject to the prior claims of the subsidiary’s
creditors. In the event Southside Bank is unable to pay dividends to Southside Bancshares, Inc., we may not be able to service debt,
pay obligations or pay dividends to our shareholders. The inability to receive dividends from Southside Bank could have a material
adverse effect on Southside Bancshares, Inc.’s business, financial condition and results of operations. See the section captioned
“Supervision and Regulation” in “Item 1. Business” and “Note 13 – Shareholders’ Equity” to our consolidated financial statements
included in this report.
Funding to provide liquidity may not be available to us on favorable terms or at all.
Liquidity is the ability to meet cash flow needs on a timely basis at a reasonable cost. The liquidity of Southside Bank is
necessary to make loans and leases, and to repay deposit liabilities as they become due or are demanded by customers. Liquidity
policies and limits are established by our board of directors. Management and our asset liability committee regularly monitor the
overall liquidity position of Southside Bank and the Company to ensure that various alternative strategies exist to cover
unanticipated events that could affect liquidity. Management and our asset liability committee also establish policies and monitor
guidelines to diversify Southside Bank’s funding sources to avoid concentrations in excess of board-approved policies in any one
market source. Funding sources include federal funds purchased, securities sold under repurchase agreements, noncore deposits, and
short- and long-term debt. Southside Bank is also a member of the Federal Home Loan Bank (“FHLB”) System, which provides
funding through advances to members that are collateralized with mortgage-related assets.
We maintain a portfolio of securities that can be used as a secondary source of liquidity. There are other sources of liquidity
available to us should they be needed. These sources include sales or securitizations of loans, our ability to acquire additional
national market, noncore deposits, additional collateralized borrowings such as FHLB advances, the issuance and sale of debt
securities, and the issuance and sale of preferred or common securities in public or private transactions. Southside Bank also can
borrow from the Federal Reserve’s discount window.
We have historically had access to a number of alternative sources of liquidity, but if there is an increase in volatility in the
credit and liquidity markets similar to 2008, there is no assurance that we will be able to obtain such liquidity on terms that are
favorable to us, or at all. For example, the cost of out-of-market deposits may exceed the cost of deposits of similar maturity in our
local market area, making them unattractive sources of funding; financial institutions may be unwilling to extend credit to banks
because of concerns about the banking industry and the economy generally; and there may not be a viable market for raising equity
capital.
If we were unable to access any of these funding sources when needed, we might be unable to meet customers’ needs, which
could adversely impact our financial condition, results of operations, cash flows and liquidity, and level of regulatory-qualifying
capital.
Acquisitions and potential acquisitions may disrupt our business and dilute shareholder value.
We occasionally evaluate merger and acquisition opportunities and conduct due diligence activities related to possible
transactions with other financial institutions and financial services companies. As a result, merger or acquisition discussions and, in
some cases, negotiations may take place and future mergers or acquisitions involving cash, debt or equity securities may occur at any
time. Acquisitions typically involve the payment of a premium over book and fair values, and, therefore, some dilution of our
tangible book value and net income per common share may occur in connection with any future transaction. Furthermore, failure to
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realize expected revenue increases, cost savings, increases in geographic or product presence, and/or other projected benefits and
synergies from an acquisition could have a material adverse effect on our financial condition and results of operations.
The value of our goodwill and other intangible assets may decline in the future.
As of December 31, 2015, we had $98.1 million of goodwill and other intangible assets. A significant decline in our
expected future cash flows, a significant adverse change in the business climate, slower growth rates or a significant and sustained
decline in the price of our common stock may necessitate taking charges in the future related to the impairment of our goodwill and
other intangible assets. If we were to conclude that a future write-down of goodwill and other intangible assets is necessary, we
would record the appropriate charge, which could have a material adverse effect on our business, financial condition and results of
operations.
Our accounting estimates and risk management processes rely on analytical and forecasting models.
The process we use to estimate our probable loan losses and to measure the fair value of financial instruments, as well as
the processes used to estimate the effects of changing interest rates and other market measures on our financial condition and results
of operations, depends upon the use of analytical and forecasting models. These models reflect assumptions that may not be
accurate, particularly in times of market stress or other unforeseen circumstances. Even if these assumptions are adequate, the
models may prove to be inadequate or inaccurate because of other flaws in their design or their implementation. If the models we
use for interest rate risk and asset-liability management are inadequate, we may incur increased or unexpected losses upon changes
in market interest rates or other market measures. If the models we use for determining our probable loan losses are inadequate, the
allowance for loan losses may not be sufficient to support future charge-offs. If the models we use to measure the fair value of
financial instruments are inadequate, the fair value of such financial instruments may fluctuate unexpectedly or may not accurately
reflect what we could realize upon sale or settlement of such financial instruments. Any such failure in our analytical or forecasting
models could have a material adverse effect on our business, financial condition and results of operations.
We may not be able to attract and retain skilled personnel.
Our success depends, in large part, on our ability to attract and retain key personnel. Competition for the best personnel in
most activities we engage in can be intense, and we may not be able to hire personnel or to retain them. The unexpected loss of
services of one or more of our key personnel could have a material adverse impact on our business because of their skills, knowledge
of our market, relationships in the communities we serve, years of industry experience and the difficulty of promptly finding
qualified replacement personnel. Although we have employment agreements with certain of our executive officers, there is no
guarantee that these officers will remain employed with the Company.
Our information systems may experience an interruption or breach in security.
We rely heavily on communications and information systems to conduct our business. Any failure, interruption or breach in
security of these systems could result in failures or disruptions in our customer relationship management, general ledger, deposit,
loan and other systems. While we have policies and procedures designed to prevent or limit the effect of the failure, interruption or
security breach of our information systems, there can be no assurance that we can prevent any such failures, interruptions, cyber
security breaches or other security breaches or, if they do occur, that they will be adequately addressed. The occurrence of any
failures, interruptions or security breaches of our information systems could damage our reputation, result in a loss of customer
business, subject us to additional regulatory scrutiny, or expose us to civil litigation and possible financial liability, any of which
could have a material adverse effect on our financial condition and results of operations.
We continually encounter technological change.
The financial services industry is continually undergoing rapid technological change with frequent introductions of new
technology-driven products and services. The effective use of technology increases efficiency and enables financial institutions to
better serve customers and reduce costs. Our future success depends, in part, upon our ability to address the needs of our customers
by using technology to provide products and services that will satisfy customer demands, as well as to create additional efficiencies
in our operations. Many of our competitors have substantially greater resources to invest in technological improvements. We may
not be able to effectively implement new technology-driven products and services or be successful in marketing these products and
services to our customers and even if we implement such products and services, we may incur substantial costs in doing so. Failure
to successfully keep pace with technological change affecting the financial services industry could have a material adverse impact on
our business, financial condition and results of operations.
Severe weather, natural disasters, climate change, acts of war or terrorism and other external events could significantly impact our
business.
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Severe weather, natural disasters, climate change, acts of war or terrorism and other adverse external events could have a
significant impact on our ability to conduct business. Such events could affect the stability of our deposit base, impair the ability of
borrowers to repay outstanding loans, impair the value of collateral securing loans, cause significant property damage, result in loss
of revenue and/or cause us to incur additional expenses. For example, because of our location and the location of the market areas
we serve, severe weather is more likely than in other areas of the country. Although management has established disaster recovery
policies and procedures, there can be no assurance of the effectiveness of such policies and procedures, and the occurrence of any
such event could have a material adverse effect on our business, financial condition and results of operations.
RISKS ASSOCIATED WITH THE BANKING INDUSTRY
We are subject or may become subject to extensive government regulation and supervision.
Southside Bancshares, Inc., primarily through Southside Bank, and certain nonbank subsidiaries, is subject to extensive
federal and state regulation and supervision. Banking regulations are primarily intended to protect depositors’ funds, federal deposit
insurance funds and the banking system as a whole, not shareholders. These regulations affect our lending practices, capital
structure, investment practices and dividend policy and growth, among other things. The statutory and regulatory framework under
which we operate has changed substantially as the result of the enactment of the Dodd-Frank Act. The Dodd-Frank Act represents a
significant overhaul of many aspects of the regulation of the financial services industry, addressing, among other things, systemic
risk, capital adequacy, deposit insurance assessments, consumer financial protection, as implemented through the Bureau,
interchange fees, derivatives, lending limits, mortgage lending practices, registration of investment advisors and changes among
bank regulatory authorities. In addition, Congress and federal and state regulatory agencies continually review banking laws,
regulations and policies for possible changes. Changes to statutes, regulations or regulatory policies, including changes in
interpretation or implementation of statutes, regulations or policies, could affect us in substantial and unpredictable ways. Such
changes could subject us to additional costs, limit deposit fees and other types of fees we charge, limit the types of financial services
and products we may offer and/or increase the ability of nonbanks to offer competing financial services and products, among other
things. While we cannot predict the impact of regulatory changes that may arise out of the current financial and economic
environment, any regulatory changes or increased regulatory scrutiny could increase costs directly related to complying with new
regulatory requirements. Failure to comply with laws, regulations or policies could result in sanctions by regulatory agencies, civil
money penalties and/or reputation damage, which could have a material adverse effect on our business, financial condition and
results of operations. While our policies and procedures are designed to prevent any such violations, there can be no assurance that
such violations will not occur. See the section captioned “Supervision and Regulation” in “Item 1. Business” and “Note 13 –
Shareholders’ Equity” to our consolidated financial statements included in this report.
We may become subject to increased regulatory capital requirements.
The capital requirements applicable to Southside Bancshares, Inc. and Southside Bank are subject to change as a result of the
Dodd-Frank Act, the international regulatory capital initiative known as Basel III and any other future government actions. In
particular, the Dodd-Frank Act eliminates Tier 1 capital treatment for most trust preferred securities after a three-year phase-in
period that began January 1, 2013 for institutions that exceed $15 billion in assets. Furthermore, each of the federal banking
agencies, including the Federal Reserve and the FDIC, has issued substantially similar risk-based and leverage capital guidelines
applicable to the banking organizations they supervise. As a result of new regulations, we were required to begin complying with
higher minimum capital requirements as of January 1, 2015. The Updated Capital Rules implement certain provisions of the Dodd-
Frank Act and a separate, international regulatory capital initiative known as Basel III. These Updated Capital Rules also make
important changes to the prompt corrective action framework. For additional discussion relating to capital adequacy refer to “Item
1. Business - Supervision and Regulation - Capital Adequacy.” The Company believes it will be able to meet the new capital
guidelines, however complying with any higher Updated Capital Rules mandated by the Dodd-Frank Act and Basel III may affect
our operations, including our asset portfolios and financial performance.
Financial services companies depend on the accuracy and completeness of information about customers and counterparties and
inaccuracies in such information, including as a result of fraud, could adversely impact our business, financial condition and results
of operations.
In deciding whether to extend credit or enter into other transactions, we rely on information furnished by or on behalf of
customers and counterparties, including financial statements, credit reports and other financial information. We may also rely on
representations of those customers, counterparties or other third parties, such as independent auditors, as to the accuracy and
completeness of that information. Such information could turn out to be inaccurate, including as a result of fraud on behalf of our
customers, counterparties or other third parties. In times of increased economic stress we are at increased risk of fraud losses. We
cannot assure you that our underwriting and operational controls will prevent or detect such fraud or that we will not experience
fraud losses or incur costs or other damage related to such fraud. Our customers may also experience fraud in their businesses which
could adversely affect their ability to repay their loans or make use of our services. Our exposure and the exposure of our customers
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to fraud may increase our financial risk and reputation risk as it may result in unexpected loan losses that exceed those that have
been provided for in our allowance for loan losses. Reliance on inaccurate or misleading information from our customers,
counterparties and other third parties, including as a result of fraud, could have a material adverse impact on our business, financial
condition and results of operations.
Consumers may decide not to use banks to complete their financial transactions.
Technology and other changes are allowing parties to complete financial transactions that historically have involved banks
through alternative methods. For example, consumers can now maintain funds that would have historically been held as bank
deposits in brokerage accounts or mutual funds. Consumers can also complete transactions such as paying bills and/or transferring
funds directly without the assistance of banks. The process of eliminating banks as intermediaries could result in the loss of fee
income, as well as the loss of customer deposits and the related income generated from those deposits. The loss of these revenue
streams and the lower cost deposits as a source of funds could have a material adverse effect on our financial condition and results of
operations.
The soundness of other financial institutions could adversely affect us.
Financial services institutions are interrelated as a result of trading, clearing, counterparty or other relationships. We have
exposure to many different industries and counterparties, and we routinely execute transactions with counterparties in the financial
services industry, including brokers and dealers, commercial banks, investment banks, mutual and hedge funds, and other
institutional clients. Many of these transactions expose us to credit risk in the event of default of our counterparty or client. In
addition, our credit risk may be exacerbated when the collateral held by us cannot be realized or is liquidated at prices insufficient to
recover the full amount of the loan or derivative exposure due to us. There is no assurance that any such losses would not materially
and adversely affect our results of operations or earnings.
We are subject to claims and litigation pertaining to fiduciary responsibility.
From time to time, customers make claims and take legal action pertaining to our performance of our fiduciary
responsibilities. Whether customer claims and legal action related to our performance of our fiduciary responsibilities are founded
or unfounded, defending claims is costly and diverts management’s attention, and if such claims and legal actions are not resolved in
a manner favorable to us, they may result in significant financial liability and/or adversely affect our market perception and products
and services as well as impact customer demand for those products and services. Any financial liability or reputation damage could
have a material adverse effect on our business, financial condition and results of operations.
RISKS ASSOCIATED WITH OUR COMMON STOCK
Our stock price can be volatile.
Stock price volatility may make it more difficult for you to resell your common stock when you want and at prices you find
attractive. Our stock price can fluctuate significantly in response to a variety of factors including, among other things:
•
•
•
•
•
•
•
•
•
•
•
actual or anticipated variations in quarterly results of operations;
recommendations by securities analysts;
operating and stock price performance of other companies that investors deem comparable to us;
news reports relating to trends, concerns and other issues in the financial services industry;
perceptions in the marketplace regarding us and/or our competitors;
perceptions in the marketplace regarding the impact of the change in price per barrel of crude oil on the Texas
economy;
new technology used, or services offered, by competitors;
significant acquisitions or business combinations, strategic partnerships, joint ventures or capital commitments by or
involving us or our competitors;
failure to integrate acquisitions or realize anticipated benefits from acquisitions;
changes in government regulations; and
geopolitical conditions such as acts or threats of terrorism or military conflicts.
General market fluctuations, industry factors and general economic and political conditions and events, such as economic
slowdowns or recessions, interest rate changes or credit loss trends, could also cause our stock price to decrease regardless of
operating results.
23
The trading volume in our common stock is less than that of other larger financial services companies.
Although our common stock is listed for trading on the NASDAQ Global Select Market, the trading volume is low, and you
are not assured liquidity with respect to transactions in our common stock. A public trading market having the desired
characteristics of depth, liquidity and orderliness depends on the presence in the marketplace of willing buyers and sellers of our
common stock at any given time. This presence depends on the individual decisions of investors and general economic and market
conditions over which we have no control. Given the lower trading volume of our common stock, significant sales of our common
stock, or the expectation of these sales, could cause our stock price to fall.
The holders of our junior subordinated debentures have rights that are senior to those of our shareholders.
On September 4, 2003, we issued $20.6 million of floating rate junior subordinated debentures in connection with a $20.0
million trust preferred securities issuance by our subsidiary, Southside Statutory Trust III. These junior subordinated debentures
mature in September 2033. On August 8 and 10, 2007, we issued $23.2 million and $12.9 million, respectively, of five-year fixed
rate converting to floating rate thereafter, junior subordinated debentures in connection with $22.5 million and $12.5 million,
respectively, trust preferred securities issuances by our subsidiaries Southside Statutory Trust IV and V, respectively. Trust IV
matures October 2037 and Trust V matures September 2037. As part of the acquisition of FWBS on October 10, 2007, we assumed
$3.6 million of floating rate junior subordinated debentures issued to Magnolia Trust Company I in connection with $3.5 million of
trust preferred securities issued in 2005 that matures in 2035.
We conditionally guarantee payments of the principal and interest on the trust preferred securities. Our junior subordinated
debentures are senior to our shares of common stock. As a result, we must make payments on the junior subordinated debentures
(and the related trust preferred securities) before any dividends can be paid on our common stock and, in the event of bankruptcy,
dissolution or liquidation, the holders of the debentures must be satisfied before any distributions can be made to the holders of
common stock. We have the right to defer distributions on our junior subordinated debentures (and the related trust preferred
securities) for up to five years, during which time no dividends may be paid to holders of common stock.
An investment in our common stock is not an insured deposit.
Our common stock is not a bank deposit and, therefore, is not insured against loss by the FDIC, any other deposit insurance
fund or by any other public or private entity. Investment in our common stock is inherently risky for the reasons described in this
“Risk Factors” section and elsewhere in this report and is subject to the same market forces that affect the price of common stock in
any company. As a result, if you acquire our common stock, you may lose some or all of your investment.
Provisions of our articles of incorporation bylaws, as well as state and federal banking regulations, could delay or prevent a
takeover of us by a third party.
Our articles of incorporation and bylaws could delay, defer or prevent a third party from acquiring us, despite the possible
benefit to our shareholders, or otherwise adversely affect the price of our common stock. These provisions include, among others,
requiring advance notice for raising business matters or nominating directors at shareholders’ meetings and staggered board
elections.
Any individual, acting alone or with other individuals, who are seeking to acquire, directly or indirectly, 10.0% or more of our
outstanding common stock must comply with the Change in Bank Control Act, which requires prior notice to the Federal Reserve for
any acquisition. Additionally, any entity that wants to acquire 5.0% or more of our outstanding common stock, or otherwise control
us, may need to obtain the prior approval of the Federal Reserve under the BHCA of 1956, as amended. As a result, prospective
investors in our common stock need to be aware of and comply with those requirements, to the extent applicable.
We may issue additional securities, which could dilute your ownership percentage.
In certain situations, our board of directors has the authority, without any vote of our shareholders, to issue shares of our
authorized but unissued stock. In the future, we may issue additional securities, through public or private offerings, to raise
additional capital or finance acquisitions. Any such issuance would dilute the ownership of current holders of our common stock.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None
24
ITEM 2. PROPERTIES
Southside Bank owns and operates the following properties:
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Southside Bank main branch at 1201 South Beckham Avenue, Tyler, Texas. The primary executive offices of Southside
Bancshares, Inc. are located at this location;
Fort Worth main branch located at 1320 South University Drive, Fort Worth, Texas. Additional executive offices of
Southside Bancshares, Inc. are located at this location;
Southside Bank Annex at 1211 South Beckham Avenue, Tyler, Texas. The Southside Bank Annex is directly adjacent to
the main bank building. Human Resources, and other support areas are located in this building;
• Operations Annex at 1221 South Beckham Avenue, Tyler, Texas. Various back office, lending and training facilities and
other support areas are located in this building;
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•
•
•
•
Southside Bank Trust at 1305 South Beckham Avenue, Tyler, Texas. The Trust Department is located in this building;
Southside Bank Technology Center at 1010 East First Street, Tyler, Texas;
Southside Bank main branch motor bank facility at 1010 East First Street, Tyler, Texas;
South Broadway branch at 6201 South Broadway, Tyler, Texas;
South Broadway branch motor bank facility at 6019 South Broadway, Tyler, Texas;
• Downtown branch at 113 West Ferguson Street, Tyler, Texas;
• Gentry Parkway branch and motor bank facility at 2121 West Gentry Parkway, Tyler, Texas;
• Highway 64 West branch and motor bank facility at 3815 State Highway 64 West, Tyler, Texas;
• Longview main branch and motor bank facility at 2001 Judson Road, Longview, Texas;
• Lindale main branch and motor bank facility at 2510 South Main Street, Lindale, Texas;
• Whitehouse main branch and motor bank facility at 901 Highway 110 North, Whitehouse, Texas;
•
Jacksonville main branch and motor bank at 1015 South Jackson Street, Jacksonville, Texas;
• Gresham main branch and motor bank at 16691 FM 2493, Tyler, Texas;
• Gun Barrel City main branch and motor bank facility at 901 West Main, Gun Barrel City, Texas;
•
Irving branch at 1401 Walnut Hill Lane, Irving, Texas;
• Cleburne branch at 1204 West Henderson, Cleburne, Texas;
• Euless branch at 2311 West Euless Boulevard, Euless, Texas;
• Arlington branch and motor bank facility at 2831 West Park Row, Arlington, Texas;
• Arlington branch at 950 West Arbrook Boulevard, Arlington, Texas;
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Fort Worth branch at 1000 Pennsylvania Avenue, Fort Worth, Texas;
Fort Worth branch at 2330 East Rosedale Street, Fort Worth, Texas;
Fort Worth branch at 6001 Bryant Irvin Road, Fort Worth, Texas;
Fort Worth branch at 7800 White Settlement Road, Fort Worth, Texas;
Fort Worth branch and motor bank facility at 9516 Clifford Street, Fort Worth, Texas;
• Watauga branch at 8024 Denton Highway, Watauga, Texas;
• Weatherford branch at 318 South Main Street, Weatherford, Texas; and
•
74 ATM’s located throughout our market areas.
25
Southside Bank currently operates full service banks in leased space in 18 grocery stores and six full service branches in
leased office space in the following locations:
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one in Bullard, Texas;
one in Lindale, Texas;
one in Flint, Texas;
one in Whitehouse, Texas;
one in Chandler, Texas;
one in Palestine, Texas;
one in Athens, Texas;
one in Hawkins, Texas;
three in Longview, Texas;
seven in Tyler, Texas;
Fort Worth operations branch at 5001 North Riverside Drive, Suite 111, Fort Worth, Texas;
Flower Mound branch at 2341 Justin Road, Flower Mound, Texas;
• Granbury branch at 1030 East Highway 377, Suite 138, Granbury, Texas;
• Grapevine branch at 1616 West Northwest Highway, Grapevine, Texas;
• Austin branch at 8200 North Mopac, Suite 130, Austin, Texas; and
• Austin branch at 1250 South Capital of Texas Hwy, Bldg 1, Suite 101, Austin, Texas.
All of the properties detailed above are suitable and adequate to provide the banking services intended based on the type of
property described. In addition, the properties for the most part are fully utilized but designed with productivity in mind and can
handle the additional business volume we anticipate they will generate. As additional potential needs are identified, individual
property enhancements or the need to add properties will be evaluated.
ITEM 3. LEGAL PROCEEDINGS
We are party to legal proceedings arising in the normal conduct of business. Management believes that such litigation is not
material to our financial position, results of operations or cash flows.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
26
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
MARKET INFORMATION
Our common stock trades on the NASDAQ Global Select Market under the symbol "SBSI." Set forth below are the high and
low sales prices on the NASDAQ Global Select Market for each full quarterly period from January 1, 2014 to December 31,
2015. During 2015 and 2014, we declared and paid a 5% stock dividend. Stock prices listed below have been adjusted to give
retroactive recognition to such stock dividends.
Sales Price Per Share
First quarter ....................................................... $
Second quarter ...................................................
Third quarter ......................................................
Fourth quarter ....................................................
2015
2014
High
Low
High
Low
29.04 $
29.76
29.71
28.90
24.68 $
26.19
24.41
24.02
28.66 $
29.67
32.71
32.67
22.84
24.32
27.12
27.50
See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Capital Resources”
for a discussion of our common stock repurchase program.
SHAREHOLDERS
There were approximately 1,532 holders of record of our common stock, the only class of equity securities currently issued
and outstanding, as of March 1, 2016.
DIVIDENDS
Cash dividends declared and paid were $1.00 and $0.96 per share for the years ended December 31, 2015 and 2014,
respectively. Stock dividends of 5% were also declared and paid during both of the years ended December 31, 2015 and 2014. We
have paid a cash dividend at least once every year since 1970 (including dividends paid by Southside Bank prior to the incorporation
of Southside Bancshares). Future dividends will depend on our earnings, financial condition and other factors that our board of
directors considers to be relevant. In addition, we must make payments on our junior subordinated debentures before any dividends
can be paid on the common stock. For additional discussion relating to restrictions that limit our ability to pay dividends refer to
“Item 1. Business – Supervision and Regulation” and “Item 7. Management’s Discussion and Analysis of Financial Condition and
Results of Operations – Capital Resources.” The cash dividends were paid quarterly each year as listed below.
Cash Dividends Per Share
First quarter ........................................................................................................................... $
Second quarter .......................................................................................................................
Third quarter ..........................................................................................................................
Fourth quarter ........................................................................................................................
Total ................................................................................................................................. $
2015
2014
0.23 $
0.23
0.23
0.31
1.00 $
0.21
0.21
0.22
0.32
0.96
ISSUER SECURITY REPURCHASES
During the quarter ended December 31, 2015, we did not purchase any of our common stock. On January 28, 2016, the
Board of Directors approved a Stock Repurchase Plan. The Board authorized the repurchase, from time to time, of up to five percent
of the issued and outstanding common stock, or approximately 1.27 million shares, in open market purchases and privately
negotiated transactions at prevailing market prices. The Company has no obligation to repurchase any shares under the Stock
Repurchase Plan and may suspend or discontinue it at any time.
Subsequent to December 31, 2015 and through March 2, 2016, we purchased 424,701 shares of common stock at an average
price of $22.89 pursuant to the Stock Repurchase Plan.
RECENT SALES OF UNREGISTERED SECURITIES
There were no equity securities sold by us during the years ended December 31, 2015, 2014, or 2013 that were not
registered under the Securities Act of 1933.
27
FINANCIAL PERFORMANCE
The following performance graph does not constitute soliciting material and should not be deemed filed or incorporated by
reference into any other Company filing under the Securities Act of 1933 or the Securities Exchange Act of 1934, except to the
extent the Company specifically incorporates the performance graph by reference therein.
Total Return Performance
Southside Bancshares, Inc.
Russell 2000
SBSI Peer Group 2015 Index*
200
180
160
140
120
100
e
u
l
a
V
x
e
d
n
I
80
12/31/10
12/31/11
12/31/12
12/31/13
12/31/14
12/31/15
Index
Southside Bancshares, Inc.
Russell 2000
SBSI Peer Group 2015 Index*
Period Ending
12/31/10
100.00
100.00
100.00
12/31/11
112.74
95.82
99.65
12/31/12
121.26
111.49
112.16
12/31/13 12/31/14
196.81
162.35
154.96
171.66
154.78
166.59
12/31/15
177.93
155.18
142.27
*SBSI Peer Group 2015 Index consist of Cullen/Frost Bankers, Inc. (CFR), First Financial Bankshares, Inc. (FFIN), International Bancshares
Corporation (IBOC), Prosperity Bancshares, Inc. (PB), Texas Capital Bancshares, Inc. (TCBI).
Source : SNL Financial LC, Charlottesville, VA
© 2016
www.snl.com
28
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected financial data regarding our results of operations and financial position for, and as of
the end of, each of the fiscal years in the five-year period ended December 31, 2015. This information should be read in conjunction
with “Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations” and “Item 8. Financial
Statements and Supplementary Data,” as set forth in this report.
Balance Sheet Data:
2015
As of and For the Years Ended December 31,
2014 (1)
2012
2013
(in thousands, except per share data)
2011
Investment Securities ...................................................... $
284,452
752,135 $
Mortgage-backed Securities............................................. $ 1,492,653 $ 1,395,498 $ 1,115,827 $ 1,051,898 $ 1,729,516
Loans, Net of Allowance for Loan Losses ......................... $ 2,412,017 $ 2,167,841 $ 1,332,396 $ 1,242,392 $ 1,068,690
Total Assets ................................................................... $ 5,162,076 $ 4,807,261 $ 3,445,663 $ 3,237,403 $ 3,303,817
Deposits ........................................................................ $ 3,455,407 $ 3,374,417 $ 2,527,808 $ 2,351,897 $ 2,321,671
695,529 $
618,716 $
728,981
$
Long-term Obligations .................................................... $
562,592 $
660,363 $
Shareholders’ Equity ....................................................... $
444,062 $
425,243 $
559,660 $
259,518 $
429,408 $
321,035
257,763 $
258,927
Income Statement Data:
Interest Income .............................................................. $
154,532 $
123,778 $
Interest Expense ............................................................. $
19,854 $
16,956 $
Deposit Service Income .................................................. $
20,112 $
15,280 $
Net Gain on Sale of Securities Available for Sale ............... $
3,660 $
2,830 $
Noninterest Income ........................................................ $
37,895 $
24,489 $
Noninterest Expense ....................................................... $
112,954 $
97,704 $
Net Income Attributable to Southside Bancshares, Inc. ....... $
43,997 $
20,833 $
119,602
$
17,968 $
15,560 $
8,472 $
35,245 $
81,713 $
41,190 $
116,020 $
131,038
26,895 $
35,631
15,433 $
15,943
17,966 $
11,795
40,021 $
35,322
76,107 $
72,348
34,695 $
39,133
Per Share Data:
Earnings Per Common Share:
Basic .......................................................................... $
Diluted ........................................................................ $
Cash Dividends Paid Per Common Share .......................... $
1.74 $
1.73 $
1.00 $
1.04 $
1.04 $
0.96 $
2.09
$
2.09 $
0.91 $
1.73 $
1.73 $
1.11 $
1.96
1.96
0.90
(1) We completed the acquisition of Omni on December 17, 2014. Accordingly, our balance sheet data as of December 31, 2014
reflects the effects of the acquisition of Omni. Income statement data with respect to Omni includes only the results of Omni's
operations for December 17 - December 31, 2014.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis provides a comparison of our results of operations for the years ended December 31,
2015, 2014, and 2013 and financial condition as of December 31, 2015 and 2014. This discussion should be read in conjunction
with the financial statements and related notes included elsewhere in this report. All share data has been adjusted to give retroactive
recognition to stock splits and stock dividends.
CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements of other than historical fact that are contained in this document and in written material, press releases and
oral statements issued by or on behalf of Southside Bancshares, Inc., a bank holding company, may be considered to be “forward-
looking statements” within the meaning of and subject to the protections of the Private Securities Litigation Reform Act of
1995. These forward-looking statements are not guarantees of future performance, nor should they be relied upon as representing
management’s views as of any subsequent date. These statements may include words such as “expect,” “estimate,” “project,”
“anticipate,” “appear,” “believe,” “could,” “should,” “may,” “might,” “will,” “would,” “seek,” “intend,” “probability,” “risk,”
“goal,” “target,” “objective,” “plans,” “potential,” and similar expressions. Forward-looking statements are statements with respect
to our beliefs, plans, expectations, objectives, goals, anticipations, assumptions, estimates, intentions and future performance, and
are subject to significant known and unknown risks and uncertainties, which could cause our actual results to differ materially from
the results discussed in the forward-looking statements. For example, discussions of the effect of our expansion, trends in asset
quality and earnings from growth, and certain market risk disclosures are based upon information presently available to management
and are dependent on choices about key model characteristics and assumptions and are subject to various limitations. See “Item 1.
Business” and this “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.” By their
nature, certain of the market risk disclosures are only estimates and could be materially different from what actually occurs in the
future. As a result, actual income gains and losses could materially differ from those that have been estimated. Other factors that
could cause actual results to differ materially from forward-looking statements include, but are not limited to, the following:
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general economic conditions, either globally, nationally, in the State of Texas, or in the specific markets in which we
operate, including, without limitation, the deterioration of the commercial real estate, residential real estate, construction
and development, energy, oil and gas, credit and liquidity markets, which could cause an adverse change in our net interest
margin, or a decline in the value of our assets, which could result in realized losses;
current or future legislation, regulatory changes or changes in monetary or fiscal policy that adversely affect the businesses
in which we are engaged, including the impact of the Dodd-Frank Wall Street Reform and Consumer Protection Act of
2010 (“Dodd-Frank Act”), the Federal Reserve’s actions with respect to interest rates, the capital requirements promulgated
by the Basel Committee on Banking Supervision (“Basel Committee”) and other regulatory responses to current economic
conditions;
adverse changes in the status or financial condition of the Government-Sponsored Enterprises (the “GSEs”) impacting the
GSEs’ guarantees or ability to pay or issue debt;
adverse changes in the credit portfolio of other U.S. financial institutions relative to the performance of certain of our
investment securities;
economic or other disruptions caused by acts of terrorism in the United States, Europe or other areas;
changes in the interest rate yield curve such as flat, inverted or steep yield curves, or changes in the interest rate
environment that impact interest margins and may impact prepayments on the mortgage-backed securities (“MBS”)
portfolio;
increases in our nonperforming assets;
our ability to maintain adequate liquidity to fund operations and growth;
the failure of our assumptions underlying allowance for loan losses and other estimates;
unexpected outcomes of, and the costs associated with, existing or new litigation involving us;
changes impacting our balance sheet and leverage strategy;
risks related to actual U.S. agency MBS prepayments exceeding projected prepayment levels;
risks related to U.S. agency MBS prepayments increasing due to U.S. Government programs designed to assist
homeowners to refinance their mortgage that might not otherwise have qualified;
30
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•
•
•
•
•
•
•
•
our ability to monitor interest rate risk;
risks related to the price per barrel of crude oil;
significant increases in competition in the banking and financial services industry;
changes in consumer spending, borrowing and saving habits;
technological changes;
our ability to increase market share and control expenses;
the effect of changes in federal or state tax laws;
the effect of compliance with legislation or regulatory changes;
the effect of changes in accounting policies and practices;
credit risks of borrowers, including any increase in those risks due to changing economic conditions; and
risks related to loans secured by real estate, including the risk that the value and marketability of collateral could
decline.
All written or oral forward-looking statements made by us or attributable to us are expressly qualified by this cautionary
notice. We disclaim any obligation to update any factors or to announce publicly the result of revisions to any of the forward-
looking statements included herein to reflect future events or developments, unless otherwise required by law.
CRITICAL ACCOUNTING ESTIMATES
Our accounting and reporting estimates conform with U.S. generally accepted accounting principles (“GAAP”) and general
practices within the financial services industry. The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying
notes. Actual results could differ from those estimates. We consider our critical accounting policies to include the following:
Allowance for Losses on Loans. The allowance for losses on loans represents our best estimate of probable losses inherent in
the existing loan portfolio. The allowance for losses on loans is increased by the provision for losses on loans charged to expense
and reduced by loans charged-off, net of recoveries. The provision for losses on loans is determined based on our assessment of
several factors: reviews and evaluations of specific loans, changes in the nature and volume of the loan portfolio, current economic
conditions and the related impact on specific borrowers and industry groups, historical loan loss experience, the level of classified
and nonperforming loans and the results of regulatory examinations.
The allowance for loan loss is based on the most current review of the loan portfolio and is a result of multiple processes. The
servicing officer has the primary responsibility for updating significant changes in a customer's financial position. Each officer
prepares status updates on any credit deemed to be experiencing repayment difficulties which, in the officer's opinion, would place
the collection of principal or interest in doubt. Our internal loan review department is responsible for an ongoing review of our loan
portfolio with specific goals set for the loans to be reviewed on an annual basis.
At each review, a subjective analysis methodology is used to grade the respective loan. Categories of grading vary in severity
from loans that do not appear to have a significant probability of loss at the time of review to loans that indicate a probability that the
entire balance of the loan will be uncollectible. If full collection of the loan balance appears unlikely at the time of review, estimates
of future expected cash flows or appraisals of the collateral securing the debt are used to determine the necessary allowances. The
internal loan review department maintains a list of all loans or loan relationships that are graded as having more than the normal
degree of risk associated with them. In addition, a list of specifically reserved loans or loan relationships of $150,000 or more is
updated on a quarterly basis in order to properly determine the necessary allowance and keep management informed on the status of
attempts to correct the deficiencies noted with respect to the loan.
Loans are considered impaired if, based on current information and events, it is probable that we will be unable to collect the
scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. The measurement of
impaired loans is generally based on the present value of expected future cash flows discounted at the historical effective interest rate
stipulated in the loan agreement, except that all collateral-dependent loans are measured for impairment based on fair value of the
collateral. In measuring the fair value of the collateral, in addition to relying on third party appraisals, we use assumptions such as
discount rates, and methodologies, such as comparison to the recent selling price of similar assets, consistent with those that would
be utilized by unrelated third parties performing a valuation.
31
Changes in the financial condition of individual borrowers, economic conditions, historical loss experience and the conditions
of the various markets in which collateral may be sold all may affect the required level of the allowance for losses on loans and the
associated provision for loan losses.
The allowance for loan losses related to purchase credit impaired (“PCI”) loans is based on an analysis that is performed each
period to estimate the expected cash flows for each loan deemed PCI. To the extent that the expected cash flows from a PCI loan
have decreased since the acquisition date, we establish or increase the allowance for loan losses.
For acquired loans that are not deemed credit impaired at acquisition, credit discounts representing the principal losses
expected over the life of the loan are a component of the initial fair value. Subsequent to the purchase date, the methods utilized to
estimate the required allowance for loan losses for these loan is similar to originated loans. The remaining differences between the
purchase price and the unpaid principal balance at the date of acquisition are recorded in interest income over the economic life of
the loan.
As of December 31, 2015, our review of the loan portfolio indicated that a loan loss allowance of $19.7 million was
appropriate to cover probable losses in the portfolio.
Refer to “Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Loan
Loss Experience and Allowance for Loan Losses” and “Note 6 – Loans and Allowance for Probable Loan Losses” to our
consolidated financial statements included in this report for a detailed description of our estimation process and methodology related
to the allowance for loan losses.
Estimation of Fair Value. The estimation of fair value is significant to a number of our assets and liabilities. In addition,
GAAP requires disclosure of the fair value of financial instruments as a part of the notes to the consolidated financial
statements. Fair values for securities are volatile and may be influenced by a number of factors, including market interest rates,
prepayment speeds, discount rates and the shape of yield curves. Fair values for most investment and MBS are based on quoted
market prices, where available. If quoted market prices are not available, fair values are based on the quoted prices of similar
instruments or estimates from independent pricing services. Where there are price variances outside certain ranges from different
pricing services for specific securities, those pricing variances are reviewed with other market data to determine which of the price
estimates is appropriate for that period.
Impairment of Investment Securities and Mortgage-backed Securities. Investment and MBS classified as available for sale
(“AFS”) are carried at fair value and the impact of changes in fair value are recorded on our consolidated balance sheet as an
unrealized gain or loss in “Accumulated other comprehensive (loss) income,” a separate component of shareholders' equity.
Securities classified as AFS or held to maturity (“HTM”) are subject to our review to identify when a decline in value is other-than-
temporary. When it is determined that a decline in value 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 to other comprehensive income for the
noncredit portion. Factors considered in determining whether a decline in value is other-than-temporary include : (1) whether the
decline is substantial, the duration of the decline and the reasons for the decline in value; (2) whether the decline is related to a credit
event, a change in interest rate or a change in the market discount rate; (3) the financial condition and near-term prospects of the
issuer; and (4) whether we have a current intent to sell the security and whether it is not more likely than not that we will be required
to sell the security before the anticipated recovery of its amortized cost basis. For certain assets, we consider expected cash flows of
the investment in determining if impairment exists.
Defined Benefit Pension Plan. The plan obligations and related assets of our defined benefit pension plan (the “Plan”) are
presented in “Note 11 – Employee Benefits” to our consolidated financial statements included in this report. Entry into the Plan by
new employees was frozen effective December 31, 2005. Plan assets, which consist primarily of marketable equity and debt
instruments, are valued using observable market quotations. Plan obligations and the annual pension expense are determined by
independent actuaries and through the use of a number of assumptions that are reviewed by management. Key assumptions in
measuring the Plan obligations include the discount rate, the rate of salary increases and the estimated future return on the Plan
assets. In determining the discount rate, we utilized a cash flow matching analysis to determine a range of appropriate discount rates
for our defined benefit pension and restoration plans. In developing the cash flow matching analysis, we constructed a portfolio of
high quality noncallable bonds (rated AA- or better) to match as close as possible the timing of future benefit payments of the Plan at
December 31, 2015. Based on this cash flow matching analysis, we were able to determine an appropriate discount rate.
Salary increase assumptions are based upon historical experience and our anticipated future actions. The expected long-term
rate of return assumption reflects the average return expected based on the investment strategies and asset allocation on the assets
invested to provide for the Plan’s liabilities. We considered broad equity and bond indices, long-term return projections, and actual
long-term historical Plan performance when evaluating the expected long-term rate of return assumption. At December 31, 2015,
the weighted-average actuarial assumptions of the Plan were: a discount rate of 4.56%; a long-term rate of return on Plan assets of
32
7.25%; and assumed salary increases of 3.50%. Material changes in pension benefit costs may occur in the future due to changes in
these assumptions. Future annual amounts could be impacted by changes in the number of Plan participants, changes in the level of
benefits provided, changes in the discount rates, changes in the expected long-term rate of return, changes in the level of
contributions to the Plan and other factors.
OVERVIEW
OPERATING RESULTS
During the year ended December 31, 2015, our net income increased $23.2 million, or 111.2%, to $44.0 million, from $20.8
million for the same period in 2014. The increase in net income was primarily attributable to an increase in net interest income of
$27.9 million and an increase in noninterest income of $13.4 million, combined with a decrease in the provision for loan losses.
These items were partially offset by an increase in noninterest expense and income tax expense. Noninterest expense increased
primarily due to expenses associated with the acquisition of Omni which are reflected primarily in salaries and employee benefits as
well as occupancy expense. Earnings per diluted share increased $0.69, or 66.3%, to $1.73 for the year ended December 31, 2015,
from $1.04 for the same period in 2014.
During the year ended December 31, 2014, our net income decreased $20.4 million, or 49.4%, to $20.8 million, from $41.2
million for the same period in 2013. The decrease in net income was primarily attributable to merger expenses related to the
acquisition of Omni, a loss on the sale of loans purchased by SFG which resulted in an increase in the provision for loan losses and
an impairment of our investment in SFG, and a decrease in net gain on sale of securities available for sale. These items were
partially offset by a decrease in income tax expense and an increase in net interest income. Noninterest expense increased primarily
due to merger related expenses which is reflected primarily in salaries and employee benefits, software and data processing expense
and professional fees. Earnings per diluted share decreased to $1.04 for the year ended December 31, 2014, from $2.09 for the same
period in 2013.
FINANCIAL CONDITION
Our total assets increased $354.8 million, or 7.4%, to $5.16 billion at December 31, 2015 from $4.81 billion at December 31,
2014 primarily as a result of the increases in our loans and increases in our investment portfolio and mortgage-backed securities
(“MBS”). Loans increased $250.6 million, or 11.5%, to $2.43 billion compared to $2.18 billion at December 31, 2014. The increase
in our loans was comprised of $167.0 million of commercial real estate, $170.4 million of construction, $16.1 million of commercial
and $30.6 million of municipal loans while offset by a decrease of $35.5 million of 1-4 family residential loans and $98.0 million of
loans to individuals. Our securities portfolio increased by $153.8 million, or 7.4%, to $2.24 billion compared to $2.09 billion at
December 31, 2014. The increase in our securities was comprised of approximately $97.2 million of MBS and approximately $56.6
million of investment securities, comprised of U.S. Treasury, Agency and Texas municipal securities. The increase in loans and
securities was funded primarily by FHLB advances and deposits.
Our nonperforming assets at December 31, 2015 increased to $32.5 million, and represented 0.63% of total assets, compared
to $12.3 million, or 0.26% of total assets at December 31, 2014. Nonaccruing loans increased $16.4 million to $20.5 million and the
ratio of nonaccruing loans to total loans increased to 0.84% at December 31, 2015 compared to 0.19% at December 31, 2014. Other
Real Estate Owned (“OREO”) decreased to $744,000 at December 31, 2015 from $1.7 million at December 31, 2014. Repossessed
assets decreased to $64,000 at December 31, 2015 from $565,000 at December 31, 2014. Restructured loans at December 31, 2015
increased to $11.1 million compared to $5.9 million at December 31, 2014.
Our deposits increased $81.0 million to $3.46 billion at December 31, 2015 from $3.37 billion at December 31, 2014. Our
deposits, net of brokered deposits, increased $18.1 million, or 0.5% during 2015. The increase in our deposits during 2015 was
primarily the result of an increase in brokered deposits and public fund deposits. During 2015, our non-interest bearing deposits
increased $11.5 million, and interest bearing deposits increased $69.5 million. During 2015, our brokered deposits increased $62.8
million and our public fund deposits increased $56.8 million. Total FHLB advances increased $250.3 million to $1.15 billion at
December 31, 2015, from $897.4 million at December 31, 2014. Short-term FHLB advances increased $348.0 million to $645.4
million at December 31, 2015 from $297.4 million at December 31, 2014. Long-term FHLB advances decreased $97.8 million to
$502.3 million at December 31, 2015 from $600.1 million at December 31, 2014. Other borrowings at December 31, 2015 and 2014
totaled $62.7 million and $64.5 million, respectively, and at December 31, 2015 consisted of $2.4 million of short-term borrowings
and $60.3 million of long-term debt compared to $4.2 million of short-term borrowings and $60.3 million of long-term debt at
December 31, 2014.
Assets under management in our trust department decreased during 2015 and were approximately $878.3 million at
December 31, 2015 compared to $932.6 million at December 31, 2014.
33
Shareholders’ equity at December 31, 2015 totaled $444.1 million compared to $425.2 million at December 31, 2014. The
increase is primarily the result of net income of $44.0 million recorded for the year ended December 31, 2015, the $1.4 million of
common stock issued under our dividend reinvestment plan and stock compensation expense of $1.4 million. These increases were
partially offset by cash dividends paid of $25.1 million and an increase in accumulated other comprehensive loss of $3.1
million. The increase in accumulated other comprehensive loss is comprised primarily of a decrease of $6.5 million, net of tax, in
the unrealized gain on securities, net of reclassification adjustment and an increase of $3.4 million, net of tax, related to the change
in the funded status of our defined benefit plan. See “Note 4 – Accumulated Other Comprehensive (Loss) Income” to our
consolidated financial statements included in this report.
Economic conditions in our market areas have continued to perform generally better than many other parts of the country.
There continues to be some economic headwinds including a decline in oil prices, however despite these headwinds, many
economists predict the national economy and the economy in markets we serve will continue to grow at a slow to modest pace in
2015.
Key financial indicators management follows include, but are not limited to, numerous interest rate sensitivity and interest
rate risk indicators, credit risk, operations risk, liquidity risk, capital risk, regulatory risk, competition risk, yield curve risk, U.S.
Agency MBS prepayment risk, and economic risk indicators.
BALANCE SHEET STRATEGY
We utilize wholesale funding and securities to enhance our profitability and balance sheet composition by determining
acceptable levels of credit, interest rate and liquidity risk consistent with prudent capital management. This balance sheet strategy
consists of borrowing a combination of long- and short-term funds from the FHLB and, when determined appropriate, issuing
brokered CDs. These funds are invested primarily in U.S. Agency MBS, and to a lesser extent, long-term municipal
securities. Although U.S. Agency MBS often carry lower yields than traditional mortgage loans and other types of loans we make,
these securities generally (i) increase the overall quality of our assets because of either the implicit or explicit guarantees of the U.S.
Government, (ii) are more liquid than individual loans and (iii) may be used to collateralize our borrowings or other
obligations. While the strategy of investing a substantial portion of our assets in U.S. Agency MBS and municipal securities has
historically resulted in lower interest rate spreads and margins, we believe that the lower operating expenses and reduced credit risk,
combined with the managed interest rate risk of this strategy, have enhanced our overall profitability over the last several years. At
this time, we utilize this balance sheet strategy with the goal of enhancing overall profitability by maximizing the use of our capital.
Risks associated with the asset structure we maintain include a lower net interest rate spread and margin when compared to
our peers, changes in the slope of the yield curve, which can reduce our net interest rate spread and margin, increased interest rate
risk, the length of interest rate cycles, changes in volatility spreads associated with the MBS and municipal securities, the
unpredictable nature of MBS prepayments and credit risks associated with the municipal securities. See “Part I - Item 1A. Risk
Factors – Risks Related to Our Business” for a discussion of risks related to interest rates. Our asset structure, net interest spread
and net interest margin require us to closely monitor our interest rate risk. An additional risk is the change in fair value of the AFS
securities portfolio as a result of changes in interest rates. Significant increases in interest rates, especially long-term interest rates,
could adversely impact the fair value of the AFS securities portfolio, which could also significantly impact our equity capital. Due
to the unpredictable nature of MBS prepayments, the length of interest rate cycles, and the slope of the interest rate yield curve, net
interest income could fluctuate more than simulated under the scenarios modeled by our Asset/Liability Committee (“ALCO”) and
described under “Item 7A. Quantitative and Qualitative Disclosures about Market Risk” in this report.
Determining the appropriate size of the balance sheet is one of the critical decisions any bank makes. Our balance sheet is
not merely the result of a series of micro-decisions, but rather the size is controlled based on the economics of assets compared to the
economics of funding. The current low interest rate environment and investment and economic landscape requires that we monitor
the interest rate sensitivity of the assets driving our growth and closely align ALCO objectives accordingly.
The management of our securities portfolio as a percentage of earning assets is guided by the current economics associated
with increasing the securities portfolio, changes in our overall loan and deposit levels, and changes in our wholesale funding
levels. If adequate quality loan growth is not available to achieve our goal of enhancing profitability by maximizing the use of
capital, as described above, then we may purchase additional securities, if appropriate, which may cause securities as a percentage of
earning assets to increase. Should we determine that increasing the securities portfolio or replacing the current securities maturities
and principal payments is not an efficient use of capital, we may decrease the level of securities through proceeds from maturities,
principal payments on MBS or sales. Our balance sheet strategy is designed such that our securities portfolio should help mitigate
financial performance associated with potential business cycles that include slower loan growth and higher credit costs.
In the year ended December 31, 2015, we primarily sold collateralized mortgage obligations (“CMO”) along with some
U.S. Agency mortgage pass-throughs, U.S. Agency commercial mortgage-backed securities (“CMBS”), Texas municipal securities
34
and U.S. Treasury securities that resulted in an overall gain on the sale of AFS securities of $3.7 million. The CMOs we sold during
the year had a poor risk reward due to ongoing prepayment concerns as a result of the lower long term interest rate environment and
very low book yields. The CMBS that were sold were primarily shorter duration CMBS and were more than replaced by longer
duration CMBS. The U.S. Treasury securities sold were due to the low interest rates at that time. Our investment securities and U.S.
Agency MBS increased from $2.09 billion at December 31, 2014, to $2.24 billion at December 31, 2015. The increase was
primarily due to increased U.S. Treasury securities and CMBS. Most of the increase in the securities portfolio occurred during the
second and fourth quarters when interest rates were higher on average than the other two quarters. At December 31, 2015, securities
as a percentage of assets remained the same at 43.5%, when compared to December 31, 2014. Our balance sheet management
strategy is dynamic and will be continually reevaluated as market conditions warrant. As interest rates, yield curves, MBS
prepayments, funding costs, security spreads and loan and deposit portfolios change, our determination of the proper types, amount
and maturities of securities to own, as well as funding needs and funding sources will continue to be reevaluated. Should the
economics of purchasing securities decrease, we may allow this part of the balance sheet to shrink through run-off or security
sales. However, should the economics become more attractive, we may continue to strategically increase the securities portfolio and
the balance sheet.
With respect to liabilities, we continue to utilize a combination of FHLB advances and deposits to achieve our strategy of
minimizing cost while achieving overall interest rate risk objectives as well as the liability management objectives of the
ALCO. FHLB funding is the primary wholesale funding source we are currently utilizing. Our FHLB borrowings increased 27.9%,
or $250.3 million, to $1.15 billion at December 31, 2015 from $897.4 million at December 31, 2014, due primarily to the increase in
securities and loans. During the year ended December 31, 2015, our long-term FHLB advances decreased $97.8 million, to $502.3
million from $600.1 million at December 31, 2014. Our brokered deposits increased from $23.4 million at December 31, 2014 to
$86.3 million at December 31, 2015, or 268.2%. At December 31, 2015, approximately $64.6 million of our brokered deposits were
non-callable brokered CDs with a weighted average cost of 56 basis points and remaining maturities of five to thirteen months. The
remaining $20.7 million were long-term brokered CDs that mature within five years and have short-term calls that we
control. During the three months ended December 31, 2015, we issued approximately $1.0 million of brokered money market
deposits and $21.5 million of brokered CDs. During 2015, increases in FHLB advances and brokered deposits resulted in an
increase in our total wholesale funding as a percentage of deposits, not including brokered deposits, to 36.6% at December 31, 2015
from 27.5% at December 31, 2014.
RESULTS OF OPERATIONS
Our results of operations are dependent primarily on net interest income, which is the difference between the interest income
earned on assets (loans and investments) and interest expense due on our funding sources (deposits and borrowings) during a
particular period. Results of operations are also affected by our noninterest income, provision for loan losses, noninterest expenses
and income tax expense. General economic and competitive conditions, particularly changes in interest rates, changes in interest
rate yield curves, prepayment rates of MBS and loans, repricing of loan relationships, government policies and actions of regulatory
authorities, also significantly affect our results of operations. Future changes in applicable law, regulations or government policies
may also have a material impact on us.
35
NET INTEREST INCOME
Net interest income is one of the principal sources of a financial institution's earnings stream and represents the difference or
spread between interest and fee income generated from interest earning assets and the interest expense paid on deposits and
borrowed funds. Fluctuations in interest rates or interest rate yield curves, as well as repricing characteristics and volume and
changes in the mix of interest earning assets and interest bearing liabilities, materially impact net interest income.
Interest income
Loans ............................................................................................................ $
Investment securities – taxable ....................................................................
Investment securities – tax-exempt ..............................................................
Mortgage-backed securities .........................................................................
FHLB stock and other investments ..............................................................
Other interest earning assets ........................................................................
Total interest income ...............................................................................
Interest expense
Deposits .......................................................................................................
Short-term obligations .................................................................................
Long-term obligations ..................................................................................
Total interest expense ..............................................................................
Net interest income ......................................................................................... $
2015
Years ended December 31,
2014
(in thousands)
2013
96,417 $
1,587
22,468
33,661
298
101
154,532
10,162
1,250
8,442
19,854
134,678 $
70,598 $
615
24,038
28,207
181
139
123,778
7,953
624
8,379
16,956
106,822 $
72,910
799
25,483
20,085
182
143
119,602
8,179
1,875
7,914
17,968
101,634
Net interest income for the year ended December 31, 2015 increased $27.9 million, or 26.1%, compared to the same period in
2014 and increased $5.2 million, or 5.1%, for the year ended December 31, 2014 compared to the same period in 2013. The overall
increase in net interest income during 2015 was primarily due to increases in interest income on loans and mortgage-backed
securities income, partially offset by increases in interest expense on deposits and short-term obligations. For the year ended
December 31, 2015, our net interest spread and net interest margin decreased to 3.31% and 3.40% from 3.63% and 3.77%,
respectively, for the same period in 2014. The overall increase in net interest income during 2014 was primarily the result of an
increase in interest income from MBS and a decrease in interest expense on short-term obligations and deposits, partially offset by a
decrease in interest income on loans and investment securities and an increase in long-term obligation interest expense. For the year
ended December 31, 2014, our net interest spread increased to 3.63% from 3.54%, and our net interest margin increased to 3.77%
from 3.69% when compared to the same period in 2013.
During the year ended December 31, 2015, total interest income increased $30.8 million, or 24.8%, when compared to the
same period in 2014, and during the year ended December 31, 2014, increased $4.2 million, or 3.5%, when compared to the same
period in 2013. The increase in total interest income for the year ended December 31, 2015 was the result of an increase in average
interest earning assets of $1.20 billion, or 36.6%, from $3.26 billion to $4.46 billion from 2014 to 2015, while partially offset by a
decrease in the average yield on average interest earning assets from 4.29% for the year ended December 31, 2014 to 3.84% for the
year ended December 31, 2015. The decrease in the yield on interest earning assets during the year ended December 31, 2015 is
reflective of a decrease in the average yield on loans and MBS.
The increase in total interest income for the year ended December 31, 2014 was the result of an increase in the average yield
on average interest earning assets from 4.25% for the year ended December 31, 2013 to 4.29% for the year ended December 31,
2014 and an increase in average interest earning assets of $81.2 million, or 2.6%, from $3.18 billion to $3.26 billion from 2013 to
2014. The increase in the yield on interest earning assets during the year ended December 31, 2014 is reflective of an increase in the
average yield on MBS and taxable investment securities.
During the year ended December 31, 2015, average loans increased $803.6 million, or 56.6%, to $2.22 billion from $1.42
billion, compared to the same period in 2014. During the year ended December 31, 2014, average loans increased $124.4 million, or
9.6%, from $1.30 billion to $1.42 billion, compared to the same period in 2013. The increase in average loans during 2015 was
primarily a result of strong loan growth in our market areas and loans acquired in the acquisition of Omni. Construction loans,
commercial real estate loans, and municipal loans represent a large part of this increase for both years. The average yield on loans
36
decreased from 5.24% for the year ended December 31, 2014 to 4.52% for the year ended December 31, 2015, due to overall lower
interest rates and the higher yield automobile loans purchased by SFG and included in the portfolio until they were sold in the 4th
quarter of the year ended December 31, 2014. Interest income on loans increased $25.8 million, or 36.6%, for the year ended
December 31, 2015 compared to the same period in 2014 as a result of an increase in average balance, which more than offset the
decrease in the average yield. The average yield on loans decreased from 5.92% for the year ended December 31, 2013 to 5.24% for
the year ended December 31, 2014. Interest income on loans decreased $2.3 million, or 3.2%, for the year ended December 31,
2014 compared to the same period in 2013 as a result of the decrease in the average yield which more than offset the increase in the
average balance. Due to the competitive loan pricing environment, we anticipate that we may be required to continue to offer lower
interest rate loans that compete with those offered by other financial institutions in order to retain quality loan relationships.
Offering lower interest rate loans could impact the overall yield on loans and, therefore, profitability.
Average investment and MBS increased $396.9 million, or 22.7%, to $2.15 billion from $1.75 billion for the year ended
December 31, 2015, when compared to the same period in 2014 and decreased $50.0 million, or 2.8%, from $1.80 billion to $1.75
billion for the year ended December 31, 2014, when compared to the same period in 2013. At December 31, 2015, substantially all
of our MBS were fixed rate securities. The overall yield on average investment and MBS decreased to 3.27% during the year ended
December 31, 2015 from 3.72% during the same period in 2014 and increased to 3.72% during the year ended December 31, 2014
from 3.24% during the same period in 2013. The decrease in the average yield during 2015 primarily reflects an overall higher
interest rate environment during 2014, the purchase of lower yielding securities when compared to those securities paying off,
maturing or sold and the addition of Omni's securities portfolio at fair value in a low interest rate environment. The increase in the
average yield during 2014 reflects an increase in the yield of MBS securities. Interest income on investment and MBS increased
$4.9 million in 2015, or 9.2%, as the increase in the average balance more than offset the decrease in the average yield. A decrease
in long-term interest rate levels combined with lower credit spreads could negatively impact our net interest margin in the future due
to increased prepayments. Interest income on investment and MBS increased $6.5 million in 2014, or 14.0%, as the increase in the
average yield more than offset the decrease in the average balance.
Average FHLB stock and other investments increased $17.9 million, or 62.4%, to $46.6 million, for the year ended
December 31, 2015, when compared to $28.7 million for 2014 due to the increase in average FHLB advances during 2015 and the
corresponding requirement to hold stock associated with those advances. Average FHLB stock and other investments decreased
$2.7 million, or 8.6%, to $28.7 million, for the year ended December 31, 2014, when compared to $31.4 million for 2013 due to the
decrease in average FHLB advances during 2014. Interest income from our FHLB stock and other investments increased $117,000,
or 64.6%, during 2015, due to an increase in the average balance. Interest income from our FHLB stock and other investments
decreased $1,000, or 0.5%, during 2014, due to a decrease in the average balance partially offset by an increase in the average yield
from 0.58% for the year ended December 31, 2013 compared to 0.63% for the same period in 2014. The FHLB stock is a variable
instrument with the rate typically tied to the federal funds rate. We are required as a member of FHLB to own a specific amount of
stock that changes as the level of our FHLB advances and asset size change.
Average interest earning deposits decreased $15.3 million, or 27.9%, to $39.5 million, for the year ended December 31, 2015,
when compared to $54.9 million for 2014. Interest income from interest earning deposits decreased $38,000 in 2015, or 27.3%, as a
result of a decrease in average balance as compared to 2014. Average interest earning deposits decreased $274,000, or 0.5%, to
$54.9 million, for the year ended December 31, 2014, when compared to $55.1 million for 2013. Interest income from interest
earning deposits decreased $4,000, or 2.8%, for the year ended December 31, 2014, when compared to 2013, as a result of the
decrease in the average balance and average yield.
During the year ended December 31, 2015, our average loans and securities increased when compared to the same period in
2014. As a result, the mix of our average interest earning assets changed as our average total securities as a percentage of total
average interest earning assets totaled 49.1% during 2015 compared to 54.4% during 2014 and 57.5% during 2013. Average loans
were 50.0% of average total interest earning assets during 2015 compared to 43.9% during 2014 and 40.8% during 2013. Other
interest earning asset categories averaged 0.9% of average interest earning assets during 2015 compared to 1.7% during both 2014
and 2013.
Total interest expense increased $2.9 million, or 17.1%, during the year ended December 31, 2015. The increase in interest
expense for 2015 was attributable to an increase in average interest bearing liabilities of $1.13 billion, or 43.6%, from $2.59 billion
to $3.71 billion which was partially offset by the decrease in the average rate paid on interest bearing liabilities for the year ended
December 31, 2015, to 0.53%, from 0.66% for the same period in 2014. The increase in average interest bearing liabilities was
primarily the result of the increase in deposits and FHLB advances to fund the increase in loans and securities, as well as the
deposits and FHLB advances acquired in the acquisition of Omni.
Total interest expense decreased $1.0 million, or 5.6%, during the year ended December 31, 2014, as compared to 2013. The
decrease was attributable to a decrease in the average rate paid on interest bearing liabilities for the year ended December 31, 2014,
to 0.66% from 0.71% for the same period in 2013, which more than offset the increase in average interest bearing liabilities of $61.2
37
million, or 2.4%, from $2.52 billion to $2.59 billion. The decrease in the average rate paid on interest bearing liabilities of five basis
points was a result of continued low short-term interest rates during the year ended December 31, 2014.
The following table sets forth our deposit averages by category for the years ended December 31, 2015, 2014 and 2013:
COMPOSITION OF DEPOSITS
2015
Average
Balance
Average
Rate
Years Ended December 31,
2014
Average
Average
Rate
Balance
(dollars in thousands)
2013
Average
Balance
Average
Rate
Interest Bearing Demand Deposits ........... $ 1,648,416
Savings Deposits ......................................
232,385
Time Deposits ...........................................
845,882
0.27% $ 1,231,711
121,453
0.10%
610,178
0.65%
0.29% $ 1,081,475
108,097
0.11%
640,608
0.70%
0.31%
0.13%
0.73%
Total Interest Bearing Deposits ................
2,726,683
0.37% 1,963,342
0.41%
1,830,180
0.45%
Noninterest Bearing Demand Deposits ....
679,346
N/A
576,770
N/A
560,762
N/A
Total Deposits ........................................ $ 3,406,029
0.30% $ 2,540,112
0.31% $ 2,390,942
0.34%
Total average interest bearing deposits increased $763.3 million, or 38.9%, while the average rate paid decreased from 0.41%
for the year ended December 31, 2014, to 0.37% for the year ended December 31, 2015. For the year ended December 31, 2014
average interest bearing deposits increased $133.2 million, or 7.3%, while the average rate paid decreased to 0.41%, from 0.45% for
the year ended December 31, 2013. Interest expense for interest bearing deposits increased $2.2 million, or 27.8%, for the year
ended December 31, 2015, when compared to the same period in 2014 due to the increase in the average balance which more than
offset the decrease in the average yield. Interest expense for interest bearing deposits for the year ended December 31, 2014,
decreased $226,000, or 2.8%, when compared to the same period in 2013 due to the decrease in the average yield which more than
offset the increase in the average balance.
Average time deposits increased $235.7 million, or 38.6%, while the average rate paid decreased five basis points for the year
ended December 31, 2015. Average time deposits decreased $30.4 million, or 4.8%, and the average rate paid decreased three basis
points for the year ended December 31, 2014. Average interest bearing demand deposits increased $416.7 million, or 33.8%, and
$150.2 million, or 13.9%, for the years ended December 31, 2015 and December 31, 2014, respectively, while the average rate paid
decreased two basis points for each of the years ended December 31, 2015 and December 31, 2014. Average savings deposits
increased $110.9 million, or 91.3%, while the average rate paid decreased one basis point for the year ended December 31, 2015.
Average savings deposits increased $13.4 million, or 12.4%, while the average rate paid decreased two basis points for the year
ended December 31, 2014. Average noninterest bearing demand deposits increased $102.6 million, or 17.8%, during 2015 and $16.0
million, or 2.9%, during 2014. The latter three categories, which are considered the lowest cost deposits, comprised 75.2% of total
average deposits during the year ended December 31, 2015 compared to 76.0% during 2014 and 73.2% during 2013. The increase
in our average total deposits during 2015 was primarily the result of our acquisition of Omni in December of 2014. The increase in
our average total deposits during 2014 was primarily the result of an increase in deposits from municipalities and to a lesser extent,
deposit growth due to branch expansion, and continued market penetration.
At December 31, 2015, total brokered CDs were $85.3 million compared to $23.4 million at December 31, 2014. This
represented an increase of $61.8 million, or 264.0%, from 2014. Total brokered CDs decreased $31.0 million, or 56.9%, in 2014
from $54.4 million at December 31, 2013. At December 31, 2015, approximately $64.6 million of our brokered CDs were non-
callable with maturities of five to thirteen months. The remaining $20.7 million were long-term CDs that mature within five years
and have short-term calls that we control. We utilize long-term callable brokered CDs because the brokered CDs better match
overall ALCO objectives at the time of issuance by protecting us with fixed rates should interest rates increase, while providing us
options to call the funding should interest rates decrease. At December 31, 2015, brokered CDs represented 2.5% of deposits
compared to 0.8% of deposits at December 31, 2014 and 2.2% at December 31, 2013. Our wholesale funding policy currently
allows maximum brokered CDs of $180 million; however, this amount could be increased to match changes in ALCO
objectives. The potential higher interest cost and lack of customer loyalty are risks associated with the use of brokered CDs.
38
Average short-term interest bearing liabilities, consisting primarily of FHLB advances, federal funds purchased and
repurchase agreements, were $384.7 million, an increase of $320.5 million, or 499.6%, for the year ended December 31, 2015 when
compared to the same period in 2014. Average short-term interest bearing liabilities increased primarily to fund the increase in loans
and securities, and advances acquired in the acquisition of Omni in the fourth quarter of 2014. For the year ended December 31,
2014, the decrease was $133.3 million, or 67.5%, to $64.2 million when compared to the same period in 2013. Interest expense
associated with short-term interest bearing liabilities increased $626,000, or 100.3%, while the average rate paid decreased 65 basis
points to 0.32% for the year ended December 31, 2015, when compared to 0.97% for the same period in 2014. Interest expense
associated with short-term interest bearing liabilities decreased $1.3 million, or 66.7%, while the average rate paid increased two
basis points to 0.97% for the year ended December 31, 2014, when compared to 0.95% for the same period in 2013. The increase in
the interest expense during 2015 was due to the increase in the average balance and was partially offset by a decrease in the average
rate paid. The decrease in the interest expense during 2014 was due to the decrease in the average balance which more than offset
the increase in the average rate paid.
Average long-term interest bearing liabilities, consisting of FHLB advances, increased $43.3 million, or 8.7%, during the year
ended December 31, 2015, to $540.6 million as compared to $497.3 million at December 31, 2014, primarily to fund the increase in
loans and securities. Average long-term interest bearing liabilities increased $61.4 million, or 14.1%, during the year ended
December 31, 2014, from $435.9 million at December 31, 2013. Interest expense associated with long-term FHLB advances
increased $32,000, or 0.5%, while the average rate paid decreased 11 basis points to 1.29% for the year ended December 31, 2015
when compared to 1.40% for the same period in 2014. The increase in interest expense was due to the increase in the average
balance which more than offset the decrease in the average rate paid. Interest expense associated with long-term FHLB advances
increased $490,000, or 7.6%, while the average rate paid decreased eight basis points to 1.40% for the year ended December 31,
2014 when compared to 1.48% for the same period in 2013. The increase in interest expense was due to the increase in the average
balance which more than offset the decrease in the average rate paid. FHLB advances are collateralized by FHLB stock, securities
and nonspecific real estate loans.
Average long-term debt, consisting of our junior subordinated debentures, was $60.3 million for the years ended
December 31, 2015, 2014, and 2013. The interest rate on the $20.6 million of long-term debentures issued to Southside Statutory
Trust III adjusts quarterly at a rate equal to three-month LIBOR plus 294 basis points. The interest rate on the $23.2 million of long-
term debentures issued to Southside Statutory Trust IV adjusts quarterly at a rate equal to three-month LIBOR plus 130 basis points.
The interest rate on the $12.9 million of long-term debentures issued to Southside Statutory Trust V adjusts quarterly at a rate equal
to three-month LIBOR plus 225 basis points. The interest rate on the $3.6 million of long-term debentures issued to Magnolia Trust
Company I adjusts quarterly at a rate equal to three-month LIBOR plus 180 basis points.
39
AVERAGE BALANCES WITH AVERAGE YIELDS AND RATES
The following table presents average balance sheet amounts and average yields/rates for the years ended December 31, 2015,
2014 and 2013. The information should be reviewed in conjunction with the consolidated financial statements for the same years
then ended. Two major components affecting our earnings are the interest earning assets and interest bearing liabilities. A summary
of average interest earning assets and interest bearing liabilities is set forth below, together with the average yield on the interest
earning assets and the average cost of the interest bearing liabilities.
AVERAGE BALANCES WITH AVERAGE YIELDS AND RATES
(dollars in thousands)
Years Ended
December 31, 2015
December 31, 2014
December 31, 2013
Average
Balance
Interest
Avg.
Yield/
Rate
Average
Balance
Interest
Avg.
Yield/
Rate
Average
Balance
Interest
Avg.
Yield/
Rate
ASSETS
INTEREST EARNING
ASSETS:
Loans(1)(2) ................................. $ 2,224,401 $ 100,471
Loans Held For Sale ..................
155
Securities:
3,439
4.52% $ 1,420,802 $ 74,450
4.51%
11,012
47
5.24% $ 1,296,440 $ 76,728
0.43%
38
1,137
5.92%
3.34%
Inv. Sec. (Taxable)(4) ................
Inv. Sec. (Tax Exempt)(3)(4) .......
75,977
637,333
1,587
34,981
2.09%
5.49%
33,168
615
659,219
36,263
1.85%
5.50%
47,914
678,000
799
37,310
1.67%
5.50%
Mortgage-backed Sec.(4) .......... 1,432,087
2,145,397
Total Securities ..................
33,661
2.35% 1,056,095
70,229
3.27% 1,748,482
28,207
65,085
2.67%
3.72%
1,072,601
1,798,515
20,085
1.87%
58,194
3.24%
FHLB stock and other
investments, at cost ....................
46,584
39,533
Interest Earning Deposits ...........
Total Interest Earning Assets ....... 4,459,354
298
101
0.64%
0.26%
28,684
54,853
181
139
171,254
3.84% 3,263,833
139,902
0.63%
0.25%
4.29%
182
31,378
55,127
143
3,182,597 135,285
0.58%
0.26%
4.25%
NONINTEREST EARNING
ASSETS:
Cash and Due From Banks .........
Bank Premises and Equipment ....
Other Assets ..............................
52,400
110,704
265,851
Less: Allowance for Loan
Losses ....................................
(16,621)
Total Assets .............................. $ 4,871,688
43,342
55,680
133,641
(17,177)
$ 3,479,319
44,013
50,766
120,725
(19,007)
$ 3,379,094
(1)
(2)
(3)
(4)
Interest on loans includes net fees on loans that are not material in amount.
Interest income includes taxable-equivalent adjustments of $4,209, $3,899 and $3,856 for the years ended December 31, 2015, 2014,
and 2013, respectively.
Interest income includes taxable-equivalent adjustments of $12,513, $12,225 and $11,827 for the years ended December 31, 2015,
2014, and 2013, respectively.
For the purpose of calculating the average yield, the average balance of securities is presented at historical cost.
Note: As of December 31, 2015, 2014 and 2013, loans totaling $20,526, $4,096 and $8,088, respectively, were on nonaccrual status. Our
policy is to reverse previously accrued but unpaid interest on nonaccrual loans; thereafter, interest income is recorded to the extent
received when appropriate.
40
AVERAGE BALANCES WITH AVERAGE YIELDS AND RATES
(dollars in thousands)
Years Ended
December 31, 2015
December 31, 2014
December 31, 2013
Average
Balance
Interest
Avg.
Yield/
Rate
Average
Balance
Interest
Avg.
Yield/
Rate
Average
Balance
Interest
Avg.
Yield/
Rate
LIABILITIES AND
SHAREHOLDERS’ EQUITY
INTEREST BEARING
LIABILITIES:
Savings Deposits ............................$ 232,385 $
845,882
Time Deposits ................................
Interest Bearing Demand Deposits ..... 1,648,416
Total Interest Bearing
Deposits .................................... 2,726,683
233
0.10% $
121,453 $
5,512
4,417
0.65%
610,178
0.27% 1,231,711
136
4,287
3,530
0.11% $ 108,097 $
0.70%
0.29%
640,608
1,081,475
142
4,700
3,337
0.13%
0.73%
0.31%
10,162
0.37% 1,963,342
7,953
0.41%
1,830,180
8,179
0.45%
Short-term Interest Bearing
Liabilities ......................................
384,694
1,250
0.32%
64,160
624
0.97%
197,506
1,875
0.95%
Long-term Interest Bearing
Liabilities-FHLB Dallas ...................
540,600
60,311
Long-term Debt (5) ..........................
Total Interest Bearing Liabilities ........ 3,712,288
6,987
1,455
1.29%
2.41%
497,296
60,311
6,955
1,424
19,854
0.53% 2,585,109
16,956
1.40%
2.36%
0.66%
435,941
60,311
2,523,938
6,465
1,449
1.48%
2.40%
17,968
0.71%
NONINTEREST BEARING
LIABILITIES:
679,346
Demand Deposits ............................
41,627
Other Liabilities .............................
Total Liabilities .............................. 4,433,261
SHAREHOLDERS’ EQUITY ...........
438,427
TOTAL LIABILITIES AND
SHAREHOLDERS’ EQUITY ...........$ 4,871,688
576,770
29,672
3,191,551
287,768
560,762
44,685
3,129,385
249,709
$ 3,479,319
$ 3,379,094
NET INTEREST INCOME ..............
$ 151,400
$ 122,946
$ 117,317
NET INTEREST MARGIN ON
AVERAGE EARNING ASSETS .......
NET INTEREST SPREAD ...............
3.40%
3.31%
3.77%
3.63%
3.69%
3.54%
(5)
Represents issuance of junior subordinated debentures.
41
ANALYSIS OF CHANGES IN INTEREST INCOME AND INTEREST EXPENSE
The following tables set forth the dollar amount of increase (decrease) in interest income and interest expense resulting from
changes in the volume of interest earning assets and interest bearing liabilities and from changes in yields/rates (in thousands):
Years Ended December 31,
2015 Compared to 2014
Average
Yield/Rate
Increase
(Decrease)
Average
Volume
INTEREST INCOME:
Loans (1) ..................................................................................................................$
Loans Held For Sale ...............................................................................................
Investment Securities (Taxable) .............................................................................
Investment Securities (Tax Exempt) (1) ...................................................................
Mortgage-backed Securities ...................................................................................
FHLB stock and other investments ........................................................................
Interest Earning Deposits .......................................................................................
Total Interest Income .........................................................................................
INTEREST EXPENSE:
Savings Deposits ....................................................................................................
Time Deposits ........................................................................................................
Interest Bearing Demand Deposits.........................................................................
Short-term Interest Bearing Liabilities ...................................................................
Long-term FHLB Advances ...................................................................................
Long-term Debt ......................................................................................................
Total Interest Expense .......................................................................................
Net Interest Income .........................................................................................$
37,437 $
(53)
885
(1,201)
9,141
114
(39)
46,284
113
1,555
1,129
1,286
581
—
4,664
41,620 $
(11,416) $
161
87
(81 )
(3,687 )
3
1
(14,932 )
(16 )
(330 )
(242 )
(660 )
(549 )
31
(1,766 )
(13,166) $
26,021
108
972
(1,282)
5,454
117
(38)
31,352
97
1,225
887
626
32
31
2,898
28,454
Years Ended December 31,
2014 Compared to 2013
Average
Yield/Rate
Increase
(Decrease)
Average
Volume
INTEREST INCOME:
Loans (1) ..................................................................................................................$
Loans Held For Sale ...............................................................................................
Investment Securities (Taxable) .............................................................................
Investment Securities (Tax Exempt) (1) ...................................................................
Mortgage-backed Securities ...................................................................................
FHLB stock and other investments ........................................................................
Interest Earning Deposits .......................................................................................
Total Interest Income .........................................................................................
INTEREST EXPENSE:
Savings Deposits ....................................................................................................
Time Deposits ........................................................................................................
Interest Bearing Demand Deposits.........................................................................
Short-term Interest Bearing Liabilities ...................................................................
Long-term FHLB Advances ...................................................................................
Long-term Debt ......................................................................................................
Total Interest Expense .......................................................................................
Net Interest Income .........................................................................................$
6,976 $
68
(266)
(1,033)
(314)
(16)
(1)
5,414
16
(218)
442
(1,296)
873
—
(183)
5,597 $
(9,254) $
(59 )
82
(14 )
8,436
15
(3 )
(797 )
(22 )
(195 )
(249 )
45
(383 )
(25 )
(829 )
32 $
(2,278)
9
(184)
(1,047)
8,122
(1)
(4)
4,617
(6)
(413)
193
(1,251)
490
(25)
(1,012)
5,629
(1)
Interest yields on loans and securities that are nontaxable for federal income tax purposes are presented on a taxable equivalent basis.
Note: Volume/Yield/Rate variances (change in volume times change in yield/rate) have been allocated to amounts attributable to changes in
volumes and to changes in yields/rates in proportion to the amounts directly attributable to those changes.
42
Non-GAAP Financial Measures - Our accounting and reporting policies conform to generally accepted accounting principles
(GAAP) in the United States and prevailing practices in the banking industry. However, certain non-GAAP measures are used by
management to supplement the evaluation of our performance. These include the following fully-taxable equivalent measures: tax-
equivalent net interest income, tax-equivalent net interest margin, and tax-equivalent net interest spread, which include the effects of
taxable-equivalent adjustments using a federal income tax rate of 35% to increase tax-exempt interest income to a tax-equivalent
basis. Tax-equivalent adjustments are reported in Notes 2 and 3 to the Average Balances with Average Yields and Rates tables under
Results of Operations.
Tax-equivalent net interest income, net interest margin and net interest spread. Net Interest Income on a tax-equivalent basis is a
non-GAAP measure that adjusts for the tax-favored status of net interest income from loans and investments. We believe this
measure to be the preferred industry measurement of net interest income and it enhances comparability of net interest income arising
from taxable and tax-exempt sources. The most directly comparable financial measure calculated in accordance with GAAP is our
net interest income. Net interest margin on a tax-equivalent basis is net interest income on a tax-equivalent basis divided by average
interest-earning assets on a tax-equivalent basis. Net interest spread on a tax-equivalent basis is the difference in the average yield
on average interest-earning assets on a tax equivalent basis and the average rate paid on average interest-bearing liabilities.
These non-GAAP financial measures should not be considered an alternative to GAAP-basis financial statements, and other
bank holding companies may define or calculate these or similar measures differently.
PROVISION FOR LOAN LOSSES
The provision for loan losses for the year ended December 31, 2015 decreased to $8.3 million compared to $14.9 million for
the year ended December 31, 2014 and $8.9 million for the year ended December 31, 2013. For the year ended December 31, 2015,
net loan charge-offs decreased $18.6 million, to $1.9 million when compared to $20.5 million for the same period in 2014 and
increased $9.9 million during 2014 from $10.6 million for the same period in 2013. Nonperforming assets to total assets increased to
0.63% at December 31, 2015 from 0.26% at December 31, 2014 primarily due to the downgrade of one large commercial borrowing
relationship to impaired status during the first quarter of 2015 and the restructure of a large PCI commercial loan during the third
quarter of 2015. During 2014, our asset quality improved as reflected in the decrease in the nonperforming assets to total assets ratio
to 0.26% at December 31, 2014 from 0.39% at December 31, 2013. This decrease was primarily due to the sale of subprime
automobile loans purchased by SFG during the fourth quarter of 2014 and increases in the loan categories that have historically had
lower levels of charge-offs and nonperforming assets, primarily the real estate and municipal loan categories.
The decrease in net charge-offs for 2015 was a result of a decrease in total charge-offs of $18.2 million, along with an
increase in total recoveries of $416,000. Net charge-offs for loans to individuals decreased 91.4%, to $1.8 million for the year ended
December 31, 2015 compared to the same period in 2014. This decrease was due to charge-offs on SFG loans and the write down of
the SFG loans to fair value in connection with the sale of the SFG subprime automobile loans during the year ended December 31,
2014. Net charge-offs for commercial loans increased $288,000, resulting in net charge-offs of $183,000 for the year ended
December 31, 2015, compared to net recoveries of $105,000 for the same period in 2014. For the year ended December 31, 2015,
we experienced net recoveries in all of our real estate loan categories. Net recoveries of construction loans increased $41,000 to
$183,000, and net recoveries of commercial real estate loans increased $77,000 to $85,000 for the year ended December 31, 2015
compared to the same period in 2014. Net recoveries for 1-4 family residential loans decreased slightly, resulting in net recoveries
of $57,000 for the year ended December 31, 2015, compared to $59,000 for the year ended December 31, 2014.
The increase in net charge-offs for 2014 was a result of an increase in total charge-offs of $9.0 million and a decrease in total
recoveries of $947,000. Net charge-offs for loans to individuals increased 99.8%, to $20.8 million for the year ended December 31,
2014 compared to the same period in 2013. This increase was due to an increase in charge-offs on SFG loans and a write down of
the SFG loans to fair value in connection with the sale of the subprime automobile loans. Net charge-offs for 1-4 family residential
loans decreased $287,000, resulting in net recoveries of $59,000 for the year ended December 31, 2014 compared to the same period
in 2013. Net charge-offs for commercial loans decreased $384,000, resulting in net recoveries of $105,000. Net recoveries of
construction loans increased $65,000 to $142,000 and net recoveries of commercial real estate loans decreased $264,000, to $8,000
for the year ended December 31, 2014 compared to the same period in 2013.
As of December 31, 2015, and 2014, our reviews of the loan portfolio indicated that loan loss allowances of $19.7 million and
$13.3 million, respectively, were appropriate to cover probable losses in the portfolio.
43
NONINTEREST INCOME
Noninterest income consists of revenues generated from a broad range of financial services and activities including deposit
related fee based services. The following schedule lists the accounts from which noninterest income was derived and gives totals for
these accounts for the year ended December 31, 2015 and the comparable years ended December 31, 2014, and 2013:
2015
Years Ended December 31,
2014
(in thousands)
2013
Deposit services .......................................................................................................... $
Net gain on sale of securities available for sale ..........................................................
Impairment of investment in SFG Finance, LLC .......................................................
Gain on sale of loans ..................................................................................................
Trust income ...............................................................................................................
Bank owned life insurance income .............................................................................
Brokerage services .....................................................................................................
Other ...........................................................................................................................
Total noninterest income ............................................................................................ $
20,112 $
3,660
—
2,082
3,419
2,623
2,206
3,793
37,895 $
15,280 $
2,830
(2,755)
323
3,145
1,334
1,308
3,024
24,489 $
15,560
8,472
—
770
3,024
3,122
1,157
3,140
35,245
Total noninterest income for the year ended December 31, 2015 increased 54.7%, or $13.4 million, compared to 2014 and
decreased 30.5%, or $10.8 million, during the year ended December 31, 2014, when compared to the same period in 2013. The
increase in noninterest income for the year ended December 31, 2015 when compared to the same period in 2014 was due to an
increase in all of the categories included in the table above, as well as mortgage servicing fee income, included in other income,
primarily as a result of the acquisition of Omni in December 2014. The decrease in noninterest income during 2014 compared to
2013 was primarily due to a $5.6 million decrease in the net gain on sale of AFS securities and a $2.8 million impairment of equity
related to the sale of the loans purchased by SFG and the repossessed assets.
During the year ended December 31, 2015, we pro-actively managed the investment portfolio and adjusted the securities
acquired in the Omni acquisition to meet our investment objectives. We primarily sold U.S. Agency MBS, CMBS, CMOs, municipal
securities and U.S. Treasury securities that resulted in a net gain on sale of AFS securities of $3.7 million compared to $2.8 million
and $8.5 million for the same periods in 2014 and 2013, respectively. The fair value of the AFS securities portfolio at December 31,
2015 was $1.46 billion with a net unrealized gain on that date of $8.5 million. The net unrealized gain is comprised of $18.0 million
in unrealized gains and $9.5 million in unrealized losses. The fair value of HTM securities portfolio at December 31, 2015 was
$799.8 million with a net unrealized gain on that date of $6.6 million. The net unrealized gain is comprised of $25.3 million in
unrealized gains and $18.7 million in unrealized losses. During the quarter ended December 31, 2015, the size of the securities
portfolio increased due primarily to an increase in U.S. Treasury securities and CMBS which was partially offset by a decrease in
municipal securities as a result of sales. The U.S. Treasury securities and CMBS purchased were longer duration bonds purchased
due to the increase in long-term interest rates during the fourth quarter. There can be no assurance that the level of security gains
reported during the year ended December 31, 2015, will continue in future periods.
During both of the years ended December 31, 2014 and 2013, as interest rates remained low, we continued to sell primarily
lower yielding, longer duration municipal securities and more prepayment volatile MBS and replaced them with primarily shorter
duration municipal securities. The sale of these securities resulted in a net gain on the sale of AFS securities of $2.8 million and
$8.5 million, respectively.
We recorded an impairment charge of $2.8 million on our investment in SFG in the year ended December 31, 2014. The
impairment occurred as a result of our decision to sell the SFG purchased automobile loans and the associated write down to fair
market value and transfer to loans held for sale of $74.8 million.
Deposit services income increased $4.8 million, or 31.6%, for the year ended December 31, 2015, as compared to the same
period in 2014 and decreased $280,000, or 1.8%, for the year ended December 31, 2014, as compared to the same period in 2013.
The increase in 2015 was due primarily to an increase in ATM and debit card income as well as service charges on deposit accounts
and NSF and overdraft income primarily as a result of the acquisition of Omni.
Gain on sale of loans increased $1.8 million, or 544.6%, for the year ended December 31, 2015, when compared to the same
period in 2014 due to an increase in the volume of loans sold and the related servicing release and secondary market fees primarily
as a result of the acquisition of Omni. Gain on sale of loans decreased $447,000, or 58.1%, for the year ended December 31, 2014,
when compared to the same period in 2013. This decrease was primarily a result of a decrease in the volume of loans sold and the
44
related servicing release and secondary market fees. The decrease in loans sold was due to a greater emphasis on retaining loans for
our own portfolio and the overall reduction in mortgage refinancing during 2014.
Bank owned life insurance (“BOLI”) income increased $1.3 million, or 96.6%, for the year ended December 31, 2015, when
compared to the same period in 2014 due to the addition of approximately $45.0 million in BOLI acquired in the acquisition of
Omni in the fourth quarter of 2014. BOLI income decreased $1.8 million, or 57.3%, for the year ended December 31, 2014, when
compared to the same period in 2013 primarily as a result of two death benefits received, one for a retired covered officer and one
for an active covered officer in 2013.
Brokerage services income increased $898,000, or 68.7% , for the year ended December 31, 2015, when compared to the
same period in 2014 primarily as a result of the acquisition of Omni. Brokerage services income increased $151,000, or 13.1%, for
the year ended December 31, 2014 when compared to the same period in 2013 due to growth in client base.
Other income increased $769,000, or 25.4%, for the year ended December 31, 2015 compared to the same period in 2014,
primarily due to an increase in mortgage servicing fee income.
45
NONINTEREST EXPENSE
The following table lists the accounts which comprise noninterest expense for the years ended December 31, 2015, 2014 and
2013:
Salaries and employee benefits ................................................................................. $
Occupancy expense ...................................................................................................
Advertising, travel & entertainment ..........................................................................
ATM and debit card expense .....................................................................................
Professional fees ........................................................................................................
Software and data processing expense ......................................................................
Telephone and communications ................................................................................
FDIC insurance .........................................................................................................
FHLB prepayment fees .............................................................................................
Other ..........................................................................................................................
Total noninterest expense .......................................................................................... $
2015
Years Ended December 31,
2014
(in thousands)
2013
67,221 $
12,883
2,708
3,132
3,877
3,858
1,978
2,510
—
14,787
112,954 $
60,821 $
7,259
2,219
1,331
7,827
4,629
1,222
1,765
539
10,092
97,704 $
52,054
7,539
2,642
1,328
2,782
2,018
1,529
1,713
1,048
9,060
81,713
Noninterest expense for the year ended December 31, 2015 increased $15.3 million, or 15.6%, when compared to the year
ended December 31, 2014 and increased $16.0 million, or 19.6% for the year ended December 31, 2014, when compared to the year
ended December 31, 2013.
Salaries and employee benefits expense increased $6.4 million, or 10.5%, during the year ended December 31, 2015, when
compared to the same period in 2014 and increased $8.8 million, or 16.8%, during the year ended December 31, 2014, when
compared to the same period in 2013. The increase in 2015 was primarily the result of increases in direct salary expense, retirement
expense and health insurance expense. The increase in 2014 was due to the $8.9 million of post combination expense for the
acceleration of unvested Omni stock options and restricted stock related to the acquisition of Omni in addition to $150,000 in a one
time payment to certain Omni officers, all included in salaries and employee benefits.
Direct salary expense and payroll taxes increased $11.0 million, or 24.4%, for the year ended December 31, 2015, when
compared to the same period in 2014 and increased $2.3 million, or 5.5%, for the year ended December 31, 2014, when compared to
the same period in 2013. The increase in direct salary expense for 2015 was primarily due to non-recurring salary payments,
severance, and stay pay of $4.1 million for the year ended December 31, 2015, as well as additional employees added associated
with the acquisition of Omni, and to a lesser extent, normal salary increases effective in the first quarter of 2015. This increase was
partially offset by the decrease in salary expense related to the dissolution of SFG.
Retirement expense, included in salary and benefits, increased $2.8 million, or 136.2%, for the year ended December 31,
2015, when compared to the same period in 2014 and decreased $3.0 million, or 59.8%, for the year ended December 31, 2014,
when compared to the same period in 2013. The increase for 2015 was primarily related to the increase in the defined benefit and
restoration plans, and to a lesser extent, we experienced increases in our deferred compensation plan expense, 401(k) plan expense
and split dollar plan expense. The defined benefit and restoration plan expense increased primarily due to the unfunded status of the
plan and the decrease in the discount rate to 4.14% for 2015 compared to 5.06% for 2014. The decrease for 2014 was primarily due
to the increase in the discount rate to 5.06% for 2014 compared to 4.08% for 2013. The assumed long-term rate of return was 7.25%
for years 2013 through 2015. We will continue to evaluate the assumed long-term rate of return and the discount rate to determine if
either should be changed in the future. If either of these assumptions decrease, the cost and funding required for the retirement plan
could increase.
Health and life insurance expense, included in salary and benefits, increased $1.5 million, or 30.7%, for the year ended
December 31, 2015, when compared to the same period in 2014 due to increased health claims expense and plan administrative cost
for the comparable period of time as well as the acquisition of Omni in the fourth quarter of 2014. Health and life insurance expense
increased $604,000, or 14.4%, for the year ended December 31, 2014, when compared to the same period in 2013 due to increased
health claims expense and plan administrative cost during 2014. We have a self-insured health plan which is supplemented with stop
loss insurance policies. Health insurance costs are rising nationwide and these costs may increase during 2016.
46
Occupancy expense increased $5.6 million, or 77.5%,for the year ended December 31, 2015, when compared to the same
period in 2014, due to the addition of 14 branches resulting from the acquisition of Omni in the fourth quarter of 2014, while
partially offset by a decrease in expenses related to our dissolution of SFG.
Advertising, travel and entertainment increased $489,000, or 22.0%, for the year ended December 31, 2015, when
compared to the same period in 2014 and decreased $423,000, or 16.0%, for the year ended December 31, 2014, when compared to
the same period in 2013. The increase in 2015 was due to the expenses related to the acquisition of Omni. The decrease in 2014
was primarily a result of decreased travel expenses related to SFG.
ATM and debit card expense increased $1.8 million, or 135.3%, for the year ended December 31, 2015, when compared to
the same period in 2014 due primarily to the addition of 21 ATMs associated with the acquisition of Omni.
Professional fees decreased $4.0 million, or 50.5%, for the year ended December 31, 2015, compared to the same period in
2014. Professional fees increased $5.0 million, or 181.3%, for year ended December 31, 2014, compared to the same period in
2013. The decrease during 2015 was due to an increased level during 2014 of legal and accounting fees associated with the Omni
acquisition.
Software and data processing expense decreased $771,000, or 16.7%, for the year ended December 31, 2015, as compared to
the same period in 2014 and increased $2.6 million, or 129.4%, for the year ended December 31, 2014, as compared to the same
period in 2013. The decrease in 2015 was due primarily to expense associated with the software contracts canceled related to the
acquisition of Omni during the fourth quarter of 2014.
Telephone and communications increased $756,000, or 61.9%, for the year ended December 31, 2015, as compared to the
same period in 2014 and decreased $307,000, or 20.1%, for the year ended December 31, 2014, as compared to the same period in
2013. The increase in 2015 was primarily due to the addition of 14 branches associated with the acquisition of Omni while partially
offset by a decrease related to our dissolution of SFG. The decrease during 2014 was due to continued savings from renegotiated
contracts.
FDIC insurance increased $745,000, or 42.2%, for the year ended December 31, 2015, as compared to the same period in
2014 due to an increase in the total assessment base which is average consolidated total assets less average tangible equity, which
resulted primarily due to the acquisition of Omni.
FHLB prepayment fees decreased $509,000, or 48.6%, for the year ended December 31, 2014, as compared to the same
period in 2014 as a result of the prepayment of FHLB advances of $39.2 million during 2014. FHLB prepayment fees were $1.0
million for the year ended December 31, 2013 as a result of the prepayment of FHLB advances of $94.3 million. There were no
FHLB prepayment fees paid in 2015.
Other expenses increased $4.7 million, or 46.5%, for the year ended December 31, 2015, as compared to the same period in
2014 and $1.0 million, or 11.4%, for the year ended December 31, 2014, as compared to the same period in 2013. The increase in
2015 was primarily due to increases in amortization expense related to the core deposit intangible, losses associated with check
cards, losses on other real estate owned (“OREO”), the retirement of assets in the dissolution of SFG and closures of branch
locations, brokerage services expense, increases in online mobile banking expenses, supplies expense and equipment expense related
to the acquisition of Omni. The increase in 2014 was primarily due to a reserve established associated with the sale of the SFG
subprime automobile loans, and other expenses related to overall growth.
INCOME TAXES
Pre-tax income for the year ended December 31, 2015 was $51.3 million compared to $18.7 million for the year ended
December 31, 2014, and $46.3 million for the year ended December 31, 2013.
Income tax expense was $7.3 million for the year ended December 31, 2015 and represented an increase of $9.4 million, or
436.4%, when compared to the year ended December 31, 2014, and decreased $7.3 million, or 142.5%, to an income tax benefit of
$2.2 million for the year ended December 31, 2014, when compared to the year ended December 31, 2013. The effective tax rate as
a percentage of pre-tax income was 14.2% in 2015, as compared to an effective benefit rate of 11.6% in 2014 and effective tax rate
of 11.0% in 2013. The increase in the income tax expense and effective tax rate for the year ended December 31, 2015 was due to a
decrease in tax-exempt income as a percentage of pre-tax income, as compared to the same period in 2014. The decrease in the
income tax expense and effective tax rate for the year ended December 31, 2014 was due to an increase in tax-exempt income as a
percentage of taxable income as compared to the prior year primarily due to the significant increase in our average tax-exempt
securities portfolio for 2014 as compared to 2013. The net deferred tax asset totaled $19.9 million at December 31, 2015 as
compared to $12.7 million in 2014. No valuation allowance for deferred tax assets was recorded at December 31, 2015 or
December 31, 2014, as management believes it is more likely than not that all of the deferred tax assets will be realized in future
years.
47
LENDING ACTIVITIES
One of our main objectives is to seek attractive lending opportunities in Texas, primarily in the counties in which we
operate. Substantially all of our loan originations are made to borrowers who live in and conduct business in the counties in Texas in
which we operate or adjoin, with the exception of municipal loans which are made almost entirely in Texas. Municipal loans are
made to municipalities, counties, school districts, and colleges primarily throughout the state of Texas. Prior to the sale of SFG
during the fourth quarter of 2014, we purchased portfolios of automobile loans from a variety of lenders throughout the United States.
These were high yield loans representing existing subprime automobile loans with payment histories that were collateralized by new
and used automobiles.
Total loans as of December 31, 2015 increased $250.6 million, or 11.5%, and the average loan balance outstanding for the
year increased $803.6 million, or 56.6%, when compared to 2014. The increase in total loans is primarily a result of increased
origination activity primarily in the Austin and Dallas-Fort Worth markets.
Construction loans increased $170.4 million, or 63.6%, from December 31, 2014 to December 31, 2015 and commercial real
estate loans increased $167.0 million, or 35.7%, respectively. Municipal loans as of December 31, 2015 increased $30.6 million, or
11.9%, from December 31, 2014. Commercial loans increased $16.1 million, or 7.1%, from December 31, 2014 to December 31,
2015. 1-4 family residential loans decreased $35.5 million, or 5.1%, from December 31, 2014 to December 31, 2015. Loans to
individuals decreased $98.0 million, or 36.3%, from December 31, 2014 to December 31, 2015.
The increase in construction loans, commercial loans and commercial real estate loans was primarily due to the growth in our
Austin and Dallas-Fort Worth markets. In our loan portfolio, loans dependent upon private household income represent a significant
concentration. Due to the number of customers involved who work in all sectors of the numerous local, state and national economies,
we believe the risk in this portion of the portfolio is adequately spread throughout the economic communities we serve, which assists
in mitigating this concentration. The decrease in 1-4 family residential loans was due primarily to payoffs in excess of originations,
and the decrease in loans to individuals reflects the continued roll-off of the indirect automobile loan portfolio in connection with the
dissolution of SFG.
A significant portion of our loan portfolio is dependent on the medical community. Medical loan types include commercial
loans and commercial real estate loans. Collateral for these loans varies depending on the type of loan and financial strength of the
borrower. The primary source of repayment for loans in the medical community is cash flow from continuing operations. The
medical community represents a concentration of risk in our Commercial loan and Commercial Real Estate loan portfolio. See “Item
1. Business – Market Area.” We believe that risk in the medical community is mitigated because it is spread among multiple practice
types and multiple specialties. Should the government change the amount it pays the medical community through the various
government health insurance programs or if new government regulation impacts the profitability of the medical community, the
medical community could be adversely impacted which in turn could result in higher default rates by borrowers in the medical
industry.
The aggregate amount of loans that we are permitted to make under applicable bank regulations to any one borrower, including
non-affiliate related entities is 25% of Tier 1 capital. Our legal lending limit at December 31, 2015, was approximately $104.1
million. Our largest loan relationship at December 31, 2015 was approximately $37.1 million.
The average yield on loans for the year ended December 31, 2015, decreased to 4.52% from 5.24% for the year ended
December 31, 2014. This decrease was reflective of the sale of the higher yielding SFG subprime automobile loans and to a lesser
extent the overall lower interest rate environment during 2015 and the lower rates associated with the new loans added and repriced
during 2015.
48
LOAN PORTFOLIO COMPOSITION AND ASSOCIATED RISK
The following table sets forth loan totals for the years presented (in thousands):
Real Estate Loans:
2015
2014
December 31,
2013
2012
2011
111,361
Construction .......................................................... $
1-4 Family Residential ..........................................
247,479
Commercial ..........................................................
206,519
Commercial Loans ..................................................
143,552
Municipal Loans .....................................................
207,261
Loans to Individuals ................................................
171,058
Total Loans .............................................................. $ 2,431,753 $ 2,181,133 $ 1,351,273 $ 1,262,977 $ 1,087,230
125,219 $
390,499
262,536
157,655
245,550
169,814
267,830 $
690,895
468,171
226,460
257,492
270,285
438,247 $
655,410
635,210
242,527
288,115
172,244
113,744 $
368,845
236,760
160,058
220,947
162,623
For purposes of this discussion, our loans are divided into Real Estate Loans, Commercial Loans, Municipal Loans and Loans
to Individuals.
REAL ESTATE LOANS
Real estate loans represent our greatest concentration of loans. We attempt to mitigate the amount of risk associated with this
group of loans through the type of loans originated and geographic distribution. At December 31, 2015, the majority of our real
estate loans were collateralized by properties located in our market areas. Of the $1.73 billion in real estate loans, $655.4 million, or
37.9%, represent loans collateralized by residential dwellings that are primarily owner-occupied. Historically, the amount of losses
suffered on this type of loan has been significantly less than those on other properties. Our loan policy requires an appraisal or
evaluation on the property, based on the size and complexity of the transaction, prior to funding any real estate loan and also outlines
the requirements for appraisals on renewals.
We pursue an aggressive policy of reappraisal on any real estate loan that is in the process of foreclosure and potential
exposures are recognized and reserved for or charged off as soon as they are identified. Our ability to liquidate certain types of
properties that may be obtained through foreclosure could adversely affect the volume of our nonperforming real estate loans.
Real estate loans are divided into 1-4 Family Residential Loans, Construction Loans and Commercial. Commercial real estate
consists of $583.4 million of commercial real estate loans, $46.8 million of loans secured by multi-family properties and $5.0 million
of loans secured by farm land. Commercial Real Estate loans are discussed in more detail below.
1-4 Family Residential Loans
Residential loan originations are generated by our loan officers, in-house origination staff, marketing efforts, present
customers, walk-in customers and referrals from real estate agents and builders. We focus our lending efforts primarily on the
origination of loans secured by first mortgages on owner-occupied, 1-4 family residences. Substantially all of our 1-4 family
residential originations are secured by properties located in or near our market areas. Historically, we have originated a portion of our
residential loans for sale into the secondary market. These loans are reflected on the balance sheet as loans held for sale. These
secondary market investors, other than FNMA, typically pay us a service release premium in addition to a predetermined price based
on the interest rate of the loan originated. We retain liabilities related to early prepayments, defaults, failure to adhere to origination
and processing guidelines and other issues. We have internal controls in place to mitigate many of these liabilities and historically
our realized liability has been extremely low. In addition, many of the retained liabilities expire one year from the date a loan is
sold. We warehouse these loans until they are transferred to the secondary market investor, which usually occurs within 45 days.
Our 1-4 family residential loans generally have maturities ranging from five to 30 years. These loans are typically fully
amortizing with monthly payments sufficient to repay the total amount of the loan . Our 1-4 family residential loans are made at both
fixed and adjustable interest rates.
We review information concerning the income, financial condition, employment and credit history when evaluating the
creditworthiness of the applicant.
49
We also make home equity loans, which are included as part of the 1-4 family residential loans, and at December 31, 2015,
these loans totaled $101.0 million. Under Texas law, these loans, when combined with all other mortgage indebtedness for the
property, are capped at 80% of appraised value.
Construction Loans
Our construction loans are collateralized by property located primarily in or near the market areas we serve. Several of our
construction loans will be owner-occupied. Construction loans for non-owner occupied projects are financed, but these typically have
cash flows from executed leased tenants, secondary sources of repayment and in some cases, additional collateral. Our construction
loans have both adjustable and fixed interest rates during the construction period. Construction loans to individuals are typically
priced and made with the intention of granting the permanent loan on the property. Speculative and commercial construction loans
are subject to underwriting standards similar to that of the commercial portfolio. Owner occupied 1-4 family residential construction
loans are subject to the underwriting standards of the permanent loan.
Commercial Real Estate Loans
Commercial real estate loans primarily include loans collateralized by commercial office buildings, retail, medical facilities
and offices, senior living, assisted living and skilled nursing facilities, warehouse facilities, hotels and churches. In determining
whether to originate commercial real estate loans, we generally consider such factors as the financial condition of the borrower and
the debt service coverage of the property. Commercial real estate loans are made at both fixed and adjustable interest rates for terms
generally up to 20 years.
COMMERCIAL LOANS
Our commercial loans are diversified loan types including short-term working capital loans for inventory and accounts
receivable and short- and medium-term loans for equipment or other business capital expansion. Management does not consider
there to be a concentration of risk in any one industry type, other than the medical industry. Loans to borrowers in the medical
industry include all loan types listed above for commercial loans. Collateral for these loans varies depending on the type of loan and
financial strength of the borrower. The primary source of repayment for loans in the medical community is cash flow from
continuing operations.
In our commercial loan underwriting, we assess the creditworthiness, ability to repay, and the value and liquidity of the
collateral being offered. Terms of commercial loans are generally commensurate with the useful life of the collateral offered.
MUNICIPAL LOANS
We have a specific lending department that makes loans to municipalities and school districts primarily throughout the state of
Texas. Municipal loans outside the state of Texas have been limited to adjoining states. The majority of the loans to municipalities
and school districts have tax or revenue pledges and in some cases are additionally supported by collateral. Municipal loans made
without a direct pledge of taxes or revenues are usually made based on some type of collateral that represents an essential
service. Lending money directly to these municipalities allows us to earn a higher yield for similar durations than we could if we
purchased municipal securities. Total loans to municipalities and school districts as of December 31, 2015 increased $30.6 million
when compared to 2014. At December 31, 2015, we had total loans to municipalities and school districts of $288.1 million.
LOANS TO INDIVIDUALS
Substantially all originations of our loans to individuals are made to consumers in our market areas. The majority of loans to
individuals are collateralized by titled equipment, which are primarily automobiles. At December 31, 2015, these types of loans
accounted for approximately $120.1 million, or 69.7%, of total loans to individuals. The indirect automobile portfolio acquired from
Omni continued to pay down during 2015 to $79.1 million at December 31, 2015, when compared to $152.8 million for the same
period in 2014. We intend to let this portfolio fully liquidate.
During the fourth quarter of 2014, we closed on the sale of all of our subprime automobile loans purchased through SFG, as
well as the repossessed assets held by SFG. As a result, the carrying amount of SFG loans totaling $70.3 million were sold and were
therefore not included in our loan portfolio as of December 31, 2014. There were no subsequent loan pool purchases through SFG
from December 2014 until the time it was dissolved in April 2015.
Home equity loans, which are included in 1-4 family residential loans, have replaced some of the traditional loans to
individuals. In addition, we make loans for a full range of other consumer purposes, which may be secured or unsecured depending
on the credit quality and purpose of the loan.
50
Consumer loan terms vary according to the type and value of collateral, length of contract and creditworthiness of the
borrower. The underwriting standards we employ for consumer loans include an application, a determination of the applicant's
payment history on other debts, with the greatest weight being given to payment history with us, and an assessment of the borrower's
ability to meet existing obligations and payments on the proposed loan. Although creditworthiness of the applicant is a primary
consideration, the underwriting process also includes a comparison of the value of the collateral, if any, in relation to the proposed
loan amount. Most of our loans to individuals are collateralized, which management believes should assist in limiting our exposure.
LOAN MATURITIES AND SENSITIVITY TO CHANGES IN INTEREST RATES
The following table represents loan maturities and sensitivity to changes in interest rates for our real estate construction,
commercial and municipal loans. The amounts of these loans outstanding at December 31, 2015, which, based on remaining
scheduled repayments of principal, are due in (1) one year or less, (2) more than one year but less than five years, and (3) more than
five years, are shown in the following table. The amounts due after one year are classified according to the sensitivity to changes in
interest rates.
Real Estate Loans – Construction ..................................................................................$
Commercial Loans .........................................................................................................
Municipal Loans ............................................................................................................
Total .............................................................................................................................$
149,114 $
131,288
28,042
308,444 $
243,285 $
86,783
87,411
417,479 $
45,848
24,456
172,662
242,966
Due in One
Year or
Less(1)
After One
but
Within Five
Years
(in thousands)
After Five
Years
Loans with Maturities After
One Year for Which:
Interest Rates are Fixed or Predetermined
Interest Rates are Floating or Adjustable
$
$
329,067
331,378
(1) The volume of commercial loans due within one year reflects our general policy of attempting to limit these loans to a short-
term maturity. Nonaccrual loans totaling $14.4 million are reflected in the due after five years column.
LOANS TO AFFILIATED PARTIES
In the normal course of business, we make loans to certain of our own executive officers and directors and their related
interests. As of December 31, 2015, 2014 and 2013, these loans totaled $8.1 million, $7.1 million and $5.5 million,
respectively. These loans represented 1.8%, 1.7%, and 2.1% of shareholders' equity as of December 31, 2015, 2014 and 2013,
respectively.
LOAN LOSS EXPERIENCE AND ALLOWANCE FOR LOAN LOSSES
Our allowance for loan losses was $19.7 million at December 31, 2015, or 0.8% of loans, an increase of $6.4 million, or
48.5%, compared to $13.3 million at December 31, 2014. The increase in the allowance for loan losses is due primarily to additional
provision associated with loan growth and impaired loans. Loans increased during 2015 as a result of increased origination activity
primarily in the Austin and Dallas-Fort Worth markets.
The allowance for loan losses is based on the most current review of the loan portfolio and is a result of multiple
processes. First, the bank utilizes historical data to establish general reserve amounts for each class of loans. The historical charge-
off figure is further adjusted through qualitative factors that include general trends in past dues, nonaccruals and classified loans to
more effectively and promptly react to both positive and negative movements. Second, our lenders have the primary responsibility
for identifying problem loans based on customer financial stress and underlying collateral. These recommendations are reviewed by
senior loan administration, the special assets department, and the loan review department. Third, the loan review department
independently reviews the portfolio on an annual basis. The loan review department follows a board-approved annual loan review
scope. The loan review scope encompasses a number of considerations including the size of the loan, the type of credit extended, the
seasoning of the loan and the performance of the loan. The loan review scope, as it relates to size, focuses more on larger dollar loan
relationships, typically, for example, aggregate debt of $500,000 or greater. The loan review officer also reviews specific reserves
51
compared to general reserves to determine trends in comparative reserves as well as losses not reserved for prior to charge-off to
determine the effectiveness of the specific reserve process.
At each review, a subjective analysis methodology is used to grade the respective loan. Categories of grading vary in severity
from loans that do not appear to have a significant probability of loss at the time of review to loans that indicate a probability that the
entire balance of the loan will be uncollectible. If full collection of the loan balance appears unlikely at the time of review, estimates
of future expected cash flows or appraisals of the collateral securing the debt are used to determine the necessary allowances. The
internal loan review department maintains a list of all loans or loan relationships that are graded as having more than the normal
degree of risk associated with them. In addition, a list of specifically reserved loans or loan relationships of $150,000 or more is
updated on a quarterly basis in order to properly determine necessary allowances and keep management informed on the status of
attempts to correct the deficiencies noted with respect to the loan.
We calculate historical loss ratios for pools of similar loans with similar characteristics based on the proportion of actual
charge-offs experienced to the total population of loans in the pool. The historical gross loss ratios are updated based on actual
charge-off experience quarterly and adjusted for qualitative factors. Our pools of similar loans include consumer loans and loans
secured by 1-4 residential family loans.
Prior to September 30, 2014, SFG loans included in loans to individuals that experienced past due status or extension of
maturity characteristics were reserved for at higher levels based on the circumstances associated with each specific loan. In general,
the reserves for SFG were calculated based on the past due status of the loan. For reserve purposes, the portfolio was segregated by
past due status and by the remaining term variance from the original contract. During repayment, loans that paid late took longer to
repay than the original contract. Additionally, some loans may have been granted extensions for extenuating payment circumstances
and evaluated for troubled debt classification. The remaining term extensions increased the risk of collateral deterioration and,
accordingly, reserves were increased to recognize this risk.
Industry and our own experience indicates that a portion of our loans will become delinquent and a portion of the loans will
require partial or full charge-off. Regardless of the underwriting criteria utilized, losses may be experienced as a result of various
factors beyond our control, including, among other things, changes in market conditions affecting the value of properties used as
collateral for loans and problems affecting the credit of the borrower and the ability of the borrower to make payments on the
loan. Our determination of the appropriateness of the allowance for loan losses is based on various considerations, including an
analysis of the risk characteristics of various classifications of loans, previous loan loss experience, specific loans which would have
loan loss potential, delinquency trends, estimated fair value of the underlying collateral, current economic conditions, and geographic
and industry loan concentration.
As of December 31, 2015, our review of the loan portfolio indicated that a loan loss allowance of $19.7 million was
appropriate to cover probable losses in the portfolio. Changes in economic and other conditions may require future adjustments to the
allowance for loan losses.
52
After all of the data in the loan portfolio is accumulated the reserve allocations are separated into various loan classes detailed
in the table below. In addition, the following table presents information regarding the average amount of net loans outstanding,
changes in the allowance for loan losses, selected asset quality ratios and an allocation of the allowance for loan losses (dollars in
thousands).
LOAN LOSS EXPERIENCE AND ALLOWANCE FOR LOAN LOSSES
Years Ended December 31,
2015
2014
2013
2012
2011
Average Net Loans Outstanding ................................................$ 2,224,401
$ 1,420,802
$ 1,296,440
$ 1,180,095
$ 1,054,882
Balance of Allowance for Loan Losses at Beginning of Period .....$
13,292
$
18,877
$
20,585
$
18,540
$
20,711
Loan Charge-Offs:
Real Estate-Construction ..........................................................
Real Estate-1-4 Family Residential ...........................................
Real Estate-Commercial ..........................................................
Commercial Loans ..................................................................
Municipal Loans .....................................................................
Loans to Individuals ................................................................
(24)
(58)
—
(336)
(249)
(14)
(22)
—
(66)
—
(3,688)
(22,461)
—
(319 )
(67 )
(512 )
—
(12,676 )
(41)
(239)
(159)
(402)
—
(46)
(675)
(271)
(1,254)
—
(10,188)
(10,231)
Total Loan Charge-Offs ...........................................................
(4,355)
(22,563)
(13,574 )
(11,029)
(12,477)
Recovery of Loans Previously Charged-off:
Real Estate-Construction ..........................................................
Real Estate-1-4 Family Residential ...........................................
Real Estate-Commercial ..........................................................
Commercial Loans ..................................................................
Loans to Individuals ................................................................
207
115
85
153
1,896
Total Recovery of Loans Previously Charged-Off .......................
2,456
156
81
8
171
1,624
2,040
77
91
339
233
2,247
2,987
121
172
6
312
1,727
2,338
61
98
275
449
1,927
2,810
Net Loan Charge-Offs .............................................................
(1,899)
(20,523)
(10,587 )
(8,691)
(9,667)
Provision for Loan Losses ........................................................
8,343
14,938
8,879
10,736
7,496
Balance of Allowance for Loan Losses at End of Period ..............$
19,736
$
13,292
$
18,877
$
20,585
$
18,540
Net Charge-Offs to Average Net Loans Outstanding ...................
Allowance for Loan Losses to Nonaccruing Loans .....................
Allowance for Loan Losses to Nonperforming Assets .................
Allowance for Loan Losses to Total Loans .................................
0.09%
1.44%
0.82 %
0.74%
0.92%
96.15
60.76
0.81
324.51
108.27
0.61
233.40
138.74
1.40
199.58
139.87
1.63
180.02
140.58
1.71
53
Allocation of Allowance for Loan Losses (dollars in thousands):
2015
2014
Years Ended December 31,
2013
2012
2011
Percent
of Loans
To Total
Loans
Amount
Percent
of Loans
To Total
Loans
Amount
Percent
of Loans
To Total
Loans
Percent
of Loans
To Total
Loans
Amount
Percent
of Loans
To Total
Loans
Amount
Amount
Real Estate
Construction .................... $ 4,350
1-4 Family Residential .....
Commercial ....................
2,595
4,577
Commercial Loans .............
Municipal Loans ................
6,596
725
Loans to Individuals ...........
Other ................................
893
—
18.0% $ 2,456
12.3% $ 2,142
9.3% $ 2,355
9.0% $ 2,620
10.2%
27.0%
26.1%
10.0%
11.8%
7.1%
0.0%
2,822
3,025
3,279
716
994
—
31.6%
21.5%
10.4%
11.8%
3,277
2,572
1,970
668
12.4%
8,248
0.0%
—
28.9%
19.4%
11.7%
18.2%
12.5%
0.0%
3,545
2,290
3,158
633
7,373
1,231
29.2%
18.7%
12.7%
17.5%
12.9%
0.0%
1,957
3,051
2,877
619
6,244
1,172
22.8%
19.0%
13.2%
19.1%
15.7%
0.0%
Ending Balance .................. $ 19,736
100.0% $ 13,292
100.0% $ 18,877
100.0% $ 20,585
100.0% $ 18,540
100.0%
See “Consolidated Financial Statements - Note 6 – Loans and Allowance for Probable Loan Losses.”
NONPERFORMING ASSETS
Nonperforming assets consist of delinquent loans 90 days or more past due, nonaccrual loans, OREO, repossessed assets and
restructured loans. Nonaccrual loans are loans 90 days or more delinquent and collection in full of both the principal and interest is
not expected. Additionally, some loans that are not delinquent may be placed on nonaccrual status due to doubts about full collection
of principal or interest. When a loan is categorized as nonaccrual, the accrual of interest is discontinued and any accrued balance is
reversed for financial statement purposes. Restructured loans represent loans that have been renegotiated to provide a reduction or
deferral of interest or principal because of deterioration in the financial position of the borrowers. The restructuring of a loan is
considered a “troubled debt restructuring” if both (i) the borrower is experiencing financial difficulties and (ii) the creditor has
granted a concession. Concessions may include interest rate reductions or below market interest rates, principal forgiveness,
restructuring amortization schedules and other actions intended to minimize potential losses. Categorization of a loan as
nonperforming is not in itself a reliable indicator of potential loan loss. Other factors, such as the value of collateral securing the loan
and the financial condition of the borrower must be considered in judgments as to potential loan loss. OREO represents real estate
taken in full or partial satisfaction of debts previously contracted. The dollar amount of OREO is based on a current evaluation of the
OREO at the time it is recorded on our books, net of estimated selling costs. Updated valuations are obtained as needed and any
additional impairments are recognized.
Total nonperforming assets at December 31, 2015 were $32.5 million representing an increase of $20.2 million, or 164.6%,
from $12.3 million at December 31, 2014. From December 31, 2014 to December 31, 2015, nonaccrual loans increased $16.4
million, or 401.1%, to $20.5 million. Of this total, 67.7% are commercial loans, 13.7% are commercial real estate loans, 9.0% are
residential real estate loans, 7.1% are loans to individuals and 2.5% are construction loans. OREO decreased $1.0 million, or 57.2%,
to $744,000 from December 31, 2014 to December 31, 2015. We are actively marketing all properties and none are being held for
investment purposes. Restructured loans increased $5.3 million, or 89.7%, to $11.1 million. Repossessed assets decreased $501,000,
or 88.7%, to $64,000 at December 31, 2015 from $565,000 at December 31, 2014. Included in total nonperforming assets are $26.7
million of loans classified as troubled debt restructurings at December 31, 2015 and $7.2 million at December 31, 2014.
54
The following table presents information on nonperforming assets (dollars in thousands):
Accruing Loans Past Due More Than 90 Days:
Loans to Individuals ......................................................... $
Loans on Nonaccrual:
Real Estate ........................................................................
Loans to Individuals .........................................................
Commercial ......................................................................
Restructured Loans:
Real Estate ........................................................................
Loans to Individuals .........................................................
Commercial ......................................................................
Municipal ..........................................................................
NONPERFORMING ASSETS
Years Ended December 31,
2013
2012
2014 (1)
2015
2011
$
3
3
$
4
4
$
3
3
$
15
15
5
5
5,171
1,459
13,896
20,526
3,045
60
7,401
637
11,143
3,408
272
416
4,096
4,542
38
595
699
5,874
3,506
3,520
1,062
8,088
2,399
423
307
759
3,888
5,774
2,728
1,812
10,314
2,135
632
231
—
2,998
7,037
1,909
1,353
10,299
762
1,206
141
—
2,109
12,413
453
322
13,188
Total Nonperforming Loans ................................................
31,672
Other Real Estate Owned ....................................................
Repossessed Assets .............................................................
Total Nonperforming Assets ................................................ $
744
64
32,480
$
9,974
1,738
565
12,277
11,979
726
901
13,606
13,327
686
704
$ 14,717
$
$
Nonperforming Assets to Total Assets ................................
Nonperforming Assets to Total Loans .................................
Nonaccrual Loans to Total Loans ........................................
0.63%
1.34
0.84
0.26%
0.56
0.19
0.39%
1.01
0.60
0.45%
1.17
0.82
0.40%
1.21
0.95
(1) Excludes purchased credit impaired loans measured at fair value at acquisition of Omni.
Nonperforming assets at December 31, 2015, as a percentage of total assets increased to 0.63% from the previous year and as a
percentage of loans increased to 1.34%. Nonperforming assets increased primarily due to the downgrade of one large commercial
borrowing relationship to impaired status during the first quarter of 2015 and the restructure of a large purchase credit impaired
commercial loan during the third quarter of 2015. Nonperforming assets hinder our ability to earn money. Decreases in earnings can
result from both the loss of interest income and the costs associated with maintaining the OREO, for taxes, insurance and other
operating expenses.
Potential problem loans consist of loans that are performing in accordance with contractual terms, but for which management
has concerns about the ability of a borrower to continue to comply with repayment terms because of the borrower’s potential
operating or financial difficulties. Management monitors these loans closely and reviews their performance on a regular basis. At
December 31, 2015, we had $29.4 million in potential problem loans that were graded as substandard accruing, of which none are
included in any one of the non-accrual, restructured or 90 days past due loan categories.
In the fourth quarter of 2015, various public reports surfaced raising our concern regarding a borrower with a commercial loan
outstanding of $8.7 million at December 31, 2015. These reports included, but were not limited to, information filed with the SEC by
the borrower disclosing that it is the subject of an ongoing investigation by the SEC and that its auditor had informed them that it
would not stand for reappointment; although no disagreements were cited between the borrower and its auditors. Further, on February
18, 2016, we learned, through published news reports, that the Federal Bureau of Investigation served a search warrant at the
borrower's offices in connection with a law enforcement investigation of the borrower. Subsequent to this news, the borrower
experienced a significant sell-off in its publicly traded stock and trading was halted in that stock.
55
The loan is secured by assignment of promissory notes payable to the borrower and secured by first liens on newly constructed
residential property made by two residential developers. At the time of this filing, we have received approximately $2.4 million in
payments since December 31, 2015 and the outstanding balance of the loan is $6.3 million. We currently believe the borrower will
pay all balances due according to the contractual terms of the loan based on the repayment performance to date and the security
provided by the underlying collateral. Based on currently available information, the loan is not considered to be impaired and is
reported in the substandard category. The loan is considered in our allowance for loan losses per our methodology for substandard
accruing loans.
Prior to 2014, the restructured loans to individuals referred to in the preceding table are primarily SFG loans which have had
payment extensions or whose maturity has extended due to late payments on the contract. Those loans continued to accrue interest on
the principal balance.
The following is a summary of our recorded investment in loans (primarily nonaccrual loans) for which impairment has been
recognized (in thousands):
Real Estate Loans ........................................................................................................ $
Commercial Loans ......................................................................................................
Municipal Loans .........................................................................................................
Loans to Individuals ....................................................................................................
Total (1) ........................................................................................................................ $
December 31, 2015
Valuation
Allowance
Carrying
Value
Total
6,895 $
21,385
637
257
29,174 $
174 $
4,599
13
105
4,891 $
6,721
16,786
624
152
24,283
(1) Includes $8.0 million of PCI loans that experienced deteriorations in credit quality subsequent to the acquisition date.
Real Estate Loans ........................................................................................................ $
Commercial Loans ......................................................................................................
Municipal Loans .........................................................................................................
Loans to Individuals ....................................................................................................
Total (1) ........................................................................................................................ $
December 31, 2014
Valuation
Allowance
Carrying
Value
Total
7,920 $
1,011
699
310
9,940 $
177 $
242
14
103
536 $
7,743
769
685
207
9,404
(1) PCI loans are excluded from this table as there was no evidence of further deterioration in credit quality as of December 31, 2014
that would indicate it was probable that our recorded investment in these loans would not be recoverable.
At December 31, 2015 and 2014, there were no impaired loans without a valuation allowance.
For the years ended December 31, 2015 and 2014, the average recorded investment in impaired loans was approximately $23.6
million and $11.0 million, respectively.
The amount of interest recognized on loans that were nonaccruing or restructured during the year was $1.2 million, $365,000
and $642,000 for the years ended December 31, 2015, 2014 and 2013, respectively. If these loans had been accruing interest at their
original contracted rates, related income would have been $2.0 million for the year ended December 31, 2015, $663,000 for the year
ended December 31, 2014 and $1.3 million for the year ended December 31, 2013.
56
SECURITIES ACTIVITY
Our securities portfolio plays a primary role in management of our interest rate sensitivity and, therefore, is managed in the
context of the overall balance sheet. The securities portfolio generates a substantial percentage of our interest income and serves as a
necessary source of liquidity.
We account for debt and equity securities as follows:
• Held to Maturity (“HTM”). Debt securities that management has the current 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.
• Available for Sale (“AFS”). Debt and equity 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 of alternative investments are classified as AFS. These assets are carried at fair
value. Fair value is determined using quoted market prices, where available. If quoted market prices are not available,
fair values are based on quoted market prices for similar securities or estimates from independent pricing
services. Unrealized gains and losses on AFS securities are excluded from earnings and reported net of tax as a separate
component of shareholders' equity until realized.
Premiums are amortized and discounts are accreted to maturity, or in the case of MBS, over the estimated life of the security,
using the level yield interest method. Declines in the fair value of HTM and AFS securities below their cost that are deemed to be
other-than-temporary are reflected in earnings as realized losses. In estimating other-than-temporary impairment losses, management
considers (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term
prospects of the issuer, and (3) our intent and ability to retain our investment in the issuer for a period of time sufficient to allow for
any anticipated recovery in fair value. Gains and losses on the sale of securities are recognized on the trade date and are determined
using the specific identification method.
Securities with limited marketability, such as FHLB stock and other investments, are carried at cost, which approximates its
fair value and are assessed for other-than-temporary impairment.
Management attempts to deploy investable funds into instruments that are expected to provide a reasonable overall return on
the portfolio given the current assessment of economic and financial conditions, while maintaining acceptable levels of capital,
interest rate and liquidity risk. At December 31, 2015, the combined investment securities, MBS, FHLB stock and other investments
portfolio as a percentage of total assets was 44.6% compared to loans, which were 47.1% of total assets. For a discussion of our
strategy in relation to the securities portfolio, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results
of Operations – Balance Sheet Strategy.”
57
The following tables set forth the carrying amount of investment securities and MBS at December 31, 2015, 2014 and 2013 (in
thousands):
Available for Sale:
Investment Securities:
U.S. Treasury ............................................................................................................ $
U.S. Government Agency Debentures ......................................................................
State and Political Subdivisions ................................................................................
Other Stocks and Bonds ............................................................................................
Other Equity Securities .............................................................................................
Mortgage-backed Securities: (1)
December 31,
2014
2015
103,587 $
—
244,246
12,790
6,016
14,906 $
4,828
267,684
13,239
6,049
2013
—
10,129
314,074
13,226
—
Residential ................................................................................................................
Commercial ..............................................................................................................
772,085
68,173
Total ..................................................................................................................... $ 1,460,492 $ 1,448,708 $ 1,177,687
964,298
177,704
588,502
505,351
Held to Maturity:
Investment Securities:
State and Political Subdivisions ................................................................................ $
Mortgage-backed Securities: (1)
December 31,
2014
2013
2015
385,496 $
388,823 $
391,552
Residential ................................................................................................................
Commercial ..............................................................................................................
Total ..................................................................................................................... $
31,379
367,421
784,296 $
52,217
201,279
642,319 $
74,030
201,539
667,121
(1) All mortgage-backed securities issued and/or guaranteed by U.S. government agencies or U.S. government-sponsored enterprises.
We invest in MBS, including mortgage participation certificates, which are insured or guaranteed by U.S. Government
agencies and GSEs, CMOs and real estate mortgage investment conduits (“REMICs”). MBS (which also are known as mortgage
participation certificates or pass-through certificates) represent a participation interest in a pool of single-family or multi-family
mortgages, the principal and interest payments on which are passed from the mortgage originators, through intermediaries (generally
U.S. Government agencies and GSEs) that pool and re-package the participation interests in the form of securities, to investors such
as ourselves. U.S. Government agencies, primarily Government National Mortgage Association (“GNMA”) and GSEs, primarily
Freddie Mac, and Fannie Mae guarantee the payment of principal and interest to investors. GSEs are not backed by the full faith and
credit of the U.S. Government. Freddie Mac, Fannie Mae and FHLB are the primary GSEs from which we purchase securities. At
December 31, 2015, all of our MBS were collateralized by U.S. Government agencies or GSEs.
MBS typically are issued with stated principal amounts, and the securities are backed by pools of mortgages that have loans
with varying maturities. The characteristics of the underlying pool of mortgages, such as fixed-rate or adjustable-rate, as well as
prepayment risk, are passed on to the certificate holder. The term of a mortgage-backed pass-through security thus approximates the
term of the underlying mortgages and can vary significantly due to prepayments.
Our MBS include CMOs, which include securities issued by entities that have qualified under the Internal Revenue Code of
1986, as amended, as REMICs. CMOs and REMICs (collectively CMOs) were developed in response to investor concerns regarding
the uncertainty of cash flows associated with the prepayment option of the underlying mortgages and are typically issued by
governmental agencies, GSEs and special purpose entities, such as trusts, corporations or partnerships, established by financial
institutions or other similar institutions. A CMO can be collateralized by loans or securities which are insured or guaranteed by
Fannie Mae, Freddie Mac or GNMA. In contrast to pass-through MBS, in which cash flow is received pro rata by all security
holders, the cash flow from the mortgages underlying a CMO is segmented and paid in accordance with a predetermined priority to
investors holding various CMO classes. By allocating the principal and interest cash flows from the underlying collateral among the
separate CMO classes, different classes of bonds are created, each with its own stated maturity, estimated average life, coupon rate
and prepayment characteristics.
Like most fixed income securities, MBS are subject to interest rate risk. However, unlike most fixed income securities, the
mortgage loans underlying a mortgage-backed security generally may be prepaid at any time without penalty. The ability to prepay a
mortgage loan generally results in significantly increased price and yield volatility (with respect to MBS) than is the case with
noncallable fixed income securities. Most of our MBS were purchased at a premium. As these MBS prepay at a faster rate our yield
58
on these securities will decrease. Conversely, as prepayments slow the yield on these MBS will increase. The total unamortized
premium for our MBS increased to $42.1 million at December 31, 2015 compared to $37.3 million at December 31, 2014.
During 2015, as interest rates remained low, we primarily sold CMOs along with some U.S. Agency mortgage pass-throughs,
U.S. Agency CMBS, Texas municipal securities and U.S. Treasury securities. The sale of these securities resulted in an overall gain
on the sale of available for sale securities of $3.7 million. There can be no assurance that the level of security gains reported during
the year ended December 31, 2015, will continue in future periods.
The combined investment securities, MBS, FHLB stock and other investments portfolio increased to $2.30 billion at
December 31, 2015, compared to $2.13 billion at December 31, 2014, an increase of $166.4 million, or 7.8%. This increase is
primarily a result of an increase in MBS of $97.2 million, or 7.0%, and an increase of $88.7 million, or 594.9%, in our ownership of
U.S. Treasury securities. Our investments in state and political subdivisions decreased $26.8 million, or 4.1% during 2015 when
compared to 2014.
During 2014, as interest rates remained low, we continued to sell primarily lower yielding, longer duration municipal
securities and more prepayment volatile MBS and replaced them with primarily shorter duration municipal securities. The sale of
these securities resulted in a gain on the sale of available for sale securities of $2.8 million.
During 2013, the interest rate yield curve gradually became steeper during the second half of the year while at the same time
credit and volatility spreads continued to tighten. We used this environment to reposition a portion of our securities portfolio. MBS
increased during 2013 because, as interest rates continued to increase prepayments on MBS continued to slow providing additional
opportunities to purchase MBS during the later half of 2013. We also increased our tax-free municipal security portfolio during 2013.
All of our municipal security purchases were Texas credits.
The combined fair value of the AFS and HTM securities portfolio at December 31, 2015 was $2.26 billion, which represented
a net unrealized gain as of that date of $15.1 million. The net unrealized gain was comprised of $43.3 million in unrealized gains and
$28.2 million of unrealized losses. The fair value of the AFS securities portfolio at December 31, 2015 was $1.46 billion, which
represented a net unrealized gain as of that date of $8.5 million. The net unrealized gain was comprised of $18.0 million of
unrealized gains and $9.5 million of unrealized losses. The $9.5 million of unrealized losses is primarily resulting from our
commercial and residential MBS. Net unrealized gains and losses on securities transferred to HTM from AFS are included as a
component of shareholder's equity on the consolidated balance sheet. Net unrealized gains and losses on AFS securities, which is
also a component of shareholders’ equity on the consolidated balance sheet, can fluctuate significantly as a result of changes in
interest rates. Because management cannot predict the future direction of interest rates, the effect on shareholders’ equity in the future
cannot be determined; however, this risk is monitored through the use of shock tests on the AFS securities portfolio using an array of
interest rate assumptions.
During the second quarter of 2015, the Company transferred CMBS with a fair value of $57.7 million from AFS to HTM.
The unrealized gain on the securities transferred from AFS to HTM was $1.3 million ($864,000, net of tax) at the date of transfer
based on the fair value of the securities on the transfer date. There were no securities transferred from AFS to HTM during 2014.
During 2013, the Company transferred CMBS with a fair value of $130.8 million and state and political subdivision securities with a
fair value of $322.0 million from AFS to HTM. The unrealized loss on the securities transferred from AFS to HTM was $12.0
million ($7.7 million, net of tax) at the date of transfer based on the fair value of the securities on the transfer date. There were no
sales from the HTM portfolio during the years ended December 31, 2015, 2014 or 2013. There were $784.3 million and $642.3
million of securities classified as HTM at December 31, 2015 and 2014, respectively.
59
The maturities classified according to the sensitivity to changes in interest rates of the December 31, 2015 securities portfolio
and the weighted yields are presented below. Tax-exempt obligations are shown on a taxable equivalent basis. Mortgage-backed
securities are included in maturity categories based on their stated maturity date. Expected maturities may differ from contractual
maturities because issuers may have the right to call or prepay obligations.
MATURING
Available For Sale:
Amount
Yield
Amount
Yield
Amount
(dollars in thousands)
Yield
Amount
Yield
Within 1 Year
After 1 But
Within 5 Years
After 5 But
Within 10 Years
After 10 Years
Investment Securities:
U.S. Treasury .....................$
State and Political
Subdivisions .......................
Other Stocks and Bonds ......
Other Equity Securities ........
Mortgage-backed Securities:
Residential .........................
Commercial .......................
Total .............................$
—
—
$
—
— $
103,587
2.12% $
—
—
15,151
6,161
6,016
52
130
27,510
2.61%
1.85%
1.97%
3.04%
1.96%
2.30% $
10,099
3,674
—
4,431
1,795
19,999
5.23%
1.93%
—
27,966
2,955
—
4.94%
1.54%
—
2.75%
2.52%
3.83% $
48,498
503,426
686,432
2.42%
2.56%
2.58% $
191,030
—
—
535,521
—
726,551
5.40%
—
—
2.42%
—
3.21%
MATURING
Held to Maturity:
Amount
Yield
Amount
Within 1 Year
After 1 But
Within 5 Years
After 5 But
Within 10 Years
Amount
(dollars in thousands)
Yield
After 10 Years
Yield Amount
Yield
Investment Securities:
State and Political
Subdivisions .......................$
Mortgage-backed Securities:
Residential .........................
Commercial .......................
Total .............................$
2,437
0.43% $
16,196
1.26% $
57,508
4.63% $
309,355
5.96%
—
—
2,437
—
—
0.43% $
7,845
10,259
34,300
3.60%
2.09%
1,433
327,167
2.04% $
386,108
3.98%
2.84%
3.11% $
22,101
29,995
361,451
5.06%
2.96%
5.66%
At December 31, 2015, there were no holdings of any one issuer, other than the U.S. Government, its agencies and its GSEs, in
an amount greater than 10% of our shareholders’ equity.
60
DEPOSITS AND BORROWED FUNDS
Deposits provide us with our primary source of funds. The increase of $81.0 million, or 2.4%, in total deposits during 2015
contributed to the increase in the loan portfolio. Deposits increased during 2015 primarily due to an increase in public fund deposits
and increased market penetration. During 2015, our public fund deposits increased $56.8 million to $918.7 million at December 31,
2015 from $861.9 million at December 31, 2014. At December 31, 2015, brokered CDs reflected an increase of approximately $61.8
million when compared to December 31, 2014. At December 31, 2015, we had $1.0 million of brokered money market deposit
accounts. There were no brokered money market deposit accounts at December 31, 2014. Deposits, net of all brokered deposits, at
December 31, 2015, increased $18.1 million, or 0.5%, when compared to December 31, 2014. Time deposits, including brokered
CDs, increased a total of $48.5 million, or 5.8%, during 2015 when compared to 2014. Noninterest bearing demand deposits
increased $11.5 million, or 1.7%, during 2015. Interest bearing demand deposits increased $14.1 million, or 0.9%, and saving
deposits increased $6.9 million, or 3.0%, during 2015. The latter three categories, which are considered the lowest cost deposits,
comprised 74.3% of total deposits at December 31, 2015 compared to 75.1% at December 31, 2014.
The following table sets forth deposits by category at December 31, 2015, 2014, and 2013 (in thousands):
Noninterest Bearing Demand Deposits .......................................................................... $
Interest Bearing Demand Deposits ................................................................................
Savings Deposits ..........................................................................................................
Time Deposits...............................................................................................................
Years Ended December 31,
2014
661,014 $
2015
672,470 $
1,660,295
233,172
889,470
1,646,155
226,276
840,972
2013
529,897
1,228,841
109,873
659,197
Total Deposits ............................................................................................................ $
3,455,407 $ 3,374,417 $
2,527,808
During the year ended December 31, 2015, total time deposits of $100,000 or more increased $26.0 million, or 4.5%, to $607.4
million from $581.4 million at December 31, 2014.
The table below sets forth the maturity distribution of time deposits of $100,000 or more at December 31, 2015 and 2014 (in
thousands):
Time
Certificates
Of Deposit
December 31, 2015
Other
Time
Deposits
Total
Time
Certificates
Of Deposit
December 31, 2014
Other
Time
Deposits
Three months or less ........................... $
Over three to six months .....................
Over six to twelve months ...................
Over twelve months ............................
Total .................................................. $
70,677 $
81,169
149,753
291,813
593,412 $
7,000 $
7,000
—
—
14,000 $
77,677 $
88,169
149,753
291,813
607,412 $
81,471 $
67,504
173,765
202,630
525,370 $
28,000 $
21,000
7,000
—
56,000 $
Total
109,471
88,504
180,765
202,630
581,370
At December 31, 2015, we had $85.3 million in brokered CDs that represented 2.5% of our deposits. Our brokered CDs at
December 31, 2015 have maturities of less than five years. Approximately $83.3 million are reflected in the CDs under $100,000
category and $2.0 million are reflected in the CDs over $100,000 category. At December 31, 2014, we had $23.4 million in brokered
CDs and at December 31, 2013, we had $54.4 million in brokered CDs. Our current policy allows for a maximum of $180 million in
brokered CDs. The potential higher interest cost and lack of customer loyalty are risks associated with the use of brokered CDs.
Short-term obligations, consisting primarily of FHLB advances and federal funds purchased and repurchase agreements,
increased $346.2 million, or 114.8%, during 2015 when compared to 2014 due primarily to the increase in securities and loans.
FHLB advances are collateralized by FHLB stock, nonspecified loans and securities.
61
Short-term obligations are summarized as follows (dollars in thousands):
Years Ended December 31,
2014
2013
2015
Federal funds purchased and repurchase agreements
Balance at end of period ........................................................................................... $
Average amount outstanding during the period (1) ....................................................
Maximum amount outstanding during the period (2) .................................................
Weighted average interest rate during the period (3) ..................................................
Interest rate at end of period .....................................................................................
$
2,429
2,277
2,429
0.1%
0.1%
4,237
1,886
4,237
0.2%
1.4%
FHLB advances
Balance at end of period ........................................................................................... $ 645,407
382,417
Average amount outstanding during the period (1) ....................................................
656,431
Maximum amount outstanding during the period (2) .................................................
Weighted average interest rate during the period (3) ..................................................
Interest rate at end of period .....................................................................................
0.3%
0.5%
$ 297,368
62,240
297,368
Other obligations
Balance at end of period ........................................................................................... $
Average amount outstanding during the period (1) ....................................................
Maximum amount outstanding during the period (2) .................................................
Weighted average interest rate during the period (3) ..................................................
Interest rate at end of period .....................................................................................
$
—
—
—
—
—
$
$
859
861
859
0.4%
0.4%
73,445
196,426
310,070
0.9%
0.2%
—
219
219
7.6%
—
0.9%
0.4%
— $
—
—
—
—
(1) The average amount outstanding during the period was computed by dividing the total daily outstanding principal balances by
the number of days in the period.
(2) The maximum amount outstanding at any month-end during the period.
(3) The weighted average interest rate during the period was computed by dividing the actual interest expense by the average
balance outstanding during the period.
62
Long-term obligations are summarized as follows (in thousands):
FHLB Advances (1)
Varying maturities to 2028 .......................................................................................................$
502,281 $
600,052
12/31/2015
12/31/2014
Long-term Debt (2)
Southside Statutory Trust III Due 2033 (3) ...............................................................................
Southside Statutory Trust IV Due 2037 (4) ...............................................................................
Southside Statutory Trust V Due 2037 (5) ................................................................................
Magnolia Trust Company I Due 2035 (6) .................................................................................
Total Long-term Debt ..........................................................................................................
Total Long-term Obligations....................................................................................................$
20,619
23,196
12,887
3,609
60,311
562,592 $
20,619
23,196
12,887
3,609
60,311
660,363
(1) At December 31, 2015, the weighted average cost of these advances was 1.3%.
(2) This long-term debt consists of trust preferred securities that qualify under the risk-based capital guidelines as Tier 1 capital,
subject to certain limitations.
(3) This debt carries an adjustable rate of 3.5467% through March 30, 2016 and adjusts quarterly at a rate equal to three-month
LIBOR plus 294 basis points.
(4) This debt carried an adjustable rate of 1.6219% through January 29, 2016 and reset to 1.9156% through April 29, 2016. This debt
adjusts quarterly at a rate equal to three-month LIBOR plus 130 basis points.
(5) This debt carries an adjustable rate of 2.762% through March 14, 2016 and adjusts quarterly at a rate equal to three-month LIBOR
plus 225 basis points.
(6) This debt carried an adjustable rate of 2.1776% through February 22, 2016 and reset to 2.4182% through May 22, 2016. This debt
adjusts quarterly at a rate equal to three-month LIBOR plus 180 basis points.
Long-term FHLB advances decreased $97.8 million, or 16.3%, during 2015 to $502.3 million when compared to $600.1
million in 2014. The decrease was the result of a decrease in long-term FHLB advances purchased during 2015 combined with
advances classified as long-term at December 31, 2014 rolling into the short-term FHLB advance category. During 2015, we issued
$47.1 million of short-term brokered CDs and $23.0 million of long-term brokered CDs to replace a portion of the reduction in FHLB
advances.
During the fourth quarter of 2015, the Company entered into a $20.0 million variable rate advance agreement with FHLB to
pay one-month LIBOR plus 0.17%. In addition, the Company entered into an interest rate swap contract that effectively converted
the variable rate advance to a fixed interest rate of 1.529% for five years. The cash flows of the swap are expected to be effective in
hedging the variability in expected future cash flows attributable to fluctuations in the one-month LIBOR interest rate. Proceeds were
used for general corporate purposes.
Long-term debt was $60.3 million at December 31, 2015 and 2014. Long-term debt consists of $56.7 million of our junior
subordinated debentures issued in connection with the issuance of trust preferred securities by Southside Statutory Trusts III, IV, V
and $3.6 million of junior subordinated debentures issued to Magnolia Trust Company I.
63
CAPITAL RESOURCES
Our total shareholders' equity at December 31, 2015 of $444.1 million increased 4.4%, or $18.8 million, from December 31,
2014 and represented 8.6% of total assets at December 31, 2015 compared to 8.8% at December 31, 2014.
The increase in shareholders' equity at December 31, 2015 primarily consisted of net income of $44.0 million, stock
compensation expense of $1.4 million and the issuance of $1.4 million in common stock (49,908 shares) through our dividend re-
investment plan. These increases were partially offset by $25.1 million in cash dividends paid and accumulated other comprehensive
loss of $3.1 million. The increase in accumulated other comprehensive loss is comprised of a decrease of $6.5 million, net of tax, in
the unrealized gain on securities, net of reclassification adjustment (see “Note 4 – Accumulated Other Comprehensive (Loss)
Income”) and an increase of $3.4 million, net of tax, related to the change in the funded status of our defined benefit plans.
As a result of new regulations, we are now required to comply with higher minimum capital requirements (the “Updated
Capital Rules”). The Updated Capital Rules, which became applicable to the Company and the Bank on January 1, 2015, made
substantial changes to these previous standards. Among other things, the new regulations (i) introduced a new capital requirement
known as “Common Equity Tier 1” (“CET1”), (ii) stated that Tier 1 capital consist of CET1 and “Additional Tier 1 capital”
instruments meeting certain requirements, (iii) defined CET1 to require that most deductions and adjustments to regulatory capital
measures be made to CET1 and not to the other components of capital and (iv) revised the scope of the deductions and adjustments
from capital as compared to regulations that previously applied to the Company and other banking organizations.
The Updated Capital Rules also established the following minimum capital ratios, which started to phase in on January 1,
2015: 4.5 percent CET1 to risk-weighted assets; 6.0 percent Tier 1 capital to risk-weighted assets; 8.0 percent total capital to risk-
weighted assets; and 4.0 percent Tier 1 leverage ratio to average consolidated assets. In addition, the Updated Capital Rules also
introduced a minimum “capital conservation buffer” equal to 2.5% of an organization’s total risk-weighted assets, which exists in
addition to these new required minimum CET1, Tier 1, and total capital ratios. The “capital conservation buffer,” which must consist
entirely of CET1, is designed to absorb losses during periods of economic stress. The Updated Capital Rules provide for a number of
deductions from and adjustments to CET1, which include the requirement that mortgage servicing rights, deferred tax assets arising
from temporary differences that could not be realized through net operating loss carry-backs and significant investments in non-
consolidated financial entities be deducted from CET1 to the extent that any one such category exceeds 10% of CET1 or all such
categories in the aggregate exceed 15% of CET1.
Under the previous capital framework, the effects of accumulated other comprehensive income items included in shareholders’
equity under U.S. GAAP were excluded for the purposes of determining capital ratios. Under the Updated Capital Rules, the company
has elected to permanently exclude capital in accumulated other comprehensive income in Common Equity Tier 1 capital, Tier 1
capital, and Total capital to risk-weighted assets and Tier 1 capital to adjusted quarterly average assets.
Under the Updated Capital Rules, certain hybrid securities, such as trust preferred securities, do not qualify as Tier 1 capital.
For bank holding companies that had assets of less than $15 billion as of December 31, 2009, which includes Southside, trust
preferred securities issued prior to May 19, 2010 can be treated as Tier 1 capital to the extent that they do not exceed 25% of Tier 1
capital after the application of capital deductions and adjustments.
Failure to meet minimum capital requirements could result in certain mandatory and possibly additional discretionary actions
by our regulators that, if undertaken, could have a direct material effect on our financial statements. Management believes that, as of
December 31, 2015, we met all capital adequacy requirements to which we were subject.
The Federal Deposit Insurance Act requires bank regulatory agencies to take “prompt corrective action” with respect to FDIC-
insured depository institutions that do not meet minimum capital requirements. A depository institution's treatment for purposes of
the prompt corrective action provisions will depend on how its capital levels compare to various capital measures and certain other
factors, as established by regulation. Prompt corrective action and other discretionary actions could have a direct material effect on
our financial statements.
It is management's intention to maintain our capital at a level acceptable to all regulatory authorities and future dividend
payments will be determined accordingly. Regulatory authorities require that any dividend payments made by either us or the Bank
not exceed earnings for that year. Accordingly, shareholders should not anticipate a continuation of the cash dividend simply because
of the existence of a dividend reinvestment program. The payment of dividends will depend upon future earnings, our financial
condition, and other related factors including the discretion of the board of directors.
64
To be categorized as well capitalized we must maintain minimum Common Equity Tier 1 risk-based, Tier 1 risk-based, Total capital
risk-based and Tier 1 leverage ratios as set forth in the following table:
Actual
Amount
Ratio
To Be Well Capitalized
Under Prompt
Corrective Actions
Provisions
Amount
Ratio
For Capital
Adequacy Purposes
Ratio
Amount
(dollars in thousands)
As of December 31, 2015:
Common Equity Tier 1 (to Risk Weighted
Assets)
Consolidated ..................................................... $
368,865
12.71% $
130,549
4.50%
N/A
Bank Only ........................................................ $
416,378
14.36% $
130,446
4.50% $ 188,422
Tier 1 Capital (to Risk Weighted Assets)
Consolidated ..................................................... $
422,513
14.56% $
174,065
6.00%
N/A
Bank Only ........................................................ $
416,378
14.36% $
173,928
6.00% $ 231,904
N/A
6.50%
N/A
8.00%
Total Capital (to Risk Weighted Assets)
Consolidated ..................................................... $
443,106
15.27% $
232,087
8.00%
N/A
N/A
Bank Only ........................................................ $
436,971
15.07% $
231,904
8.00% $ 289,881
10.00%
Tier 1 Capital (to Average Assets) (1)
Consolidated ..................................................... $
422,513
8.61% $
196,347
4.00%
N/A
Bank Only ........................................................ $
416,378
8.49% $
196,209
4.00% $ 245,261
N/A
5.00%
As of December 31, 2014:
Tier 1 Capital (to Risk Weighted Assets)
Consolidated ..................................................... $
398,798
16.12% $
Bank Only ........................................................ $
384,009
15.55% $
98,932
98,751
4.00%
N/A
4.00% $ 148,127
N/A
6.00%
Total Capital (to Risk Weighted Assets)
Consolidated ..................................................... $
412,893
16.69% $
197,863
8.00%
N/A
N/A
Bank Only ........................................................ $
398,104
16.13% $
197,503
8.00% $ 246,878
10.00%
Tier 1 Capital (to Average Assets) (1)
Consolidated ..................................................... $
398,798
11.35% $
140,492
4.00%
N/A
Bank Only ........................................................ $
384,009
10.95% $
140,329
4.00% $ 175,412
N/A
5.00%
(1) Refers to quarterly average assets as calculated in accordance with policies established by bank regulatory agencies.
Management believes that, as of December 31, 2015, Southside Bancshares and Southside Bank would meet all capital
adequacy requirements under the Basel III Capital Rules on a fully phased-in basis as if such requirements were currently in effect.
65
The table below summarizes our key equity ratios for the years ended December 31, 2015, 2014 and 2013:
Years Ended December 31,
2014
2013
2015
Return on Average Assets .........................................................................................
Return on Average Shareholders' Equity ..................................................................
Dividend Payout Ratio – Basic ................................................................................
Dividend Payout Ratio – Diluted .............................................................................
Average Shareholders' Equity to Average Total Assets ............................................
0.90%
10.04%
57.47%
57.80%
9.00%
0.60%
7.24%
92.31%
92.31%
8.27%
1.22%
16.50%
43.54%
43.54%
7.39%
ACCOUNTING PRONOUNCEMENTS
See “Note 1 – Summary of Significant Accounting and Reporting Policies” to our consolidated financial statements included in
this report.
EFFECTS OF INFLATION
Our consolidated financial statements, and their related notes, have been prepared in accordance with GAAP which requires
the measurement of financial position and operating results in terms of historical dollars, without considering the change in the
relative purchasing power of money over time and due to inflation. The impact of inflation is reflected in the increased cost of our
operations. Unlike many industrial companies, nearly all of our assets and liabilities are monetary. As a result, interest rates have a
greater impact on our performance than do the effects of general levels of inflation. Interest rates do not necessarily move in the same
direction or to the same extent as the price of goods and services. Inflation can affect the amount of money customers have for
deposits, as well as ability to repay loans.
MANAGEMENT OF LIQUIDITY
Liquidity management involves our ability to convert assets to cash with a minimum risk of loss to enable us to meet our
obligations to our customers at any time. This means addressing (1) the immediate cash withdrawal requirements of depositors and
other fund providers; (2) the funding requirements of all lines and letters of credit; and (3) the short-term credit needs of
customers. Liquidity is provided by short-term investments that can be readily liquidated with a minimum risk of loss. Cash, interest
earning deposits and short-term investments with maturities or repricing characteristics of one year or less continue to be a substantial
percentage of total assets. At December 31, 2015, these investments were 11.0% of total assets, as compared with 12.9% for
December 31, 2014, and 14.1% for December 31, 2013. The decrease to 11.0% at December 31, 2015 is primarily reflective of
changes in the investment portfolio and the increase in total assets. Liquidity is further provided through the matching, by time
period, of rate sensitive interest earning assets with rate sensitive interest bearing liabilities. Southside Bank has three unsecured lines
of credit for the purchase of overnight federal funds at prevailing rates with Frost Bank, TIB -The Independent Bankers Bank and
Comerica Bank for $30.0 million, $15.0 million and $7.5 million, respectively. There were no federal funds purchased at
December 31, 2015. Southside Bank has a $5.0 million line of credit with Frost Bank to be used to issue letters of credit and at
December 31, 2015, we had one outstanding letter of credit for $195,000. At December 31, 2015, the amount of additional funding
Southside Bank could obtain from FHLB using unpledged securities at FHLB was approximately $606.9 million, net of FHLB stock
purchases required. Southside Bank currently has no outstanding letters of credit from FHLB as collateral for a portion of its public
fund deposits.
Interest rate sensitivity management seeks to avoid fluctuating net interest margins and to enhance consistent growth of new
interest income through periods of changing interest rates. The ALCO closely monitors various liquidity ratios and interest rate
spreads and margins. The ALCO performs interest rate simulation tests that apply various interest rate scenarios including immediate
shocks and market value of portfolio equity (“MVPE”) with interest rates immediately shocked plus and minus 200 basis points to
assist in determining our overall interest rate risk and adequacy of the liquidity position. In addition, the ALCO utilizes a simulation
model to determine the impact on net interest income of several different interest rate scenarios. By utilizing this technology, we can
determine changes that need to be made to the asset and liability mix to minimize the change in net interest income under these
various interest rate scenarios.
66
OFF-BALANCE-SHEET ARRANGEMENTS
Financial Instruments with Off-Balance-Sheet Risk. In the normal course of business, we are a party to certain financial
instruments with off-balance-sheet risk to meet the financing needs of our customers. These off-balance-sheet instruments include
commitments to extend credit and standby letters of credit. These instruments involve, to varying degrees, elements of credit and
interest rate risk in excess of the amount reflected in the financial statements. The contract or notional amounts of these instruments
reflect the extent of involvement and exposure to credit loss that we have in these particular classes of financial instruments.
Commitments to extend credit are agreements to lend to a customer provided that the terms established in the contract are
met. Commitments generally have fixed expiration dates and may require the payment of fees. Since some commitments are
expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements.
Standby letters of credit are conditional commitments issued to guarantee the performance of a customer to a third party. These
guarantees are primarily issued to support public and private borrowing arrangements. The credit risk involved in issuing letters of
credit is essentially the same as that involved in extending loan commitments to customers and similarly do not necessarily represent
future cash obligations.
Financial instruments with off-balance-sheet risk were as follows (in thousands):
Unused commitments:
Commitments to extend credit .................................................................$
Standby letters of credit ...........................................................................
Total ....................................................................................................$
546,660 $
7,752
554,412 $
373,255
6,222
379,477
December 31, 2015 December 31, 2014
We apply the same credit policies in making commitments and standby letters of credit as we do for on-balance-sheet
instruments. We evaluate each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed
necessary, upon extension of credit is based on management's credit evaluation of the borrower. Collateral held varies but may
include cash or cash equivalents, negotiable instruments, real estate, accounts receivable, inventory, oil, gas and mineral interests,
property, plant, and equipment.
67
COMMITMENTS AND CONTRACTUAL OBLIGATIONS
The following summarizes our contractual cash obligations and commercial commitments at December 31, 2015, and the
effect such obligations are expected to have on liquidity and cash flow in future periods. Payments reflected in the table below do not
include interest.
Payments Due By Period
Less than 1
Year
1-3 Years
3-5 Years
(in thousands)
More than 5
Years
Total
Contractual obligations:
Long-term debt, including current maturities (1) ................ $
FHLB advances (2) ........................................................
Operating leases (3) ........................................................
Deferred compensation agreements (4) .............................
Time deposits (5) ...........................................................
Securities purchased not paid for ....................................
Capital lease obligations ................................................
Purchase obligations .....................................................
Total contractual obligations ............................................. $
— $
— $
646,500
367,096
1,988
678
501,440
19,350
—
—
2,768
819
296,939
—
—
—
1,169,956 $
667,622 $
— $
118,364
1,441
810
85,243
—
—
—
205,858 $
60,311 $
60,311
15,728
1,147,688
267
3,790
5,848
—
—
—
6,464
6,097
889,470
19,350
—
—
85,944 $
2,129,380
(1) The total balance of long-term debt was $60.3 million at December 31, 2015. The scheduled maturities and interest rates were as follows:
• Floating rate debt of $20.6 million with a scheduled maturity of 2033, was indexed to three-month LIBOR plus 294 basis points and
adjusts on a quarterly basis. The rate of interest associated with this debt is 3.5467% through March 30, 2016.
• Floating rate debt of $23.2 million with a scheduled maturity of 2037, was indexed to three-month LIBOR plus 130 basis points and
adjusts on a quarterly basis. The rate of interest associated with this debt was 1.6219% through January 29, 2016 and reset to 1.9156%
through April 29, 2016.
• Floating rate debt of $12.9 million with a scheduled maturity of 2037, was indexed to three-month LIBOR plus 225 basis points and
adjusts on a quarterly basis. The rate of interest associated with this debt is 2.762% through March 14, 2016.
• Floating rate debt of $3.6 million with a scheduled maturity of 2035, was indexed to three-month LIBOR plus 180 basis points and
adjusts on a quarterly basis. The rate of interest associated with this debt was 2.1776% through February 22, 2016 and reset to 2.4182%
through May 22, 2016.
(2) We had fixed rate FHLB advances with maturity dates ranging from 2016 through 2028, with interest rates ranging from 0.3% to 5.0% with
a total balance of $1.15 billion at December 31, 2015.
(3) We had various operating leases for our office machines that total $188,000 and expire on or before the end of 2018. In addition, we have
operating leases totaling $6.3 million on our retail branch locations, loan production offices and full service branch locations which have future
commitments of up to eight years and additional options, which we control, beyond the commitment period.
(4) We have deferred compensation agreements (the “agreements”) with 17 officers with remaining payments totaling $6.1 million. Payments
from the agreements are to commence at the time of retirement or death. As of December 31, 2015, $2.5 million in payments had been made
from such agreements. Of the 17 officers included in the agreements, payments have commenced to five executives and/or their beneficiaries.
In addition, one active officer was eligible for retirement at December 31, 2015. Three officers become eligible in 2016 as a result of the
acceptance of an early retirement package offered in late December 2015 with an acceptance deadline of January 29, 2016. The remaining
eight officers are eligible at various dates beginning in 2018. The totals reflected under five years assume the retirement of the eligible officer
at December 31, 2015 and the retirement of the eligible officers in 2016. Additional information regarding executive compensation is
incorporated into “Item 11. Executive Compensation” of this Annual Report on Form 10-K.
(5) We had $85.3 million of brokered CDs at December 31, 2015 with maturity dates ranging from 2016 through 2020 and coupons ranging
from 0.3% to 1.5%.
We expect to contribute $3.0 million to our defined benefit plan during 2016. We also expect to contribute to our defined benefit
plan in future years, however, those amounts are indeterminable at this time.
68
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In the banking industry, a major risk exposure is changing interest rates. The primary objective of monitoring our interest rate
sensitivity, or risk, is to provide management the tools necessary to manage the balance sheet to minimize adverse changes in net
interest income as a result of changes in the direction and level of interest rates. Federal Reserve Board monetary control efforts, the
effects of deregulation, the current economic downturn and legislative changes have been significant factors affecting the task of
managing interest rate sensitivity positions in recent years.
In an attempt to manage our exposure to changes in interest rates, management closely monitors our exposure to interest rate
risk through our ALCO. Our ALCO meets regularly and reviews our interest rate risk position and makes recommendations to our
board for adjusting this position. In addition, our board reviews our asset/liability position on a monthly basis. We primarily use
two methods for measuring and analyzing interest rate risk: net income simulation analysis and MVPE modeling. We utilize the net
income simulation model as the primary quantitative tool in measuring the amount of interest rate risk associated with changing
market rates. The model quantifies the effects of various interest rate scenarios on projected net interest income and net income over
the next 12 months. The model was used to measure the impact on net interest income relative to a base case scenario of rates
increasing 100 and 200 basis points or decreasing 100 and 200 basis points over the next 12 months. These simulations incorporate
assumptions regarding balance sheet growth and mix, pricing and the repricing and maturity characteristics of the existing and
projected balance sheet. The impact of interest rate-related risks such as prepayment, basis and option risk are also considered. Due
to the low level of interest rates many of the current interest rates cannot decline 100 or 200 basis points. The model has floors for
each of those interest rates and none are assumed to go negative. As of December 31, 2015, the model simulations projected that
100 and 200 basis point immediate increases in interest rates would result in negative variances on net interest income of 0.42% and
1.78%, respectively, relative to the base case over the next 12 months, while an immediate decrease in interest rates of 100 and 200
basis points would result in a negative variance in net interest income of 1.18% and 0.38%, respectively, relative to the base case
over the next 12 months. As of December 31, 2014, the model simulations projected that 100 and 200 basis point increases in
interest rates would result in negative variances on net interest income of 2.34% and 2.29%, respectively, relative to the base case
over 12 months, while an immediate decrease in interest rates of 100 and 200 basis points would result in a negative variance in net
interest income of 3.43% and 3.25%, respectively, relative to the base case over the next 12 months. As part of the overall
assumptions, certain assets and liabilities have been given reasonable floors. This type of simulation analysis requires numerous
assumptions including but not limited to changes in balance sheet mix, prepayment rates on mortgage-related assets and fixed rate
loans, cash flows and repricings of all financial instruments, changes in volumes and pricing, future shapes of the yield curve,
relationship of market interest rates to each other (basis risk), credit spread and deposit sensitivity. Assumptions are based on
management’s best estimates but may not accurately reflect actual results under certain changes in interest rates.
The ALCO monitors various liquidity ratios to ensure a satisfactory liquidity position for us. Management continually
evaluates the condition of the economy, the pattern of market interest rates and other economic data to determine the types of
investments that should be made and at what maturities. Using this analysis, management from time to time assumes calculated
interest sensitivity gap positions to maximize net interest income based upon anticipated movements in the general level of interest
rates. Regulatory authorities also monitor our gap position along with other liquidity ratios. In addition, as described above, we
utilize a simulation model to determine the impact of net interest income under several different interest rate scenarios. By utilizing
this technology, we can determine changes that need to be made to the asset and liability mixes to mitigate the change in net interest
income under these various interest rate scenarios.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item is set forth in Part IV.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
69
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Management, including our Chief Executive Officer (“CEO”) and our Chief Financial Officer (“CFO”), undertook an
evaluation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act of 1934, as
amended (the “Exchange Act”)) as of December 31, 2015 and, based on that evaluation, our CEO and CFO concluded that our
disclosure controls and procedures were effective as of that date in recording, processing, summarizing and reporting in a timely
manner the information that the Company is required to disclose in its reports under the Exchange Act and in accumulating and
communicating to the Company's management, including the Company's CEO and CFO, such information as appropriate to allow
timely decisions regarding required disclosure.
Changes in Internal Control Over Financial Reporting
No changes were made to our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act)
during the last fiscal quarter of the period covered by this report that materially affected, or are reasonably likely to materially affect,
our internal control over financial reporting.
Management’s Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal
control over financial reporting is defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended,
is a process designed by, or under the supervision of, our CEO and CFO and effected by our board of directors, management and
other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles and includes those policies and
procedures that:
•
•
•
pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions
of our assets;
provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in
accordance with authorizations of our management and directors; and
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risks that controls may become inadequate because
of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Management assessed
the effectiveness of our internal control over financial reporting as of December 31, 2015. In making this assessment, management
used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal
Control-Integrated Framework (“2013 framework”).
Based on this assessment, management concluded that we maintained effective internal control over financial reporting as of
December 31, 2015.
The effectiveness of our internal control over financial reporting as of December 31, 2015 has been audited by Ernst & Young
LLP, an independent registered public accounting firm, as stated in their report which appears in this Item under the heading
“Attestation Report of Independent Registered Public Accounting Firm.”
Southside Bancshares, Inc.
March 8, 2016
70
Attestation Report of Independent Registered Public Accounting Firm
Report of Independent Registered Public Accounting Firm
Board of Directors and Shareholders
Southside Bancshares, Inc.
We have audited Southside Bancshares, Inc. and subsidiaries’ internal control over financial reporting as of December 31, 2015,
based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (2013 framework) (the COSO criteria). Southside Bancshares, Inc. and subsidiaries’ management is
responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal
control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting.
Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over
financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of
internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances.
We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted
accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements
in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only
in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material
effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because
of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Southside Bancshares, Inc. and subsidiaries maintained, in all material respects, effective internal control over
financial reporting as of December 31, 2015, based on the COSO criteria.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the
2015 consolidated financial statements of Southside Bancshares, Inc. and subsidiaries and our report dated March 8, 2016 expressed
an unqualified opinion thereon.
/s/ Ernst & Young LLP
Dallas, Texas
March 8, 2016
71
ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by this Item is incorporated herein by reference to our Proxy Statement (Schedule 14A) for our
2016 Annual Meeting of shareholders to be filed with the SEC within 120 days of our fiscal year-end.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated herein by reference to our Proxy Statement (Schedule 14A) for our
2016 Annual Meeting of shareholders to be filed with the SEC within 120 days of our fiscal year-end.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
The information required by this Item is incorporated herein by reference to our Proxy Statement (Schedule 14A) for our
2016 Annual Meeting of shareholders to be filed with the SEC within 120 days of our fiscal year-end.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by this Item is incorporated herein by reference to our Proxy Statement (Schedule 14A) for our
2016 Annual Meeting of shareholders to be filed with the SEC within 120 days of our fiscal year-end.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required by this Item is incorporated herein by reference to our Proxy Statement (Schedule 14A) for our
2016 Annual Meeting of shareholders to be filed with the SEC within 120 days of our fiscal year-end.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
1. Financial Statements
The following consolidated financial statements of Southside Bancshares, Inc. and its subsidiaries are filed as part of this
report.
• Consolidated Balance Sheets as of December 31, 2015 and 2014.
• Consolidated Statements of Income for the years ended December 31, 2015, 2014 and 2013.
• Consolidated Statements of Comprehensive Income for the years ended December 31, 2015, 2014 and 2013.
• Consolidated Statements of Changes in Equity for the years ended December 31, 2015, 2014 and 2013.
• Consolidated Statements of Cash Flow for the years ended December 31, 2015, 2014 and 2013.
• Notes to Consolidated Financial Statements.
2. Financial Statement Schedules
All schedules are omitted because they are not applicable or not required, or because the required information is included in
the consolidated financial statements or notes thereto.
3. Exhibits
The exhibits listed in the Exhibit Index (following the signature pages of this report) are filed with, or incorporated by
reference in, this report.
72
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
DATE: March 8, 2016
SOUTHSIDE BANCSHARES, INC.
BY:
/s/ Sam Dawson
Sam Dawson, Chief Executive Officer
(Principal Executive Officer)
DATE: March 8, 2016
BY:
/s/ Lee R. Gibson
Lee R. Gibson, CPA, President and Chief Financial Officer
(Principal Financial Officer)
DATE: March 8, 2016
BY:
/s/ Julie N. Shamburger
Julie N. Shamburger, CPA, Executive Vice President and
Chief Accounting Officer
(Principal Accounting Officer)
73
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following
persons on behalf of the registrant and in the capacities and on the date indicated.
Signature
Title
Date
/s/ Joe Norton
(Joe Norton)
/s/ John (Bob) Garrett
John (Bob) Garrett
(B. G. Hartley)
/s/ Sam Dawson
(Sam Dawson)
/s/ Lee R. Gibson
(Lee R. Gibson)
/s/ Lawrence Anderson
(Lawrence Anderson)
/s/ S. Elaine Anderson
(S. Elaine Anderson)
/s/ Herbert C. Buie
(Herbert C. Buie)
/s/ Alton Cade
(Alton Cade)
/s/ Patricia A. Callan
(Patricia A. Callan)
/s/ Melvin B. Lovelady
(Melvin B. Lovelady)
(Paul W. Powell)
/s/ William Sheehy
(William Sheehy)
/s/ Preston L. Smith
(Preston L. Smith)
/s/ Don W. Thedford
(Don W. Thedford)
Chairman of the Board
and Director
Vice Chairman of the Board
and Director
Chairman Emeritus
and Director
Chief Executive Officer
and Director
President, Chief Financial Officer
and Director
Director
Director
Director
Director
Director
Director
Director
Director
Director
Director
74
March 8, 2016
March 8, 2016
March 8, 2016
March 8, 2016
March 8, 2016
March 8, 2016
March 8, 2016
March 8, 2016
March 8, 2016
March 8, 2016
March 8, 2016
March 8, 2016
March 8, 2016
March 8, 2016
March 8, 2016
Report of Independent Registered Public Accounting Firm
Board of Directors and Shareholders
Southside Bancshares, Inc.
We have audited the accompanying consolidated balance sheets of Southside Bancshares, Inc. and subsidiaries as of December 31,
2015 and 2014, and the related consolidated statements of income, comprehensive income, changes in equity and cash flows for
each of the three years in the period ended December 31, 2015. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management,
as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of
Southside Bancshares, Inc. and subsidiaries at December 31, 2015 and 2014, and the consolidated results of their operations and
their cash flows for each of the three years in the period ended December 31, 2015, in conformity with U.S. generally accepted
accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States),
Southside Bancshares, Inc.’s internal control over financial reporting as of December 31, 2015, based on criteria established in
Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013
framework) and our report dated March 8, 2016 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Dallas, Texas
March 8, 2016
75
SOUTHSIDE BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
December 31,
2015
December 31,
2014
ASSETS
Cash and due from banks .................................................................................................................... $
Interest bearing deposits ......................................................................................................................
Total cash and cash equivalents ....................................................................................................
Investment securities:
54,288 $
26,687
80,975
Available for sale, at estimated fair value .......................................................................................
Held to maturity, at carrying value (estimated fair value of $397,194 and $400,248, respectively) .......
366,639
385,496
64,001
20,654
84,655
306,706
388,823
Mortgage-backed securities:
Available for sale, at estimated fair value .......................................................................................
1,093,853
1,142,002
Held to maturity, at carrying value (estimated fair value of $402,569 and $261,339, respectively) .......
FHLB stock, at cost ............................................................................................................................
Other investments, at cost ...................................................................................................................
Loans held for sale .............................................................................................................................
Loans:
Loans .........................................................................................................................................
Less: Allowance for loan losses ...................................................................................................
Net loans ....................................................................................................................................
Premises and equipment, net ...............................................................................................................
Goodwill ...........................................................................................................................................
Other intangible assets, net ..................................................................................................................
Interest receivable ..............................................................................................................................
Deferred tax asset, net .........................................................................................................................
Unsettled trades to sell securities .........................................................................................................
Bank owned life insurance ..................................................................................................................
Other assets .......................................................................................................................................
TOTAL ASSETS ......................................................................................................................... $
398,800
51,047
5,462
3,811
2,431,753
(19,736)
2,412,017
107,929
91,520
6,548
22,700
19,903
9,343
95,080
10,953
5,162,076 $
253,496
39,942
3,929
2,899
2,181,133
(13,292)
2,167,841
112,860
91,372
8,844
22,436
12,707
57,202
92,384
19,163
4,807,261
Deposits:
LIABILITIES AND SHAREHOLDERS’ EQUITY
Noninterest bearing .......................................................................................................................... $
Interest bearing ................................................................................................................................
Total deposits .............................................................................................................................
Short-term obligations:
Federal funds purchased and repurchase agreements............................................................................
FHLB advances ...............................................................................................................................
Total short-term obligations..........................................................................................................
Long-term obligations:
FHLB advances ...............................................................................................................................
Long-term debt ................................................................................................................................
Total long-term obligations ..........................................................................................................
Unsettled trades to purchase securities ..................................................................................................
Other liabilities ..................................................................................................................................
TOTAL LIABILITIES .................................................................................................................
672,470 $
2,782,937
3,455,407
661,014
2,713,403
3,374,417
2,429
645,407
647,836
502,281
60,311
562,592
19,350
32,829
4,718,014
4,237
297,368
301,605
600,052
60,311
660,363
5,982
39,651
4,382,018
Off-Balance-Sheet Arrangements, Commitments and Contingencies (Note 16)
Shareholders' equity:
Common stock: ($1.25 par, 40,000,000 shares authorized, 27,865,798 shares issued in 2015 and
26,578,127 shares issued in 2014)......................................................................................................
Paid-in capital .................................................................................................................................
Retained earnings ............................................................................................................................
Treasury stock (2,469,638 shares at cost) ............................................................................................
Accumulated other comprehensive loss ..............................................................................................
TOTAL SHAREHOLDERS' EQUITY ..........................................................................................
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY ............................................................ $
34,832
424,078
41,527
(37,692)
(18,683)
444,062
5,162,076 $
33,223
389,886
55,396
(37,692)
(15,570)
425,243
4,807,261
The accompanying notes are an integral part of these consolidated financial statements.
76
SOUTHSIDE BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
Years Ended December 31,
2014
2013
2015
Interest income
Loans ........................................................................................................................ $
Investment securities – taxable ....................................................................................
Investment securities – tax-exempt ..............................................................................
Mortgage-backed securities .........................................................................................
FHLB stock and other investments ..............................................................................
Other interest earning assets ........................................................................................
Total interest income .............................................................................................
Interest expense
Deposits ....................................................................................................................
Short-term obligations ................................................................................................
Long-term obligations ................................................................................................
Total interest expense ............................................................................................
Net interest income .......................................................................................................
Provision for loan losses ...............................................................................................
Net interest income after provision for loan losses ...........................................................
Noninterest income
Deposit services .........................................................................................................
Net gain on sale of securities available for sale ..............................................................
Impairment of investment in SFG Finance, LLC ...........................................................
Gain on sale of loans ..................................................................................................
Trust income .............................................................................................................
Bank owned life insurance income...............................................................................
Brokerage services .....................................................................................................
Other ........................................................................................................................
Total noninterest income ........................................................................................
Noninterest expense
Salaries and employee benefits ....................................................................................
Occupancy expense ....................................................................................................
Advertising, travel & entertainment .............................................................................
ATM and debit card expense .......................................................................................
Professional fees ........................................................................................................
Software and data processing expense ..........................................................................
Telephone and communications ...................................................................................
FDIC insurance ..........................................................................................................
FHLB prepayment fees ...............................................................................................
Other ........................................................................................................................
Total noninterest expense .......................................................................................
Income before income tax expense .................................................................................
Income tax expense (benefit) .........................................................................................
Net income .................................................................................................................. $
Earnings per common share – basic ................................................................................ $
Earnings per common share – diluted ............................................................................. $
Dividends paid per common share .................................................................................. $
The accompanying notes are an integral part of these consolidated financial statements.
96,417 $
1,587
22,468
33,661
298
101
154,532
70,598 $
615
24,038
28,207
181
139
123,778
10,162
1,250
8,442
19,854
134,678
8,343
126,335
20,112
3,660
—
2,082
3,419
2,623
2,206
3,793
37,895
67,221
12,883
2,708
3,132
3,877
3,858
1,978
2,510
—
14,787
112,954
51,276
7,279
43,997 $
1.74 $
1.73 $
1.00 $
7,953
624
8,379
16,956
106,822
14,938
91,884
15,280
2,830
(2,755)
323
3,145
1,334
1,308
3,024
24,489
60,821
7,259
2,219
1,331
7,827
4,629
1,222
1,765
539
10,092
97,704
18,669
(2,164)
20,833 $
1.04 $
1.04 $
0.96 $
72,910
799
25,483
20,085
182
143
119,602
8,179
1,875
7,914
17,968
101,634
8,879
92,755
15,560
8,472
—
770
3,024
3,122
1,157
3,140
35,245
52,054
7,539
2,642
1,328
2,782
2,018
1,529
1,713
1,048
9,060
81,713
46,287
5,097
41,190
2.09
2.09
0.91
77
SOUTHSIDE BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
Net income ....................................................................................................$
43,997 $
20,833 $
41,190
Years ended December 31,
2015
2014
2013
Other comprehensive (loss) income:
Net unrealized holding (losses) gains on available for sale securities during
the period .......................................................................................................
Change in net unrealized loss on securities transferred to held to maturity .......
Noncredit portion of other-than-temporary impairment losses on the AFS
securities .......................................................................................................
Reclassification adjustment for gain on sale of available for sale securities,
included in net income ...................................................................................
Reclassification of other-than-temporary impairment charges on available for
sale securities, included in net income ............................................................
Amortization of net actuarial loss, included in net periodic benefit cost ...........
Amortization of prior service credit, included in net periodic benefit cost ........
Effect of settlement recognition ......................................................................
Prior service cost adjustment due to plan amendments ....................................
Change in net actuarial gain (loss) ..................................................................
Other comprehensive (loss) income, before tax ...............................................
Income tax benefit (expense) related to other items of comprehensive income .
Other comprehensive (loss) income, net of tax ................................................
(7,235)
930
—
24,338
1,405
—
(50,518)
471
(10)
(3,660)
(2,830)
(8,472)
—
2,448
(16)
(62)
—
2,806
(4,789)
1,676
(3,113)
—
1,042
(14)
—
43
(15,574)
8,410
(2,943)
5,467
26,300 $
42
2,787
(43)
—
(357)
19,215
(36,885)
12,910
(23,975)
17,215
Comprehensive income ..................................................................................$
40,884 $
The accompanying notes are an integral part of these consolidated financial statements.
78
SOUTHSIDE BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(in thousands, except share amounts)
Common
Stock
Paid In
Capital
Retained
Earnings
Treasury
Stock
Balance at December 31, 2012 ..................................... $ 24,308 $ 195,602 $ 70,708 $ (35,793) $
Net Income ...................................................................
Other comprehensive loss ............................................
41,190
—
—
—
—
—
Accu-
mulated-
Other
Compre-
hensive
Income
(Loss)
Total
Equity
2,938 $ 257,763
41,190
(23,975)
—
(23,975)
—
—
—
—
—
1,396
(1,899)
911
65
155
—
—
—
(1,899)
—
—
—
—
—
—
(77)
—
72
—
—
—
38
1,324
—
911
65
194
Issuance of common stock (57,675 shares) ..................
Purchase of common stock (90,300 shares) .................
Stock compensation expense ........................................
Tax benefit related to stock awards ..............................
Net issuance of common stock under employee stock
plans .............................................................................
Cash dividends paid on common stock ($0.91 per
share) ............................................................................
Stock dividend declared ...............................................
Balance at December 31, 2013 .....................................
Net Income ...................................................................
Other comprehensive income .......................................
Issuance of common stock (40,142 shares) ..................
Net issuance of common stock in connection with the
acquisition of OmniAmerican Bancorp, Inc.
(5,168,138 shares) ........................................................
Stock compensation expense ........................................
Tax expense related to stock awards ............................
Net issuance of common stock under employee stock
plans .............................................................................
Cash dividends paid on common stock ($0.96 per
share) ............................................................................
Impairment of investment in SFG Finance, LLC .........
Stock dividend declared ...............................................
Balance at December 31, 2014 .....................................
Net Income ...................................................................
Other comprehensive loss ............................................
—
1,065
25,483
— (16,088)
(17,060)
78,673
15,995
214,091
—
—
(37,692)
— (16,088)
—
—
259,518
(21,037)
—
—
50
—
—
1,163
6,460
144,832
—
—
1,086
(76)
20,833
—
—
—
—
—
106
1,094
(126)
—
—
—
—
—
—
—
—
20,833
5,467
—
5,467
1,213
— 151,292
—
—
—
1,086
(76)
1,074
—
—
1,124
33,223
—
—
— (17,919)
—
(26,065)
55,396
43,997
—
2,755
24,941
389,886
—
—
—
—
—
(37,692)
—
—
— (17,919)
2,755
—
—
—
425,243
(15,570)
43,997
—
(3,113)
(3,113)
Issuance of common stock (49,908 shares) ..................
Stock compensation expense ........................................
Tax benefit related to stock awards ..............................
Net issuance of common stock under employee stock
plans .............................................................................
Cash dividends paid on common stock ($1.00 per
— (25,071)
—
share) ............................................................................
Stock dividend declared ...............................................
1,512
—
—
Balance at December 31, 2015 ..................................... $ 34,832 $ 424,078 $ 41,527 $ (37,692) $ (18,683) $ 444,062
— (25,071)
(32,675)
1,308
1,395
75
1,370
1,395
75
—
—
—
62
—
—
—
—
—
—
—
—
—
—
31,163
(120)
166
251
35
—
—
The accompanying notes are an integral part of these consolidated financial statements.
79
SOUTHSIDE BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
(in thousands)
OPERATING ACTIVITIES:
Net income ................................................................................................................ $
Adjustments to reconcile net income to net cash provided by operations:
Depreciation and net amortization ...........................................................................
Securities premium amortization (discount accretion), net .........................................
Accretion of loan (discounts) premium amortization, net...........................................
Provision for loan losses ........................................................................................
Stock compensation expense ..................................................................................
Deferred tax benefit ...............................................................................................
Tax benefit related to stock awards ..........................................................................
Net gain on sale of securities available for sale .........................................................
Impairment of investment in SFG Finance, LLC.......................................................
Net loss on premises and equipment ........................................................................
Gross proceeds from sales of loans held for sale .......................................................
Gross originations of loans held for sale ..................................................................
Net loss on other real estate owned ..........................................................................
Net change in:
Interest receivable ..........................................................................................
Other assets ...................................................................................................
Interest payable ..............................................................................................
Other liabilities ..............................................................................................
Net cash provided by operating activities ...............................................................
INVESTING ACTIVITIES:
Securities held to maturity:
Purchases ......................................................................................................
Maturities, calls and principal repayments ........................................................
Securities available for sale:
Purchases ......................................................................................................
Sales .............................................................................................................
Maturities, calls and principal repayments ........................................................
Proceeds from redemption of FHLB stock ...............................................................
Purchases of FHLB stock and other investments .......................................................
Net loans originated ...............................................................................................
Proceeds from sale of SFG loans .............................................................................
Net cash paid in acquisition ....................................................................................
Purchases of premises and equipment ......................................................................
Proceeds from sales of premises and equipment........................................................
Proceeds on bank owned life insurance ....................................................................
Proceeds from sales of other real estate owned .........................................................
Proceeds from sales of repossessed assets ................................................................
Net cash used in investing activities ......................................................................
(continued)
Years Ended December 31,
2014
2013
2015
43,997 $
20,833 $
41,190
8,624
21,978
(2,746)
8,343
1,395
(3,392)
(75)
(3,660)
—
584
70,014
(70,926)
430
(264)
325
129
(1,775)
72,981
(98,556)
23,322
(984,725)
660,092
278,995
8,603
(19,850)
(251,465)
—
—
(3,765)
26
—
640
2,274
(384,409)
3,458
18,522
(1,343)
14,938
1,086
(925)
72
(2,830)
2,755
14
11,007
(13,007)
137
2,512
(5,573)
(99)
4,477
56,034
3,844
28,147
(4,432)
8,879
911
(1,386)
(65)
(8,472)
—
8
25,509
(22,059)
41
(3,037)
(9,310)
(444)
182
59,506
—
21,889
(140,861)
168,673
(803,163)
650,391
272,073
12,872
(4,915)
(158,572)
67,575
(127,020)
(5,162)
8
—
535
6,199
(67,290)
(1,499,307)
826,735
379,661
5,819
(11,995)
(99,446)
—
—
(5,662)
—
4,165
480
3,935
(367,803)
80
SOUTHSIDE BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW (continued)
(in thousands)
Years Ended December 31,
2014
2013
2015
FINANCING ACTIVITIES:
Net change in deposits ................................................................................................ $
Net (decrease) increase in federal funds purchased and repurchase agreements.................
Proceeds from FHLB advances ....................................................................................
Repayment of FHLB advances ....................................................................................
Tax benefit related to stock awards ..............................................................................
Net issuance of common stock under employee stock plan .............................................
Purchase of common stock ..........................................................................................
Proceeds from the issuance of common stock ................................................................
Cash dividends paid ...................................................................................................
Payments for other financing activities .........................................................................
Net cash provided by financing activities .................................................................
82,251 $
(1,808)
23,022,132
(22,771,367)
75
166
—
1,370
(25,071)
—
307,748
45,253 $
1,378
7,102,277
(7,091,125)
(72)
1,074
—
1,213
(17,919)
(599)
41,480
175,882
(125)
20,739,951
(20,687,239)
65
155
(1,899)
1,396
(16,088)
—
212,098
Net (decrease) increase in cash and cash equivalents......................................................
Cash and cash equivalents at beginning of period ..........................................................
Cash and cash equivalents at end of period ................................................................... $
(3,680)
84,655
80,975 $
30,224
54,431
84,655 $
(96,199)
150,630
54,431
SUPPLEMENTAL DISCLOSURES FOR CASH FLOW INFORMATION:
Interest paid ............................................................................................................... $
Income taxes paid ...................................................................................................... $
19,725 $
8,500 $
17,055 $
4,300 $
18,412
4,000
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING
ACTIVITIES:
Loans transferred to other repossessed assets and real estate through foreclosure .............. $
Transfer of available for sale securities to held to maturity securities ............................... $
Adjustment to pension liability .................................................................................... $
5% stock dividend ...................................................................................................... $
Unsettled trades to purchase securities .......................................................................... $
Unsettled trades to sell securities ................................................................................. $
Common stock issued in acquisition ............................................................................ $
1,706 $
57,724 $
(5,176) $
32,675 $
(19,350) $
9,343 $
— $
5,211 $
— $
14,503 $
26,065 $
(5,982) $
57,202 $
151,891 $
5,793
452,884
(21,602)
17,060
(973)
3,933
—
The accompanying notes are an integral part of these consolidated financial statements.
81
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Southside Bancshares, Inc. and Subsidiaries
1. SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES
Organization. Southside Bancshares, Inc., incorporated in Texas in 1982, is a bank holding company for Southside Bank, a Texas
state bank headquartered in Tyler, Texas that was formed in 1960. We operate through 60 banking centers, 18 of which are located
in grocery stores. We consider our primary market areas to be East Texas, the greater Fort Worth, Texas area and the greater Austin,
Texas area. We are a community-focused financial institution that offers a full range of financial services to individuals, businesses,
municipal entities, and nonprofit organizations in the communities that we serve. These services include consumer and commercial
loans, deposit accounts, trust services, safe deposit services and brokerage services.
Basis of Presentation and Consolidation. The consolidated financial statements are prepared in conformity with U.S. generally
accepted accounting principles (“GAAP”) and include the accounts of Southside Bancshares, Inc. (the “Company”), and its wholly-
owned subsidiaries, Southside Bank (“Southside Bank” or “the Bank”), OmniAmerican Bancorp (“Omni”), SFG Finance, LLC
(formerly Southside Financial Group, LLC) which was a wholly-owned subsidiary of the Bank and was dissolved in April 2015, and
the nonbank subsidiaries. All significant intercompany accounts and transactions are eliminated in consolidation.
On December 17, 2014, we acquired OmniAmerican Bancorp, Inc., a bank holding company traded on the NASDAQ Global Market
and the holding company for OmniAmerican Bank, a federal savings association, headquartered in Fort Worth, Texas. See "Note 2 -
Acquisition" in the accompanying notes to consolidated financial statements included elsewhere in this report.
We determine if we have a controlling financial interest in an entity by first evaluating whether the entity is a voting interest entity or
a variable interest entity (“VIE”) under GAAP. Voting interest entities are entities in which the total equity investment at risk is
sufficient to enable the entity to finance itself independently and provides the equity holders with the obligation to absorb losses, the
right to receive residual returns and the right to make decisions about the entity’s activities. We consolidate voting interest entities in
which we have all, or at least a majority of, the voting interest. As defined in applicable accounting standards, VIEs are entities that
lack one or more of the characteristics of a voting interest entity. A controlling financial interest in a VIE is present when an
enterprise has both the power to direct the activities of the VIE that most significantly impact the VIEs economic performance and
an obligation to absorb losses or the right to receive benefits that could potentially be significant to the VIE. The enterprise with a
controlling financial interest, known as the primary beneficiary, consolidates the VIE.
Use of Estimates. In preparing consolidated financial statements in conformity with GAAP, management is required to make
estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and reported
amounts of revenues and expenses during the reporting period. These estimates are subjective in nature and involve matters of
judgment. Actual results could differ from these estimates. Material estimates that are particularly susceptible to significant change
in the near term relate to the determination of the allowance for loan losses, assumptions used in the defined benefit plan and the fair
values of financial instruments. The status of contingencies are particularly subject to change and significant assumptions used in
periodic evaluation of securities for other-than-temporary impairment. Certain prior-period amounts have been reclassified to
conform to the current period presentation.
Segment Information. Operating segments are components of a business about which separate financial information is available and
that are evaluated regularly by the chief operating decision-maker in deciding how to allocate resources and assess performance. Our
chief operating decision-maker uses consolidated results to make operating and strategic decisions. Therefore, we have determined
that our business is conducted in one reportable segment.
Stock Dividend. On April 13, 2015, our board of directors declared a 5% stock dividend to common stock shareholders of record as
of April 27, 2015, payable on May 14, 2015. On March 20, 2014, our board of directors declared a 5% stock dividend to common
stock shareholders of record as of April 10, 2014, payable on May 1, 2014. All share data for all periods presented has been adjusted
to give retroactive recognition to these stock dividends.
Business Combinations. Business combinations are accounted for using the acquisition method of accounting. Under this
accounting method, the acquired company's net assets are recorded at fair value on the date of acquisition, and the results of
operations of the acquired company are combined with our results from that date forward. Costs related to the acquisition are
expensed as incurred. The difference between the purchase price and the fair value of the net assets acquired (including intangible
assets with finite lives) is recorded as goodwill. The accounting policy for goodwill and intangible assets is summarized in this note
under the heading “Goodwill and Other Intangibles.”
82
Acquired loans (non-impaired and impaired) are initially measured at fair value as of the acquisition date. The fair value estimates
for acquired loans are based on the estimate of expected cash flows, both principal and interest and prepayments, discounted at
prevailing market interest rates. Credit discounts representing the principal losses expected over the life of the loan are also a
component of the initial fair value; therefore, an allowance for loan losses is not recorded at the acquisition date.
We evaluate acquired loans for impairment in accordance with the provisions of ASC 310-30, “Loans and Debt Securities Acquired
with Deteriorated Credit Quality” (“ASC 310-30”). Acquired loans are considered impaired if there is evidence of credit
deterioration since origination and if it is probable at time of acquisition that all contractually required payments will not be
collected. Expected cash flows at the acquisition date in excess of the fair value of the loans is referred to as the accretable yield and
recorded as interest income over the life of the loans. Acquired impaired loans are not classified as nonaccrual or nonperforming as
they are considered to be performing under the provisions of ASC 310-30. Subsequent to the acquisition date, increases in expected
cash flows will generally result in a recovery of any previously recorded allowance for loan loss, to the extent applicable, and/or a
reclassification from the nonaccretable difference to accretable yield, which will be recognized prospectively. The present value of
any decreases in expected cash flows after the acquisition date will generally result in an impairment charge recorded as a provision
for loan losses, resulting in an increase to the allowance for loan loss.
For acquired non-impaired loans, the difference between the acquisition date fair value and the contractual amounts due at the
acquisition date represents the fair value adjustment. Fair value adjustments may be discounts (or premiums) to a loan's cost basis
and are accreted (or amortized) to interest income over the loan's remaining contractual life using the level yield method.
Cash Equivalents. Cash equivalents, for purposes of reporting cash flow, include cash, amounts due from banks and federal funds
sold that have an initial maturity of less than 90 days. We maintain deposits with other institutions in amounts that exceed federal
deposit insurance coverage. Management regularly evaluates the credit risk associated with the counterparties to these transactions
and believes that we are not exposed to any significant credit risks on cash and cash equivalents.
Cash on hand or on deposit with the Federal Reserve Bank of $19.4 million and $13.4 million was required to meet regulatory
reserves and clearing requirements at December 31, 2015 and 2014, respectively.
Basic and Diluted Earnings per Common Share. Basic earnings per common share is based on net income divided by the weighted-
average number of common shares outstanding during the period. Diluted earnings per common share include the dilutive effect of
stock options granted using the treasury stock method. A reconciliation of the weighted-average shares used in calculating basic
earnings per common share and the weighted average common shares used in calculating diluted earnings per common share for the
reported periods is provided in “Note 3 – Earnings Per Share.”
Comprehensive Income. Comprehensive income includes all changes in shareholders’ equity during a period, except those resulting
from transactions with shareholders. Besides net income, other components of comprehensive income include the after tax effect of
changes in the fair value of securities available for sale, changes in the funded status of defined benefit retirement plans and the
noncredit portion of other-than-temporary impairment. Comprehensive income is reported in the accompanying consolidated
statements of changes in shareholders’ equity and in “Note 4 - Accumulated Other Comprehensive (Loss) Income.”
Loans. All loans are stated at principal outstanding net of unearned discount and other deferred expenses or fees. Interest income on
loans is recognized using the level yield method or simple interest method. Loans receivable that management has the intent and
ability to hold for the foreseeable future or until maturity or pay-off are reported at their outstanding principal adjusted for any
charge-offs, the allowance for loan losses, and any unamortized deferred fees or costs on originated loans and unamortized
premiums or discounts on purchased loans. A loan is considered impaired, based on current information and events, if it is probable
that we will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the
loan agreement. Substantially all of our impaired loans are collateral-dependent, and as such, are measured for impairment based on
the fair value of the collateral.
Loans Held For Sale. Loans originated and intended for sale in the secondary market are carried at the lower of aggregate cost or
fair value, as determined by aggregate outstanding commitments from investors or current investor yield requirements. Net
unrealized losses are recognized through a valuation allowance by charges to income. Gains or losses on sales of mortgage loans are
recognized based on the difference between the selling price and the carrying value of the related mortgage loans sold.
Loan Fees. We treat loan fees, net of direct costs, as an adjustment to the yield of the related loan over its term.
Allowance for Loan Losses. An allowance for loan losses is provided through charges to income in the form of a provision for loan
losses. Loans which management believes are uncollectible are charged against this account with subsequent recoveries, if any,
83
credited to the account. The amount of the allowance for loan losses is determined by management's evaluation of the quality and
inherent risks in the loan portfolio, economic conditions and other factors which warrant current recognition.
Nonaccrual Loans. A loan is placed on nonaccrual when principal or interest is contractually past due 90 days or more unless, in the
determination of management, the principal and interest on the loan are well collateralized and in the process of collection. In
addition, a loan is placed on nonaccrual when, in the opinion of management, the future collectability of interest and principal is not
expected. When classified as nonaccrual, accrued interest receivable on the loan is reversed and the future accrual of interest is
suspended. Payments of contractual interest are recognized as income only to the extent that full recovery of the principal balance of
the loan is reasonably certain.
Other Real Estate Owned and Foreclosed Assets. Other Real Estate Owned (“OREO”) includes real estate acquired in full or partial
settlement of loan obligations. OREO is initially carried at the fair value of the collateral net of estimated selling costs. Prior to
foreclosure, the recorded amount of the loan is written down, if necessary, to the appraised fair value of the real estate to be acquired,
less selling costs, by charging the allowance for loan losses. Any subsequent reduction in fair value net of estimated selling costs is
charged to noninterest expense. Costs of maintaining and operating foreclosed properties are expensed as incurred and included in
other expense in our income statement. Expenditures to complete or improve foreclosed properties are capitalized only if expected
to be recovered; otherwise, they are expensed.
Other foreclosed assets are held for sale and are initially recorded at fair value less estimated selling costs at the date of foreclosure,
by charging the allowance for loan losses. Subsequent to foreclosure, valuations are periodically performed by management and the
assets are carried at the lower of carrying amount or fair value less costs to sell. Foreclosed assets are included in other assets in the
accompanying consolidated balance sheets. Expenses from operations and changes in the valuation allowance are included in
noninterest expense.
Securities. We use the specific identification method to determine the basis for computing realized gain or loss. We account for debt
and equity securities as follows:
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.
Available for Sale (“AFS”). Debt and equity 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 of 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.
Unrealized gains and losses on AFS securities are excluded from earnings and reported net of tax in Accumulated Other
Comprehensive Income until realized. Declines in the fair value of securities below their cost are reflected in earnings as realized
losses to the extent the impairment is deemed to be other-than-temporary credit losses. The amount of the impairment related to
other factors is recognized in other comprehensive income unless there is no ability or intent to hold to recovery.
Premiums are amortized and discounts are accreted to maturity, or in the case of mortgage-backed securities (“MBS”), over the
estimated life of the security, using the level yield interest method. Declines in the fair value of HTM and AFS securities below their
cost that are deemed to be other-than-temporary are reflected in earnings as realized losses. In estimating other-than-temporary
impairment losses, we consider (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial
condition and near-term prospects of the issuer, and (3) our intent and ability to retain our investment in the issuer for a period of
time sufficient to allow for any anticipated recovery in fair value. Gains and losses on the sale of securities are recorded in the
month of the trade date and are determined using the specific identification method.
Securities with Limited Marketability. Securities with limited marketability, such as stock in the FHLB, are carried at cost and
assessed for other-than-temporary impairment.
Fair Value Option. We elect the fair value option for MBS purchased at a significant premium.
Premises and Equipment. Land is carried at cost. Bank premises and equipment are stated at cost, net of accumulated
depreciation. Depreciation is computed on a straight line basis over the estimated useful lives of the related assets. Useful lives are
estimated to be 15 to 40 years for premises and 3 to 10 years for equipment. Leasehold improvements are generally depreciated over
84
the lesser of the term of the respective leases or the estimated useful lives of the improvements. Maintenance and repairs are
charged to expense as incurred while major improvements and replacements are capitalized.
Bank-Owned Life Insurance. The Company has purchased life insurance policies on certain key executives. Bank-owned life
insurance is recorded at the amount that can be realized under the insurance contract at the balance sheet date, which is the cash
surrender value adjusted for other charges or other amounts due that are probable at settlement. Changes in the net cash surrender
value of the policies, as well as insurance proceeds received are reflected in non-interest income on the consolidated statements of
income and are not subject to income taxes.
Goodwill and Other Intangibles. Other intangible assets consist primarily of core deposits. Intangible assets with definite useful
lives are amortized on an accelerated basis over their estimated life. Goodwill and intangible assets that have indefinite useful lives
are subject to at least an annual impairment test and more frequently if a triggering event occurs. If any such impairment is
determined, a write-down is recorded.
During the year ended December 31, 2015, we changed our annual goodwill impairment testing date from December 31st to October
1st of each year, commencing on October 1, 2015. The change in the testing date did not impact the financial statements. During
the year ended December 31, 2015, the fair value of the reporting unit was greater than the carrying value of the reporting unit. As a
result, we did not record any goodwill impairment for the year ended December 31, 2015, and we had no cumulative goodwill
impairment.
For the years ended December 31, 2015, 2014 and 2013, amortization expense related to our core deposit intangible was $2.2
million, $187,000, and $146,000, respectively.
Repurchase Agreements. We sell certain securities under agreements to repurchase. The agreements are treated as collateralized
financing transactions and the obligations to repurchase securities sold are reflected as a liability in the accompanying consolidated
balance sheets. The dollar amount of the securities underlying the agreements remains in the asset account. We determine the type
of securities to pledge. Generally we pledge U.S. agency MBS.
Revenue Recognition. The following summarizes our revenue recognition policies as they relate to certain noninterest income line
items in the consolidated statements of income.
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.
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 are based on either the market value of the assets managed or the services provided.
Advertising Costs. Advertising costs are expensed as incurred. Advertising expense was $1.0 million for both years ended
December 31, 2015 and 2014, and $1.3 million for the year ended December 31, 2013.
Income Taxes. We file a consolidated federal income tax return. Income tax expense represents the taxes expected to be paid or
returned for current year taxes adjusted for the change in deferred tax assets and liabilities. Deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing
assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected
to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of changes in tax rates is recognized in income in the period the change occurs.
FHLB Advance Option Fees. Option fees paid to the FHLB giving us the option to enter into long-term advance commitments at
specified interest rates in the future are capitalized and reviewed for impairment. Once the option is exercised, the FHLB advance
option fee is amortized over the term of the advance as interest expense.
Fair Value of Financial Instruments. Fair values of financial instruments are estimated using relevant market information and other
assumptions. Fair value estimates involve uncertainties and matters of significant judgment. In cases where quoted market prices
are not available, fair values are based on estimates using present value or other estimation techniques. Those techniques are
significantly affected by the assumptions used, including the discount rate and estimates of future cash flows.
85
Defined Benefit Pension Plan. Defined benefit pension plan costs are charged to retirement expense and included in “salaries and
employee benefits” on the consolidated statements of income. Defined benefit pension obligations and the annual pension costs are
determined by independent actuaries and through the use of a number of assumptions that are reviewed by management. These
assumptions include a compensation rate increase, a discount rate used to determine the current benefit obligation and a long-term
expected rate of return on plan assets. Net periodic defined benefit pension expense includes service cost, interest cost based on the
assumed discount rate, an expected return on plan assets, amortization of prior service cost and amortization of net actuarial gains or
losses. Prior service costs include the impact of plan amendments on the liabilities and are amortized over the future service periods
of active employees expected to receive benefits under the plan. Actuarial gains and losses result from experience different from that
assumed and from changes in assumptions. Amortization of actuarial gains and losses is included as a component of net periodic
defined benefit pension cost.
The plan obligations and related assets of our defined benefit pension plan are presented in “Note 11 – Employee Benefits” to our
consolidated financial statements included in this report.
Share-Based Awards. Share-based compensation transactions are recognized as compensation cost in the income statement based on
their fair values on the date of the grant and recorded over the vesting period.
Loss Contingencies. Loss contingencies, including claims and legal actions arising in the ordinary course of business are recorded
as liabilities when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated.
Trust Assets. Assets of our trust department, other than cash on deposit at Southside Bank, are not included in the accompanying
financial statements because they are not our assets.
Subsequent Events. On January 28, 2016, the Board of Directors approved a Stock Repurchase Plan. The Board authorized the
repurchase, from time to time, of up to 5% of the issued and outstanding common stock, or approximately 1.27 million shares, in
open market purchases and privately negotiated transactions at prevailing market prices. The Company has no obligation to
repurchase any shares under the Stock Repurchase Plan and may suspend or discontinue it at any time.
Subsequent to December 31, 2015 and through March 2, 2016, we purchased 424,701 shares of common stock at an average price of
$22.89 pursuant to the Stock Repurchase Plan.
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, FASB issued ASU 2015-14, “Revenue from Contracts with
Customers (Topic 606): Deferral of the Effective Date,” which effectively delayed the adoption date by one year. We are required to
adopt ASU 2014-09 in the first quarter of fiscal 2018 and 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 have not yet selected a transition method nor have we determined the impact of adoption on our
consolidated financial statements.
In April 2015, the FASB issued ASU 2015-05, “Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40) –
Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement.” ASU 2015-05 affects the accounting for fees paid by a
customer in cloud computing arrangements such as (i) software as a service, (ii) platform as a service (iii) infrastructure as a service
and (iv) other similar hosting arrangements. If a cloud computing arrangement includes a software license, then the customer should
account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud
computing arrangement does not include a software license, the customer should account for the arrangement as a service contract.
ASU 2015-05 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. Early
adoption is permitted. The adoption of this guidance is not expected to have a significant impact on our consolidated financial
statements.
In May 2015, the FASB issued ASU 2015-07, “Disclosures for Investments in Certain Entities that Calculate Net Asset Value per
Share.” ASU 2015-07 eliminates the current requirement to categorize within the fair value hierarchy investments whose fair values
are measured at net asset value (“NAV”). Instead, entities will be required to disclose the fair values of such investments so that
financial statement users can reconcile amounts reported in the fair value hierarchy table and the amounts reported on the balance
sheet. ASU 2015-07 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015.
Early adoption is permitted. The adoption of this guidance is not expected to have a significant impact on our consolidated financial
statements.
86
In September 2015, the FASB issued ASU 2015-16, “Business Combinations (Topic 805) – Simplifying the Accounting for
Measurement-Period Adjustments.” ASU 2015-16 eliminates the requirement for an acquirer in a business combination to account
for measurement-period adjustments retrospectively. Instead, acquirers must recognize measurement-period adjustments during the
period in which the amounts are determined, including the effect on earnings of any amounts that would have been recorded in
previous periods if the accounting had been completed at the acquisition date. ASU 2015-16 is effective for fiscal years, and interim
periods within those fiscal years, beginning after December 15, 2015. Early adoption is permitted. We adopted this guidance early
for the year ended December 31, 2015. See “Note 2 – Acquisition” for details regarding measurement-period adjustments and the
effect on our consolidated financial statements.
In January 2016, the FASB issued ASU 2016-1, “Financial Instruments – Overall (Subtopic 825-10) – Recognition and
Measurement of Financial Assets and Financial Liabilities." 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 securities in combination with the entity's other deferred tax assets. ASU 2016-01 is effective for fiscal years,
and interim periods within those fiscal years, beginning after December 15, 2017. Early adoption is permitted. The adoption of this
guidance is not expected to have a significant impact on our consolidated financial statements.
2. ACQUISITION
On December 17, 2014, we acquired 100% of the outstanding stock of OmniAmerican Bancorp, Inc. and its wholly-owned
subsidiary OmniAmerican Bank (collectively, “Omni”) headquartered in Fort Worth, Texas. Omni operated 14 banking offices in
Fort Worth, Texas and surrounding areas. We acquired Omni to further expand our presence in the growing Fort Worth market. The
operations of Omni were merged into the Company as of the date of the acquisition. The results of Omni's operations for December
17 - December 31, 2014 are included in the consolidated financial statements and are not separately quantifiable subsequent to the
business combination.
Pursuant to the merger agreement and our closing stock price on December 17, 2014 of $29.39, we issued 5.2 million shares of our
common stock and paid $157.4 million in cash for all outstanding shares of OmniAmerican Bancorp stock and outstanding stock
options. In accordance with the merger agreement, each outstanding share of common stock of OmniAmerican Bancorp, Inc. was
converted into (a) 0.4459 of a share of common stock of the Company and (b) $13.125 in cash (the “Per Share Merger
Consideration”). Each Omni restricted stock award and stock option, whether vested or unvested, that was outstanding immediately
prior to the effective time of the merger, was cancelled and converted to the right to receive the Per Share Merger Consideration in
the case of the restricted stock awards or, in the case of the stock options, the excess, if any, of the Per Share Merger Consideration
over the exercise price of such stock option. The consideration associated with the non-vested restricted awards and the unvested
stock options is excluded from the total purchase consideration. The total merger consideration for the Omni merger was $298.3
million.
The fair value of assets acquired, excluding goodwill, totaled $1.36 billion, including total loans of $763.3 million and total
investment securities of $428.4 million. Total fair value of the liabilities assumed totaled $1.13 billion, including deposits of $801.3
million. Goodwill represents consideration transferred in excess of the fair value of the net assets acquired. As of December 31,
2015, the Company recognized $69.3 million in initial goodwill associated with the Omni merger. The goodwill resulting from the
acquisition represents the value expected from the opportunities to strategically grow our franchise in the greater Fort Worth market
area and to enhance our operations through customer synergies and efficiencies, thereby providing enhanced customer
service. Goodwill is not expected to be deductible for tax purposes.
87
The Omni merger was accounted for using the purchase method of accounting and accordingly, purchased assets, including
identifiable intangible assets, and assumed liabilities were recorded at their respective acquisition date fair values. The components
of the consideration paid are shown in the following table (in thousands).
Fair value of consideration transferred:
Common stock issued.......................................................................................................................... $
Cash .....................................................................................................................................................
Less: Post-combination share-based compensation expense (1) ..........................................................
Reimbursement of contract cancellation fees ............................................................................
Non-compete agreements ..........................................................................................................
Total consideration transferred ...................................................................................................................... $
151,891
157,408
8,874
1,815
300
298,310
(1) In connection with the merger, we recorded the unvested stock options and the non-vested restricted stock awards as a post-combination
expense.
The purchase price allocation as reported at December 31, 2014 was preliminary and was subject to final determination and
valuation of the fair value of assets acquired and liabilities assumed. Within the measurement period which closed during the fourth
quarter 2015, we made purchase accounting adjustments to goodwill, consisting primarily of a $1.4 million adjustment to the fair
value of Visa Class B stock included in other investments on the consolidated balance sheets, not previously recorded, which upon
the filing of the short-period Federal Income Tax return for Omni and its subsidiaries and other immaterial adjustments was partially
offset by a $1.0 million decrease to taxes receivable included in other assets on the consolidated balance sheets.
The estimated fair values of the assets acquired and liabilities assumed as of the closing date of the transaction adjusted for the
subsequent measurement period adjustments are shown in the following table (in thousands).
As Originally
Reported (1)
Measurement
Period
Adjustments
Adjusted
Balances
Cash, cash equivalents, and amounts due from banks .......................................$
Other investments..............................................................................................
Securities available for sale ...............................................................................
Loans held for sale ............................................................................................
Loans .................................................................................................................
Property and equipment ....................................................................................
Bank owned life insurance ................................................................................
Other assets .......................................................................................................
Core deposit intangible .....................................................................................
Goodwill ...........................................................................................................
Deposits .............................................................................................................
Short-term borrowings ......................................................................................
Federal Home Loan Bank advances ..................................................................
Deferred tax liability, net ...................................................................................
Other liabilities ..................................................................................................
21,214 $
15,698
428,447
748
763,327
58,928
44,964
13,409
8,570
69,338
(801,327)
(7,000)
(308,516)
(3,244)
(6,246)
— $
1,345
—
—
159
—
—
(970)
—
148
—
—
—
(682)
—
21,214
17,043
428,447
748
763,486
58,928
44,964
12,439
8,570
69,486
(801,327)
(7,000)
(308,516)
(3,926)
(6,246)
(1) The estimated fair value as of the acquisition date, December 17, 2014, as previously reported in our Form 10-K for the year ended
December 31, 2014.
$
298,310 $
—
$
298,310
88
The following table reflects the changes in the carrying amount of our goodwill for the year ended December 31, 2015 (in
thousands):
Goodwill
Balance as of December 31, 2014 ......................................................................................................... $
Plus: measurement period adjustments ..............................................................................................
Balance as of December 31, 2015 ........................................................................................................ $
91,372
148
91,520
The determination of estimated fair values of the acquired loans required the Company to make certain estimates about discount
rates, future expected cash flows, market conditions and other future events that are highly subjective in nature. Based on such
factors as past due status, nonaccrual status, bankruptcy status, and credit risk ratings, the acquired loans were divided into loans
with evidence of credit quality deterioration, which are accounted for under ASC 310-30 (purchased credit impaired “PCI”), and
loans that do not meet this criteria, which are accounted for under ASC 310-20 (purchased non-impaired). Expected cash flows, both
principal and interest, were estimated based on key assumptions covering such factors as prepayments, default rates and severity of
loss given default. These assumptions were developed using both Omni’s historical experience and the portfolio characteristics as of
the acquisition date as well as available market research. The fair value estimates for acquired loans were based on the amount and
timing of expected principal, interest and other cash flows, including expected prepayments, discounted at prevailing market interest
rates applicable to the types of acquired loans, which we considered to be level 3 fair value measurements. Deposit liabilities
assumed in the acquisition of Omni were segregated into two categories: time-deposits (i.e., deposit accounts with a stated maturity)
and demand deposits, both using level 2 fair value measurements. In determining fair value of time deposits, the Company
discounted the contractual cash flows of the deposit accounts using prevailing market interest rates for time deposit accounts of
similar type and duration. For demand deposits, the acquisition date outstanding balance of the assumed demand deposit accounts
approximates fair value. The acquisition date fair value assigned to FHLB advance borrowings was determined based on prepayment
penalty quotes for these assumed FHLB advances, which we considered to be level 2 fair value measurements. Acquisition date fair
values for AFS securities were determined using Level 1 or Level 2 inputs consistent with the methods discussed further in “Note 12
- Fair Value Measurement”. The remaining acquisition date fair values represent either Level 2 fair value measurements (other
investments, loans held for sale, and short term borrowings) or Level 3 fair value measurements (property and equipment and core
deposit intangible).
We recognized a core deposit intangible of $8.6 million which will be amortized using an accelerated method over a 10 year period
consistent with expected future cash flows.
For the year ended December 31, 2014, the Company incurred a total of pre-tax merger related expenses associated with the Omni
merger of approximately $15.9 million which consisted of $4.4 million of legal and consulting fees and $2.6 million of software
expenses due to canceling of contracts. These expenses were recognized in the consolidated statements of income in professional
fees and software and data processing expense, respectively. In addition, approximately $8.9 million was immediately recognized
as share-based compensation at closing as a result of the vesting provisions of the underlying awards. The share-based
compensation expense is a component of salaries and employee benefits in the consolidated statements of income.
We incurred cost of $599,000 directly related to the issuance of the shares related to the merger which were offset against additional
paid-in-capital in the consolidated statements of changes in equity. We also recorded non-compete agreements for $300,000 that
will be amortized using the straight-line method over three years in conjunction with the merger.
Loans acquired with Omni were measured at fair value at the acquisition date with no carryover of any allowance for loan losses.
Loans were segregated into those loans considered to be performing and those considered purchased credit impaired (“PCI”). PCI
loans are loans acquired with evidence of deteriorated credit quality for which it was probable, at acquisition, that all contractually
required cash flows would not be collected.
89
The table below details the PCI loan portfolio at acquisition date (in thousands):
Purchased Credit
Impaired Loans at
Acquisition Date
Contractually required principal and interest payments .....................................................................$
Nonaccretable difference ...................................................................................................................
Cash flows expected to be collected ..................................................................................................
Accretable difference .........................................................................................................................
Fair value of loans acquired with a deterioration of credit quality .....................................................$
46,647
23,262
23,385
1,898
21,487
Acquired loans that were considered performing at acquisition date and therefore not subject to ASC 310-30 are shown below (in
thousands):
Fair Value at
Acquisition Date
Contractual
Amounts
Receivable
Cash Flows Not
Expected to be
Collected at
Acquisition Date (1)
Real Estate Loans:
Construction ..................................................................................$
1-4 Family Residential ..................................................................
Commercial ..................................................................................
Commercial Loans ..........................................................................
Loans to Individuals ........................................................................
Total Loans ......................................................................................$
49,625 $
282,577
152,087
59,007
199,292
742,588 $
56,877 $
608,986
190,920
72,583
261,280
1,190,646 $
3,947
248,669
15,692
8,602
34,689
311,599
(1) Cash flows not expected to be collected relate to estimated credit losses and expected prepayments.
Unaudited pro forma net income for the years ended December 31, 2014 and 2013 would have been $33.3 million and $38.8 million,
respectively, and revenues would have been $209.0 million and $221.6 million for the same years, respectively, had the acquisition
occurred as of January 1, 2013.
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):
Years Ended December 31,
2014
2013
2015
Basic and Diluted Earnings:
Net Income .............................................................................................................. $
Basic weighted-average shares outstanding: .............................................................
Add: Stock options ..................................................................................................
Diluted weighted-average shares outstanding .........................................................
Basic Earnings Per Share:
Net Income .............................................................................................................. $
Diluted Earnings Per Share:
Net Income .............................................................................................................. $
43,997 $
25,350
85
25,435
1.74 $
1.73 $
20,833 $
41,190
20,028
99
20,127
19,709
42
19,751
1.04 $
2.09
1.04 $
2.09
For the year ended December 31, 2015, there were approximately 33,000 antidilutive options. For the years ended December 31,
2014 and 2013 there were approximately 10,000 and 4,000 antidilutive options, respectfully.
90
4. ACCUMULATED OTHER COMPREHENSIVE (LOSS) INCOME
The changes in accumulated other comprehensive (loss) income by component are as follows (in thousands):
Year Ended December 31, 2015
Unrealized Gains
(Losses) on Securities
Pension Plans
Beginning balance, net of tax ................................................$
6,238 $
— $
Other
OTTI
Net Prior
Service
(Cost)
Credit
Net Gain
(Loss)
(21,815) $
7 $
Total
(15,570)
Other comprehensive (loss) income:
Other comprehensive (loss) income before
reclassifications ...................................................................
Reclassified from accumulated other comprehensive
income .................................................................................
Income tax benefit (expense) ...............................................
Net current-period other comprehensive (loss) income, net
of tax ......................................................................................
Ending balance, net of tax ......................................................$
(6,305)
(3,660)
3,488
—
—
—
(62 )
2,806
(3,561)
(16 )
27
2,448
(1,839)
(1,228)
1,676
(6,477)
(239) $
—
— $
(51 )
(44) $
3,415
(18,400) $
(3,113)
(18,683)
Year Ended December 31, 2014
Unrealized Gains
(Losses) on Securities
Pension Plans
Beginning balance, net of tax ................................................$
(8,656) $
— $
(12) $
Other
OTTI
Net Prior
Service
(Cost)
Credit
Net Gain
(Loss)
(12,369) $
Total
(21,037)
Other comprehensive income (loss):
Other comprehensive income (loss) before
reclassifications ...................................................................
Reclassified from accumulated other comprehensive
income .................................................................................
Income tax (expense) benefit .................................................
Net current-period other comprehensive income (loss), net
of tax ......................................................................................
25,743
(2,830)
(8,019)
14,894
—
—
—
—
43
(15,574)
10,212
(14 )
(10 )
1,042
5,086
(1,802)
(2,943)
19
(9,446)
5,467
Ending balance, net of tax ......................................................$
6,238 $
— $
7
$
(21,815) $
(15,570)
91
Beginning balance, net of tax ................................................$
Other comprehensive (loss) income:
Other comprehensive (loss) income before
reclassifications ...................................................................
Reclassified from accumulated other comprehensive
income .................................................................................
Income tax benefit (expense) ...............................................
Net current-period other comprehensive (loss) income, net
of tax ......................................................................................
Ending balance, net of tax ......................................................$
Year Ended December 31, 2013
Unrealized Gains
(Losses) on Securities
Pension Plans
Other
30,500 $
OTTI
(1,140) $
Net Prior
Service
(Cost)
Credit
Net Gain
(Loss)
(26,670) $
248 $
Total
2,938
(50,810)
753
(357 )
19,215
(31,199)
(9,431)
21,085
1,001
(614)
(43 )
140
2,787
(7,701)
(5,686)
12,910
(39,156)
(8,656) $
1,140
(260 )
— $
(12) $
14,301
(12,369) $
(23,975)
(21,037)
The reclassifications out of accumulated other comprehensive (loss) income into net income are presented below (in
thousands):
Year ended December 31,
2014
2015
2013
Unrealized gains and losses on available for sale securities:
Realized gain on sale of securities (1) ................................................................... $
Impairment losses (2) ............................................................................................
Total before tax ....................................................................................................
Tax expense .........................................................................................................
Net of tax ............................................................................................................. $
Amortization of pension plan:
Net loss (3) ............................................................................................................ $
Prior service credit (3) ...........................................................................................
Total before tax ....................................................................................................
Tax benefit ...........................................................................................................
Net of tax ............................................................................................................. $
Total reclassifications for the period, net of tax ....................................................... $
3,660 $
—
3,660
(1,281)
2,379 $
(2,448) $
16
(2,432)
851
(1,581) $
798 $
2,830 $
—
2,830
(991)
1,839 $
(1,042) $
14
(1,028)
359
(669) $
1,170 $
8,472
(42)
8,430
(2,951)
5,479
(2,787)
43
(2,744)
960
(1,784)
3,695
(1) Listed as net gain on sale of securities available for sale on the consolidated statements of income.
(2) Included in other in noninterest income on the consolidated statements of income.
(3) These accumulated other comprehensive income components are included in the computation of net periodic pension cost
presented in “Note 11 - Employee Benefits.”
92
5. SECURITIES
The amortized cost, gross unrealized gains and losses, carrying value, and estimated fair value of investment and mortgage-backed
securities as of December 31, 2015 and 2014, are reflected in the tables below (in thousands):
December 31, 2015
Recognized in OCI
Gross
Gross
Unrealized
Unrealized
Losses
Gains
Not recognized in OCI
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Carrying
Value
Amortized
Cost
Estimated
Fair Value
AVAILABLE FOR SALE
Investment Securities:
$
61 $
380 $
103,587 $
—
$
— $
103,587
U.S. Treasury ........................... $ 103,906
State and Political
Subdivisions .............................
Other Stocks and Bonds ...........
236,534
12,772
Other Equity Securities ............
6,052
Mortgage-backed Securities: (1)
8,323
63
—
611
45
36
244,246
12,790
6,016
580,621
Residential ...............................
512,116
Commercial .............................
Total ........................................... $ 1,452,001 $
9,120
466
18,033 $
1,239
7,231
9,542 $ 1,460,492 $
588,502
505,351
—
—
—
—
—
— $
—
—
—
244,246
12,790
6,016
588,502
—
—
505,351
— $ 1,460,492
HELD TO MATURITY
Investment Securities:
State and Political
Subdivisions ............................. $ 389,997
$
Mortgage-backed Securities: (1)
Residential ...............................
Commercial .............................
Total ........................................... $ 793,154 $
31,430
371,727
4,772 $
9,273 $
385,496 $
13,061
$
1,363 $
397,194
—
1,233
6,005 $
51
5,539
14,863 $
31,379
367,421
784,296 $
2,018
4,232
19,311 $
1
2,480
3,844 $
33,396
369,173
799,763
93
December 31, 2014
Recognized in OCI
Gross
Gross
Unrealized
Unrealized
Losses
Gains
Amortized
Cost
Not recognized in OCI
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Carrying
Value
Estimated
Fair Value
AVAILABLE FOR SALE
Investment Securities:
14,883
$
30 $
7 $
14,906 $
—
$
— $
14,906
U.S. Treasury .......................... $
U.S. Government Agency
Debentures .............................
State and Political
Subdivisions ...........................
Other Stocks and Bonds ........
4,835
260,535
13,086
—
8,055
153
Other Equity Securities ...........
6,061
—
Mortgage-backed Securities:(1)
952,481
Residential .............................
176,112
Commercial............................
Total .......................................... $ 1,427,993 $
12,624
1,743
22,605 $
HELD TO MATURITY
Investment Securities:
7
906
—
12
807
151
4,828
267,684
13,239
6,049
964,298
177,704
1,890 $ 1,448,708 $
—
—
—
—
—
—
—
—
4,828
267,684
13,239
6,049
—
—
— $
—
—
— $
964,298
177,704
1,448,708
State and Political Subdivisions $ 393,525
$
5,168 $
9,870 $
388,823 $
12,181
$
756 $
400,248
Mortgage-backed Securities: (1)
Residential ..............................
Commercial ............................
Total .......................................... $ 653,436 $
52,287
207,624
—
—
5,168 $
70
6,345
16,285 $
52,217
201,279
642,319 $
2,871
5,461
20,513 $
—
489
1,245 $
55,088
206,251
661,587
(1) All mortgage-backed securities issued and/or guaranteed by U.S. government agencies or U.S. government-sponsored enterprises.
During the second quarter of 2015, the Company transferred commercial mortgage-backed securities with a fair value of $57.7 million
from AFS to HTM. The unrealized gain on the securities transferred from AFS to HTM was $1.3 million ($864,000, net of tax) at the
date of transfer based on the fair value of the securities on the transfer date. We transferred these securities due to overall balance sheet
strategies and our management has the current intent and ability to hold these securities until maturity. The overall net unrealized loss on
the transferred securities included in accumulated other comprehensive income will be amortized over the remaining life of the
underlying security as an adjustment of the yield on those securities. There were no securities transferred from AFS to HTM during
2014.
94
The following table represents the unrealized loss on securities for the years ended December 31, 2015 and 2014 (in thousands):
Less Than 12 Months
More Than 12 Months
Total
Fair Value
Unrealized
Loss
Fair Value
Unrealized
Loss
Fair Value
Unrealized
Loss
As of December 31, 2015:
AVAILABLE FOR SALE
Investment Securities:
U.S. Treasury .......................................... $
State and Political Subdivisions ..............
Other Stocks and Bonds ..........................
Other Equity Securities ..........................
Mortgage-backed Securities:
64,172 $
15,550
2,954
6,016
380 $
116
45
36
— $
19,270
—
—
Residential ..............................................
Commercial ............................................
Total .......................................................... $
229,514
422,316
740,522 $
1,215
7,039
8,831 $
3,817
5,110
28,197 $
— $
495
—
—
24
192
711 $
64,172 $
34,820
2,954
6,016
233,331
427,426
768,719 $
380
611
45
36
1,239
7,231
9,542
HELD TO MATURITY
Investment Securities:
State and Political Subdivisions .............. $
24,340 $
214 $
62,240 $
1,149 $
86,580 $
1,363
Mortgage-backed Securities:
Residential ..............................................
Commercial ............................................
Total .......................................................... $
1,717
193,710
219,767 $
1
2,439
2,654 $
—
2,481
64,721 $
—
41
1,190 $
1,717
196,191
284,488 $
1
2,480
3,844
As of December 31, 2014:
AVAILABLE FOR SALE
Investment Securities:
U.S. Treasury .......................................... $
U.S. Government Agency
Debentures ..............................................
State and Political Subdivisions ..............
Other Equity Securities ...........................
Mortgage-backed Securities:
4,968 $
7 $
— $
— $
4,968 $
4,828
28,155
6,049
7
90
12
—
44,269
—
—
816
—
4,828
72,424
6,049
Residential ..............................................
Commercial ............................................
Total .......................................................... $
347,777
21,103
412,880 $
573
54
743 $
27,632
10,116
82,017 $
234
97
1,147 $
375,409
31,219
494,897 $
7
7
906
12
807
151
1,890
HELD TO MATURITY
Investment Securities:
State and Political Subdivisions .............. $
7,843 $
31 $
64,946 $
725 $
72,789 $
756
Mortgage-backed Securities:
Commercial ............................................
Total .......................................................... $
—
7,843 $
—
31 $
44,144
109,090 $
489
1,214 $
44,144
116,933 $
489
1,245
95
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. The Company considers 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 HTM or AFS 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 the noncredit portion to other comprehensive income. 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 December 31, 2015.
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 December 31, 2015.
On December 13, 2013, management decided to sell AFS Other Stocks and Bonds, with a $2.7 million amortized cost basis in pooled
trust preferred securities (“TRUPs”) as a result of new guidance effective in 2014 as listed in Section 419 of the Dodd-Frank Act (Volcker
Rule). Those securities were structured products with cash flows dependent upon securities issued by U.S. financial institutions,
including banks and insurance companies. The sale of these securities resulted in a loss of approximately $959,000 in 2013. Until the
final rules of the Volcker Rule were issued by the agencies on December 10, 2013, management did not intend to sell the securities and it
was not more likely than not that we would be required to sell the security before the anticipated recovery of its amortized cost basis.
The following table presents a roll forward of the credit losses recognized in earnings on these AFS debt securities held at the end of the
year presented (in thousands):
Balance, beginning of period ........................................................................................................................... $
Additions for credit losses recognized on debt securities that had previously incurred impairment losses ...
Sales of credit impaired securities .................................................................................................................
Balance, end of period ...................................................................................................................................... $
There were no credit losses recognized in earnings on AFS debt securities held at December 31, 2015 or 2014.
Interest income recognized on securities for the years presented (in thousands):
Year Ended
December 31,
2013
3,256
42
(3,298)
—
Years Ended December 31,
2014
2015
2013
U.S. Treasury ....................................................................................................................$
U.S. Government Agency Debentures ..............................................................................
State and Political Subdivisions ........................................................................................
Other Stocks and Bonds ....................................................................................................
Other Equity Securities .....................................................................................................
Mortgage-backed Securities .............................................................................................
Total interest income on securities ......................................................................................$
1,132 $
118
22,474
213
118
33,661
57,716 $
264 $
104
24,077
208
—
28,207
52,860 $
17
440
25,620
205
—
20,085
46,367
96
Of the $3.7 million in net securities gains from the AFS portfolio for the year ended December 31, 2015, there were $4.9 million in
realized gains and approximately $1.2 million in realized losses. Of the $2.8 million in net securities gains from the AFS portfolio for the
year ended December 31, 2014, there were $8.2 million in realized gains and approximately $5.4 million in realized losses. Of the $8.5
million in net securities gains from the AFS portfolio for the year ended December 31, 2013, there were $14.9 million in realized gains
and $6.4 million in realized losses. There were no sales from the HTM portfolio during the years ended December 31, 2015, 2014 or
2013.
The amortized cost, carrying value, and fair value of securities at December 31, 2015, are presented below by contractual maturity.
Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations. MBS are
presented in total by category due to the fact that MBS typically are issued with stated principal amounts, and the securities are backed
by pools of mortgages that have loans with varying maturities. The characteristics of the underlying pool of mortgages, such as fixed-
rate or adjustable-rate, as well as prepayment risk, are passed on to the certificate holder. The term of a mortgage-backed pass-through
security thus approximates the term of the underlying mortgages and can vary significantly due to prepayments.
Available for sale securities:
Investment Securities
December 31, 2015
Amortized Cost
Fair Value
(in thousands)
Due in one year or less ............................................................................................................. $
Due after one year through five years ......................................................................................
Due after five years through ten years .....................................................................................
Due after ten years ...................................................................................................................
Mortgage-backed securities and other equity securities .............................................................
Total .................................................................................................................................... $
21,207 $
13,438
133,958
184,609
353,212
1,098,789
1,452,001 $
21,313
13,773
134,507
191,030
360,623
1,099,869
1,460,492
Held to maturity securities:
Investment Securities
December 31, 2015
Carrying Value
Fair Value
(in thousands)
Due in one year or less ............................................................................................................. $
Due after one year through five years ......................................................................................
Due after five years through ten years .....................................................................................
Due after ten years ...................................................................................................................
Mortgage-backed securities ........................................................................................................
Total .................................................................................................................................... $
2,437 $
16,196
57,508
309,355
385,496
398,800
784,296 $
2,434
16,322
58,719
319,719
397,194
402,569
799,763
Investment and MBS with book values of $1.33 billion and $1.12 billion were pledged as of December 31, 2015 and 2014, respectively,
to collateralize FHLB advances, repurchase agreements and public funds or for other purposes as required by law.
Securities with limited marketability, such as FHLB stock and other investments, are carried at cost, which approximates fair value and
are assessed for other-than-temporary impairment. These securities have no maturity date.
97
6. LOANS AND ALLOWANCE FOR PROBABLE LOAN LOSSES
Loans in the accompanying consolidated balance sheets are classified as follows (in thousands):
December 31, 2015 December 31, 2014
Real Estate Loans:
Construction .......................................................................................................... $
1-4 Family Residential ..........................................................................................
Commercial ...........................................................................................................
Commercial Loans ..................................................................................................
Municipal Loans ......................................................................................................
Loans to Individuals ................................................................................................
Total Loans (1) ..........................................................................................................
Less: Allowance for Loan Losses .........................................................................
Net Loans ................................................................................................................ $
438,247 $
655,410
635,210
242,527
288,115
172,244
2,431,753
19,736
2,412,017 $
267,830
690,895
468,171
226,460
257,492
270,285
2,181,133
13,292
2,167,841
(1) Includes approximately $581.1 million and $763.3 million as of December 31, 2015 and 2014, respectively, of loans acquired with
the Omni acquisition on December 17, 2014. These loans were measured at fair value at the acquisition date with no carryover of
allowance for loan loss. The allowance for loan loss recorded on acquired loans for the year ended December 31, 2015 totaled
$629,000.
Loans to Affiliated Parties
In the normal course of business, we make loans to certain of our own executive officers and directors and their related interests. As
of December 31, 2015, 2014 and 2013, these loans totaled $8.1 million, $7.1 million and $5.5 million, respectively. These loans
represented 1.8%, 1.7%, and 2.1% of shareholders' equity as of December 31, 2015, 2014 and 2013, respectively.
Real Estate Construction Loans
Our construction loans are collateralized by property located primarily in the market areas we serve. A majority of our construction
loans will be owner-occupied upon completion. Construction loans for speculative projects are financed, but these typically have
secondary sources of repayment and collateral. Our construction loans have both adjustable and fixed interest rates during the
construction period. Construction loans to individuals are typically priced and made with the intention of granting the permanent
loan on the property. Speculative and commercial construction loans are subject to underwriting standards similar to that of the
commercial portfolio. Owner occupied 1-4 family residential construction loans are subject to the underwriting standards of the
permanent loan.
Real Estate 1-4 Family Residential Loans
Residential loan originations are generated by our loan officers, in-house origination staff, marketing efforts, present customers,
walk-in customers and referrals from real estate agents and builders. We focus our residential lending efforts primarily on the
origination of loans secured by first mortgages on owner-occupied, 1-4 family residences. Substantially all of our 1-4 family
residential loan originations are secured by properties located in or near our market areas.
Our 1-4 family residential loans generally have maturities ranging from five to 30 years. These loans are typically fully amortizing
with monthly payments sufficient to repay the total amount of the loan. Our 1-4 family residential loans are made at both fixed and
adjustable interest rates.
Underwriting for 1-4 family residential loans includes debt-to-income analysis, credit history analysis, appraised value and down
payment considerations. Changes in the market value of real estate can affect the potential losses in the portfolio.
Commercial Real Estate Loans
Commercial real estate consists of $583.4 million of commercial real estate loans, $46.8 million of loans secured by multi-family
properties and $5.0 million of loans secured by farm land. Commercial real estate loans primarily include loans collateralized by
commercial office buildings, retail, medical facilities and offices, warehouse facilities, hotels and churches. In determining whether
to originate commercial real estate loans, we generally consider such factors as the financial condition of the borrower and the debt
service coverage of the property. Commercial real estate loans are made at both fixed and adjustable interest rates for terms
generally up to 20 years.
98
Commercial Loans
Our commercial loans are diversified loan types including short-term working capital loans for inventory and accounts receivable
and short- and medium-term loans for equipment or other business capital expansion. Management does not consider there to be a
concentration of risk in any one industry type, other than the medical industry. Loans to borrowers in the medical industry include
all loan types listed above for commercial loans. Collateral for these loans varies depending on the type of loan and financial
strength of the borrower. The primary source of repayment for loans in the medical community is cash flow from continuing
operations.
In our commercial loan underwriting, we assess the creditworthiness, ability to repay, and the value and liquidity of the collateral
being offered. Terms of commercial loans are generally commensurate with the useful life of the collateral offered.
Municipal Loans
We have a specific lending department that makes loans to municipalities and school districts primarily throughout the state of
Texas. Municipal loans outside the state of Texas have been limited to adjoining states. The majority of the loans to municipalities
and school districts have tax or revenue pledges and in some cases are additionally supported by collateral. Municipal loans made
without a direct pledge of taxes or revenues are usually made based on some type of collateral that represents an essential service.
Loans to Individuals
Substantially all originations of our loans to individuals are made to consumers in our market areas. The majority of loans to
individuals are collateralized by titled equipment, which are primarily automobiles. Loan terms vary according to the type and value
of collateral, length of contract and creditworthiness of the borrower. The underwriting standards we employ for consumer loans
include an application, a determination of the applicant's payment history on other debts, with the greatest weight being given to
payment history with us, and an assessment of the borrower's ability to meet existing obligations and payments on the proposed
loan. Although creditworthiness of the applicant is a primary consideration, the underwriting process also includes a comparison of
the value of the collateral, if any, in relation to the proposed loan amount. Most of our loans to individuals are collateralized, which
management believes should assist in limiting our exposure.
During the fourth quarter of 2014, we closed on the sale of all of our subprime automobile loans purchased through SFG, as well as
the repossessed assets held by SFG. As a result, the carrying amount of SFG loans totaling $70.3 million were sold and were
therefore not included in our loan portfolio as of December 31, 2014. There were no subsequent loan pool purchases through SFG
from December 2014 until the time it was dissolved in April 2015.
Allowance for Loan Losses
The allowance for loan losses is based on the most current review of the loan portfolio and is a result of multiple processes. First,
the bank utilizes historical data to establish general reserve amounts for each class of loans. The historical charge off figure is
further adjusted through qualitative factors that include general trends in past dues, nonaccruals and classified loans to more
effectively and promptly react to both positive and negative movements. Second, our lenders have the primary responsibility for
identifying problem loans based on customer financial stress and underlying collateral. These recommendations are reviewed by
senior loan administration, the special assets department, and the loan review department. Third, the loan review department
independently reviews the portfolio on an annual basis. The loan review department follows a board-approved annual loan review
scope. The loan review scope encompasses a number of considerations including the size of the loan, the type of credit extended,
the seasoning of the loan and the performance of the loan. The loan review scope, as it relates to size, focuses more on larger dollar
loan relationships, typically, for example, aggregate debt of $500,000 or greater. The loan review officer also reviews specific
reserves compared to general reserves to determine trends in comparative reserves as well as losses not reserved for prior to charge-
off to determine the effectiveness of the specific reserve process.
At each review, a subjective analysis methodology is used to grade the respective loan. Categories of grading vary in severity from
loans that do not appear to have a significant probability of loss at the time of review to loans that indicate a probability that the
entire balance of the loan will be uncollectible. If full collection of the loan balance appears unlikely at the time of review, estimates
of future expected cash flows or appraisals of the collateral securing the debt are used to determine the necessary allowances. The
internal loan review department maintains a list of all loans or loan relationships that are graded as having more than the normal
degree of risk associated with them. In addition, a list of specifically reserved loans or loan relationships of $150,000 or more is
updated on a quarterly basis in order to properly determine necessary allowances and keep management informed on the status of
attempts to correct the deficiencies noted with respect to the loan.
99
We calculate historical loss ratios for pools of similar loans with similar characteristics based on the proportion of actual charge-offs
experienced to the total population of loans in the pool. The historical gross loss ratios are updated based on actual charge-off
experience quarterly and adjusted for qualitative factors. Our pools of similar loans include consumer loans and loans secured by 1-4
residential family loans.
Prior to September 30, 2014, SFG loans included in loans to individuals that experienced past due status or extension of maturity
characteristics were reserved for at higher levels based on the circumstances associated with each specific loan. In general, the
reserves for SFG were calculated based on the past due status of the loan. For reserve purposes, the portfolio was segregated by past
due status and by the remaining term variance from the original contract. During repayment, loans that paid late took longer to
repay than the original contract. Additionally, some loans may have been granted extensions for extenuating payment circumstances
and evaluated for troubled debt classification. The remaining term extensions increased the risk of collateral deterioration and,
accordingly, reserves were increased to recognize this risk.
Industry and our own experience indicates that a portion of our loans will become delinquent and a portion of the loans will require
partial or full charge-off. Regardless of the underwriting criteria utilized, losses may be experienced as a result of various factors
beyond our control, including, among other things, changes in market conditions affecting the value of properties used as collateral
for loans and problems affecting the credit of the borrower and the ability of the borrower to make payments on the loan. Our
determination of the appropriateness of the allowance for loan losses is based on various considerations, including an analysis of the
risk characteristics of various classifications of loans, previous loan loss experience, specific loans which would have loan loss
potential, delinquency trends, estimated fair value of the underlying collateral, current economic conditions, and geographic and
industry loan concentration.
Credit Quality Indicators
We categorize loans into risk categories on an ongoing basis based on relevant information about the ability of borrowers to service
their debt such as: current financial information, historical payment experience, credit documentation, public information, and
current economic trends, among other factors. We use the following definitions for risk ratings:
•
•
•
•
Pass (Rating 1 – 4) – This rating is assigned to all satisfactory loans. This category, by definition, consists of acceptable
credit. Credit and collateral exceptions should not be present, although their presence would not necessarily prohibit a
loan from being rated Pass, if deficiencies are in process of correction. These loans are not included in the Watch List.
Pass Watch (Rating 5) – These loans require some degree of special treatment, but not due to credit quality. This
category does not include loans specially mentioned or adversely classified; however, particular attention must be
accorded such credits due to characteristics such as:
(cid:405) A lack of, or abnormally extended payment program;
(cid:405) A heavy degree of concentration of collateral without sufficient margin;
(cid:405) A vulnerability to competition through lesser or extensive financial leverage; and
(cid:405) A dependence on a single or few customers or sources of supply and materials without suitable substitutes or
alternatives.
Special Mention (Rating 6) – A Special Mention asset has potential weaknesses that deserve management’s close
attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the
asset or in the institution’s credit position at some future date. Special Mention assets are not adversely classified and do
not expose an institution to sufficient risk to warrant adverse classification.
Substandard (Rating 7) – Substandard loans are inadequately protected by the current sound worth and paying capacity
of the obligor or of the collateral pledged, if any. Loans so classified must have a well-defined weakness or weaknesses
that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the Bank will sustain
some loss if the deficiencies are not corrected.
• Doubtful (Rating 8) – Loans classified as Doubtful have all the weaknesses inherent in those classified Substandard with
the added characteristic that the weaknesses make collection or liquidation, in full, on the basis of currently known facts,
conditions and values, highly questionable and improbable.
100
All accruing loans are reserved for as a group of similar type credits and included in the general portion of the allowance for loan
losses. Loans to individuals and 1-4 family residential loans, including loans not accruing, are collectively evaluated and included in
the general portion of the allowance for loan losses. All loans considered troubled debt restructurings (“TDR”) are evaluated
individually for further impairment.
The general portion of the loan loss allowance is reflective of historical charge-off levels for similar loans adjusted for changes in
current conditions and other relevant factors. These factors are likely to cause estimated losses to differ from historical loss
experience and include:
• Changes in lending policies or procedures, including underwriting, collection, charge-off, and recovery procedures;
• Changes in local, regional and national economic and business conditions, including entry into new markets;
• Changes in the volume or type of credit extended;
• Changes in the experience, ability, and depth of lending management;
• Changes in the volume and severity of past due, nonaccrual, restructured, or classified loans;
• Changes in charge-off trends;
• Changes in loan review or Board oversight;
• Changes in the level of concentrations of credit; and
• Changes in external factors, such as competition and legal and regulatory requirements.
These factors are also considered for the Omni purchased portfolio specifically in regards to changes in past due,
nonaccrual and charge-off trends.
101
The following tables detail activity in the allowance for loan losses by portfolio segment for the periods presented (in thousands):
Year Ended December 31, 2015
Real Estate
1-4 Family
Residential
Construction
Commercial
Commercial
Loans
Municipal
Loans
Loans to
Individuals
Total
Balance at beginning of
period (2) ......................... $
Provision (reversal) for
loan losses ....................
Loans charged off .........
Recoveries of loans
charged off ...................
2,456
$
2,822 $
3,025 $
3,279 $
716
$
994 $
13,292
1,711
(24)
207
(284)
(58)
115
1,467
—
85
3,500
(336)
258
(249 )
1,691
8,343
(3,688)
(4,355)
153
—
1,896
2,456
Balance at end of period ... $
4,350
$
2,595 $
4,577 $
6,596 $
725
$
893 $
19,736
Year Ended December 31, 2014
Real Estate
Construction
1-4 Family
Residential
Commercial
Commercial
Loans
Municipal
Loans
Loans to
Individuals (1)
Total
Balance at beginning of
period ............................... $
Provision (reversal) for
loan losses ......................
Loans charged off ...........
Recoveries of loans
charged off .....................
2,142
$
3,277 $
2,572 $
1,970 $
668
$
8,248 $ 18,877
172
(14)
156
(514)
(22)
81
445
—
8
1,204
(66)
171
48
—
—
13,583
14,938
(22,461)
(22,563)
1,624
2,040
Balance at end of period (2) . $
2,456
$
2,822 $
3,025 $
3,279 $
716
$
994 $ 13,292
(1) Of the $22.5 million in charge-offs recorded in the Loans to Individuals category for the year ended December 31, 2014,
approximately $7.1 million relate to the write-down of SFG loans to fair value in connection with the sale of the subprime
automobile loans that was completed in the fourth quarter 2014.
(2) Loans acquired with the Omni acquisition were measured at fair value on December 17, 2014 with no carryover of allowance for
loan loss.
Year Ended December 31, 2013
Real Estate
Construction
1-4 Family
Residential Commercial
Commercial
Loans
Municipal
Loans
Loans to
Individuals Other
Total
Balance at beginning of
period ............................. $
Provision (reversal) for
loan losses ....................
Distribution of other
allowance .....................
Loans charged off .........
Recoveries of loans
charged off ...................
2,355
$
3,545 $
2,290 $
3,158 $
633 $
7,373
$ 1,231 $ 20,585
(290)
—
—
77
(40)
—
(319)
91
10
—
(67)
339
(909)
—
(512)
233
35
—
—
—
10,073
—
8,879
1,231
(1,231)
—
(12,676)
— (13,574)
2,247
—
2,987
Balance at end of period ... $
2,142
$
3,277 $
2,572 $
1,970 $
668 $
8,248
$ — $ 18,877
102
The following tables present the balance in the allowance for loan losses by portfolio segment based on impairment method (in
thousands):
Construction
Real Estate
1-4 Family
Residential
Commercial
Commercial
Loans
Municipal
Loans
Loans to
Individuals
Total
As of December 31, 2015
Ending balance –
individually evaluated for
impairment (1) ....................... $
Ending balance –
collectively evaluated for
impairment ..........................
12
$
25 $
137 $
4,599 $
13
$
105 $
4,891
4,338
2,570
4,440
1,997
712
788
14,845
Balance at end of period ........ $
4,350
$
2,595 $
4,577 $
6,596 $
725
$
893 $
19,736
Construction
Real Estate
1-4 Family
Residential
Commercial
Commercial
Loans
Municipal
Loans
Loans to
Individuals
Total
As of December 31, 2014
Ending balance –
individually evaluated for
impairment (1) ....................... $
Ending balance –
collectively evaluated for
impairment ..........................
43
$
102 $
26 $
242 $
14
$
103 $
530
2,413
2,720
2,999
3,037
702
891
12,762
Balance at end of period ........ $
2,456
$
2,822 $
3,025 $
3,279 $
716
$
994 $
13,292
(1) Purchase credit impaired (“PCI”) loans were measured at fair value at acquisition and did not have any associated allowance for
loan losses as of December 31, 2014. As of December 31, 2015, there was approximately $629,000 of allowance for loan losses
associated with PCI loans.
103
The following tables present the recorded investment in loans by portfolio segment based on impairment method (in thousands):
Real Estate
1-4 Family
Residential
Construction
Commercial
Commercial
Loans
Municipal
Loans
Loans to
Individuals
Total
December 31, 2015
Loans individually
evaluated for
impairment .................. $
Loans collectively
evaluated for
impairment ..................
Purchased credit
impaired loans ..............
Total ending loans
balance ........................ $
508
$
1,751 $
3,757 $
14,250 $
637
$
258 $
21,161
437,518
646,590
628,405
220,199
287,478
171,782
2,391,972
221
7,069
3,048
8,078
—
204
18,620
438,247
$
655,410 $
635,210 $
242,527 $
288,115
$
172,244 $
2,431,753
Construction
Real Estate
1-4 Family
Residential
Commercial
Commercial
Loans
Municipal
Loans
Loans to
Individuals
Total
December 31, 2014
Loans individually
evaluated for
impairment .................. $
Loans collectively
evaluated for
impairment (1) ...............
Purchased credit
impaired loans (2) ..........
Total ending loans
balance ........................ $
2,461
$
2,936 $
1,605 $
1,011 $
699
$
310 $
9,022
264,584
680,658
463,564
216,272
256,793
268,894
2,150,765
785
7,301
3,002
9,177
—
1,081
21,346
267,830
$
690,895 $
468,171 $
226,460 $
257,492
$
270,285 $
2,181,133
(1) Includes purchased non impaired loans which were measured at fair value at acquisition and did not have an associated
allowance for loan loss as of December 31, 2014.
(2) PCI loans were measured at fair value at acquisition and did not have an associated allowance for loan loss as of
December 31, 2014.
104
The following tables set forth loans by credit quality indicator for the periods presented (in thousands):
Pass
Pass Watch
Special
Mention (1)
Substandard (1) Doubtful (1)
Total
December 31, 2015
Real Estate Loans:
434,893 $
Construction ................................. $
643,498
1-4 Family Residential ...................
620,117
Commercial ..................................
204,775
Commercial Loans ..........................
286,415
Municipal Loans .............................
170,558
Loans to Individuals ........................
Total .............................................. $ 2,360,256 $
— $
1,754 $
1,403
—
716
—
2
1,636
—
1,738
1,063
—
2,121 $
6,191 $
1,576 $
4,915
14,988
27,681
637
478
50,275 $
24 $
3,958
105
7,617
—
1,206
12,910 $
438,247
655,410
635,210
242,527
288,115
172,244
2,431,753
(1) Includes PCI loans comprised of $95,000 special mention, $3.6 million substandard, and $9.9 million doubtful as of
December 31, 2015.
Real Estate Loans:
Pass
Pass Watch
Special
Mention (1)
Substandard (1) Doubtful
Total
December 31, 2014
677,559
260,183 $
Construction .................................... $
1-4 Family Residential ......................
Commercial .....................................
Commercial Loans .............................
Municipal Loans ................................
Loans to Individuals ...........................
Total ................................................. $ 2,118,189 $
455,394
199,306
256,543
269,204
862 $
1,394 $
1,453
2,416
781
—
16
1,706
2,569
1,044
—
—
5,528 $
6,713 $
5,363 $
9,167
7,792
25,102
949
871
49,244 $
28 $
1,010
—
227
—
194
267,830
690,895
468,171
226,460
257,492
270,285
1,459 $
2,181,133
(1) Includes PCI loans comprised of $0.7 million special mention and $17.8 million substandard as of December 31, 2014.
Nonperforming Assets and Past Due Loans
Nonaccrual loans are loans 90 days or more delinquent and collection in full of both the principal and interest is not
expected. Additionally, some loans that are not delinquent may be placed on nonaccrual status due to doubts about full collection of
principal or interest. When a loan is categorized as nonaccrual, the accrual of interest is discontinued and any accrued balance is
reversed for financial statement purposes. Payments received on nonaccrual loans are applied to the outstanding principal balance.
Payments of contractual interest are recognized as income only to the extent that full recovery of the principal balance of the loan is
reasonably certain. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought
current and future payments are reasonably assured. Other factors, such as the value of collateral securing the loan and the financial
condition of the borrower, are considered in judgments as to potential loan loss.
Nonaccrual loans and accruing loans past due more than 90 days include both smaller balance homogeneous loans that are
collectively evaluated for impairment and individually classified impaired loans.
PCI loans are recorded at fair value at acquisition date. Although the PCI loans may be contractually delinquent, we do not classify
these loans as past due or nonperforming as the loans were written down to fair value at the acquisition date and the accretable yield
is recognized in interest income over the remaining life of the loan. However, subsequent to acquisition, we re-assess PCI loans for
additional impairment and record additional impairment in the event we conclude it is probable that we will be unable to collect all
cash flows originally expected to be collected at acquisition plus any additional cash flows expected to be collected due to changes
in estimates after acquisition. All such PCI loans for which we recognize subsequent impairment are reported as impaired loans in
the financial statements.
105
The following table sets forth nonperforming assets for the periods presented (in thousands):
Nonaccrual loans (1) .......................................................................................................... $
Accruing loans past due more than 90 days (1) .................................................................
Restructured loans (2) ........................................................................................................
Other real estate owned ....................................................................................................
Repossessed assets ...........................................................................................................
Total Nonperforming Assets ............................................................................................. $
At
December 31,
2015
At
December 31,
2014
20,526 $
3
11,143
744
64
32,480 $
4,096
4
5,874
1,738
565
12,277
(1) Excludes PCI loans measured at fair value at acquisition.
(2) Includes $7.5 million in PCI loans restructured during the year ended December 31, 2015.
Foreclosed assets include other real estate owned and repossessed assets. For 1-4 family residential real estate properties, a loan is
recognized as a foreclosed property once legal title to the real estate property has been received upon completion of foreclosure or
the borrower has conveyed all interest in the residential property through a deed in lieu of foreclosure. There were $67,000 in loans
secured by 1-4 family residential properties for which formal foreclosure proceedings were in process as of December 31, 2015.
The following table sets forth the recorded investment in nonaccrual by class of loans for the periods presented (in thousands):
Real Estate Loans:
Construction .................................................................................................. $
1-4 Family Residential ..................................................................................
Commercial ...................................................................................................
Commercial Loans ..........................................................................................
Loans to Individuals ........................................................................................
Total ................................................................................................................. $
(1) Excludes PCI loans measured at fair value at acquisition.
Nonaccrual Loans (1)
December 31, 2015
December 31, 2014
508 $
1,847
2,816
13,896
1,459
20,526 $
716
2,017
675
416
272
4,096
Accruing loans past due more than 90 days were not significant at December 31, 2015 or 2014.
Loans are considered impaired if, based on current information and events, it is probable we will be unable to collect the scheduled
payments of principal and interest when due according to the contractual terms of the loan agreement. Impairment is evaluated in
total for smaller-balance loans of a similar nature and on an individual loan basis for other loans. The measurement of loss on
impaired loans is generally based on the fair value of the collateral if repayment is expected solely from the collateral or the present
value of the expected future cash flows discounted at the historical effective interest rate stipulated in the loan agreement. In
measuring the fair value of the collateral, in addition to relying on third party appraisals, we use assumptions, such as discount rates,
and methodologies, such as comparison to the recent selling price of similar assets, consistent with those that would be utilized by
unrelated third parties performing a valuation. Loans that are evaluated and determined not to meet the definition of an impaired
loan are reserved for at the general reserve rate for its appropriate class.
At the time a loss is probable in the collection of contractual amounts, specific reserves are allocated. Loans are charged off to the
liquidation value of the collateral net of liquidation costs, if any, when deemed uncollectible or as soon as collection by liquidation is
evident.
106
The following tables set forth impaired loans by class of loans for the periods presented (in thousands):
December 31, 2015
Unpaid Contractual
Principal Balance
Recorded Investment
With Allowance
Related
Allowance for
Loan Losses
Real Estate Loans:
Construction ....................................................................... $
1-4 Family Residential .......................................................
Commercial ........................................................................
Commercial Loans ...............................................................
Municipal Loans ...................................................................
Loans to Individuals .............................................................
Total (1) .................................................................................. $
1,320 $
1,842
4,756
29,844
637
288
38,687 $
508 $
1,751
4,636
21,385
637
257
29,174 $
12
25
137
4,599
13
105
4,891
(1) Includes of $8.0 million of PCI loans that experienced deterioration in credit quality subsequent to the acquisition date.
December 31, 2014
Unpaid Contractual
Principal Balance
Recorded Investment
With Allowance
Related
Allowance for
Loan Losses
Real Estate Loans:
Construction ....................................................................... $
1-4 Family Residential .......................................................
Commercial ........................................................................
Commercial Loans ...............................................................
Municipal Loans ...................................................................
Loans to Individuals .............................................................
Total (1) .................................................................................. $
3,183 $
4,023
1,622
1,162
699
321
11,010 $
2,461 $
3,854
1,605
1,011
699
310
9,940 $
43
108
26
242
14
103
536
(1) PCI loans are excluded from this table as there was no evidence of further deterioration in credit quality as of
December 31, 2014 that would indicate it was probable that our recorded investment in these loans would not be
recoverable.
There were no impaired loans recorded without an allowance for the years ended December 31, 2015 or 2014.
The following tables present the aging of the recorded investment in past due loans by class of loans (in thousands):
30-59 Days
Past Due
60-89 Days
Past Due
December 31, 2015
Greater than
90 Days
Past Due
Total Past
Due
Current (1)
Total
Real Estate Loans:
Construction .................................... $
1-4 Family Residential ....................
Commercial .....................................
Commercial Loans ............................
Municipal Loans ................................
Loans to Individuals ..........................
Total ................................................... $
121 $
3,703
359
527
—
2,457
7,167 $
208 $
1,080
361
335
—
285
2,269 $
587 $
438,247
437,660 $
5,564
655,410
649,846
2,009
635,210
633,201
1,000
242,527
241,527
—
288,115
288,115
3,350
172,244
168,894
12,510 $ 2,419,243 $ 2,431,753
258 $
781
1,289
138
—
608
3,074 $
107
30-59 Days
Past Due
60-89 Days
Past Due
December 31, 2014
Greater than
90 Days
Past Due
Total Past
Due
Current (1)
Total
Real Estate Loans:
Construction .................................... $
1-4 Family Residential ....................
Commercial .....................................
Commercial Loans ............................
Municipal Loans ................................
Loans to Individuals ..........................
Total ................................................... $
376 $
3,511
1,203
397
—
362
5,849 $
(1) Includes PCI loans measured at fair value.
42 $
509
—
3
—
66
620 $
716 $
2,017
675
416
—
276
4,100 $
1,134 $
6,037
1,878
816
—
704
267,830
266,696 $
690,895
684,858
468,171
466,293
226,460
225,644
257,492
257,492
270,285
269,581
10,569 $ 2,170,564 $ 2,181,133
The following table sets forth average recorded investment and interest income recognized on impaired loans by class of loans for
the periods presented (in thousands):
December 31, 2015
December 31, 2014
December 31, 2013
Average
Recorded
Investment (1)
Interest
Income
Recognized (1)
Average
Recorded
Investment (1)
Interest
Income
Recognized (1)
Average
Recorded
Investment
Interest
Income
Recognized
Real Estate Loans:
Construction ...................... $
1-4 Family Residential ......
Commercial .......................
Commercial Loans ..............
Municipal Loans ..................
Loans to Individuals ............
Total ..................................... $
1,518 $
3,410
3,323
13,807
824
725
23,607 $
— $
61
64
256
37
4
422 $
1,346 $
3,511
2,173
1,286
750
1,920
10,986 $
4 $
67
52
26
41
3
193 $
1,707 $
2,915
1,972
1,935
292
3,149
11,970 $
—
76
72
19
16
449
632
(1) Excludes PCI loans measured at fair value at acquisition that have not experienced further deterioration in credit
quality subsequent to the acquisition date.
108
Troubled Debt Restructurings
The restructuring of a loan is considered a TDR if both (i) the borrower is experiencing financial difficulties and (ii) the creditor has
granted a concession. Concessions may include interest rate reductions or below market interest rates, restructuring amortization
schedules and other actions intended to minimize potential losses.
The following tables set forth the recorded balance at December 31, 2015 and 2014 of loans considered to be TDRs that were
restructured during the periods presented (dollars in thousands):
Year Ended December 31, 2015
Extend
Amortization
Period
Interest Rate
Reductions
Combination (1)
Total
Modifications
Number of
Contracts
Real Estate Loans:
1-4 Family Residential ................................... $
Commercial ..................................................
Commercial Loans ...........................................
Loans to Individuals.........................................
Total ................................................................ $
— $
438
13,249
60
13,747 $
80 $
—
—
—
80 $
255 $
1,290
7,507
130
9,182 $
335
1,728
20,756
190
23,009
3
4
12
14
33
Year Ended December 31, 2014
Extend
Amortization
Period
Interest Rate
Reductions
Combination (1)
Total
Modifications
Number of
Contracts
Real Estate Loans:
Construction ................................................. $
1-4 Family Residential ...................................
Commercial ..................................................
Commercial Loans ...........................................
Loans to Individuals.........................................
Total ................................................................ $
1,746 $
—
558
291
5
2,600 $
— $
280
—
—
10
290 $
— $
374
391
172
68
1,005 $
1,746
654
949
463
83
3,895
1
3
3
6
8
21
(1) These modifications may include an extension of the amortization period, interest rate reduction, and/or converting the loan
to interest-only for a limited period of time.
The majority of loans restructured as TDRs during the year ended December 31, 2015 were modified with maturity extensions.
Interest continues to be charged on principal balances outstanding during the extended term. Therefore, the financial effects of the
recorded investment of loans restructured as TDRs during the years ended December 31, 2015 and 2014 were not significant.
During the year ended December 31, 2015, a $12.4 million commercial loan, previously impaired and placed in nonaccrual status
was restructured as a TDR. In addition, a $7.5 million PCI commercial loan was restructured as a TDR during the year ended
December 31, 2015 and resulted in additional provision of approximately $633,000. Generally, the loans identified as TDRs were
previously reported as impaired loans prior to restructuring and therefore the modification did not impact our determination of the
allowance for loan losses.
On an ongoing basis, the performance of the TDRs is monitored for subsequent payment default. Payment default for TDRs is
recognized when the borrower is 90 days or more past due. For the year ended December 31, 2015, there were $627,000 of TDRs
currently in default. For the year ended December 31, 2014, there were no material TDRs in default. Payment defaults for TDRs
did not significantly impact the determination of the allowance for loan loss in either period presented.
At December 31, 2015 and 2014, there were no commitments to lend additional funds to borrowers whose terms have been modified
in TDRs.
109
Purchased Credit Impaired Loans
The following table presents the outstanding principal balance and carrying value for PCI loans for the periods presented (in
thousands):
Outstanding principal balance ...............................................................................$
Carrying amount ....................................................................................................$
December 31, 2015 December 31, 2014
32,572
21,346
27,644 $
18,620 $
The following table presents the changes of the accretable yield during the period for PCI loans (in thousands):
Balance at beginning of period ..............................................................................$
Additions ...............................................................................................................
Additions due to acquisition ..................................................................................
Reclassifications from Nonaccretable Discount ....................................................
Accretion ...............................................................................................................
Balance at end of period ........................................................................................$
December 31, 2015 December 31, 2014
—
—
1,898
—
(78)
1,820
1,820 $
—
—
2,739
(2,066 )
2,493 $
7. PREMISES AND EQUIPMENT
December 31,
2015
December 31,
2014
(in thousands)
Premises ...................................................................................................................................... $
Furniture and equipment .............................................................................................................
Less: accumulated depreciation ...................................................................................................
Total .......................................................................................................................................... $
124,626 $
35,069
159,695
51,766
107,929 $
121,740
36,045
157,785
44,925
112,860
During the years ended December 31, 2015 and 2014, assets with accumulated depreciation of $1.2 million and $614,000,
respectively, were written off.
Depreciation expense was $8.1 million, $3.3 million, and $3.7 million for the years ended December 31, 2015, 2014 and 2013,
respectively.
110
8. DEPOSITS
December 31,
2015
December 31,
2014
(in thousands)
Noninterest bearing demand deposits:
Private accounts ................................................................................................................... $
Public accounts .....................................................................................................................
Total noninterest bearing demand deposits ........................................................................
651,992 $
20,478
672,470
640,450
20,564
661,014
Interest bearing deposits:
Private accounts:
Savings deposits ..............................................................................................................
Money market demand deposits .......................................................................................
Platinum money market deposits ......................................................................................
Interest bearing checking .................................................................................................
NOW demand deposits ....................................................................................................
Certificates and other time deposits of $250,000 or more ..................................................
Certificates and other time deposits under $250,000..........................................................
Total private accounts ....................................................................................................
Public accounts:
Savings deposits ..............................................................................................................
Money market demand deposits .......................................................................................
Platinum money market deposits ......................................................................................
Interest bearing checking .................................................................................................
NOW demand deposits ....................................................................................................
Certificates and other time deposits of $250,000 or more ..................................................
Certificates and other time deposits under $250,000..........................................................
Total public accounts .....................................................................................................
Total interest bearing deposits ..........................................................................................
Total deposits .......................................................................................................................... $
233,157
341,432
323,526
177,409
253,041
57,209
498,901
1,884,675
15
22,518
383,716
6,679
151,974
311,824
21,536
898,262
2,782,937
3,455,407 $
226,267
379,149
291,473
11,863
409,737
60,408
493,125
1,872,022
9
22,656
398,333
35
132,909
268,302
19,137
841,381
2,713,403
3,374,417
For the years ended December 31, 2015, 2014 and 2013, interest expense on time deposits of $250,000 or more was $1.4 million,
$1.1 million and $1.4 million, respectively.
At December 31, 2015, the scheduled maturities of certificates and other time deposits, including public accounts, were as follows
(in thousands):
2016 .........................$
2017 .........................
2018 .........................
2019 .........................
2020 .........................
2021 and thereafter ...
$
501,440
160,560
136,379
47,368
37,875
5,848
889,470
At December 31, 2015, we had $85.3 million in brokered certificates of deposit (“CDs”) that represented 2.5% of our deposits.
Approximately $64.6 million of our brokered CDs were non-callable with a weighted average cost of 56 basis points and remaining
maturities of five to thirteen months. The remaining $20.7 million were long terms CDs that mature within five years and have
short-term calls that we control. These brokered CDs are reflected in the CDs under $250,000 category. At December 31, 2014, we
had $23.4 million in brokered CDs. We utilized long-term brokered CDs because the brokered CDs better matched overall ALCO
objectives at the time of issuance by protecting us with fixed rates should interest rates increase, while providing us options to call
the funding should interest rates decrease. Our current policy allows for a maximum of $180 million in brokered CDs.
At December 31, 2015 and 2014, we had approximately $11.6 million and $10.7 million, respectively, in deposits from related
parties, including directors and named executive officers.
The aggregate amount of demand deposit overdrafts that have been reclassified as loans were $637,000 and $2.8 million at
December 31, 2015 and 2014, respectively.
111
9. SHORT-TERM BORROWINGS
Information related to short-term borrowings is provided in the table below:
Years Ended December 31,
2015
2014
(dollars in thousands)
Federal funds purchased and repurchase agreements
Balance at end of period............................................................................................................... $
Average amount outstanding during the period (1) ........................................................................
Maximum amount outstanding during the period (2) ....................................................................
Weighted average interest rate during the period (3) .....................................................................
Interest rate at end of period ........................................................................................................
$
2,429
2,277
2,429
0.1%
0.1%
4,237
1,886
4,237
0.2%
1.4%
FHLB advances
Balance at end of period............................................................................................................... $ 645,407
382,417
Average amount outstanding during the period (1) .......................................................................
656,431
Maximum amount outstanding during the period (2) ....................................................................
Weighted average interest rate during the period (3) .....................................................................
Interest rate at end of period ........................................................................................................
0.3%
0.5%
$ 297,368
62,240
297,368
0.9%
0.4%
(1)
(2)
(3)
The average amount outstanding during the period was computed by dividing the total daily outstanding principal balances by
the number of days in the period.
The maximum amount outstanding at any month-end during the period.
The weighted average interest rate during the period was computed by dividing the actual interest expense by the average
balance outstanding during the period.
Southside Bank has three unsecured lines of credit for the purchase of overnight federal funds at prevailing rates with Frost Bank,
TIB – The Independent Bankers Bank and Comerica Bank for $30.0 million, $15.0 million and $7.5 million, respectively. Southside
Bank has a $5.0 million line of credit with Frost Bank to be used to issue letters of credit and at December 31, 2015, we had one
outstanding letter of credit for $195,000. At December 31, 2015, the amount of additional funding Southside Bank could obtain
from FHLB using unpledged securities at FHLB was approximately $606.9 million, net of FHLB stock purchases required. There
were no federal funds purchased at December 31, 2015 or 2014. Southside Bank obtained no letters of credit from FHLB as
collateral for its public fund deposits.
Southside Bank enters into sales of securities under agreements to repurchase (“repurchase agreements”). These repurchase
agreements totaled $2.4 million and $4.2 million at December 31, 2015 and 2014, respectively, and had maturities of less than one
year. These repurchase agreements are secured by investment securities and are stated at the amount of cash received in connection
with the transaction.
112
10. LONG-TERM OBLIGATIONS
Years Ended December 31,
2014
2015
(dollars in thousands)
FHLB advances
Balance at end of period................................................................................................................. $ 502,281
Weighted average interest rate during the period (1) .......................................................................
Interest rate at end of period ..........................................................................................................
1.3%
1.3%
$ 600,052
1.4%
1.3%
Long-term debt (2)
Balance at end of period................................................................................................................. $
Weighted average interest rate during the period (1) .......................................................................
Interest rate at end of period ..........................................................................................................
60,311
$
60,311
2.4%
2.6%
2.4%
2.3%
(1) The weighted average interest rate during the period was computed by dividing the actual interest expense by the average balance
outstanding during the period.
(2) This long-term debt consists of trust preferred securities that qualify under the risk-based capital guidelines as Tier 1 capital,
subject to certain limitations.
Maturities of fixed rate long-term obligations based on scheduled repayments at December 31, 2015 are as follows (in thousands):
FHLB advances ......................... $
Long-term debt ..........................
2016
2017
1,093 $ 288,808 $
—
—
Total long-term obligations ..... $
1,093 $ 288,808 $
Years Ended December 31,
2019
42,348 $
—
42,348 $
2018
78,288 $
—
78,288 $
2020
76,016 $
—
76,016 $
Thereafter
Total
15,728 $ 502,281
60,311
60,311
76,039 $ 562,592
FHLB advances represent borrowings with fixed interest rates ranging from 0.8% to 5.0% and with maturities of one to thirteen
years. FHLB advances are collateralized by FHLB stock, nonspecified real estate loans and MBS.
During the fourth quarter of 2015, the Company entered into a $20.0 million variable rate advance agreement with FHLB to pay
one-month LIBOR plus 0.17%. In addition, the Company entered into an interest rate swap contract that is treated as a cash flow
hedge under ASC 815 that effectively converted the variable rate advance to a fixed interest rate of 1.529% for five years. The cash
flows of the swap are expected to be effective in hedging the variability in expected future cash flows attributable to fluctuations in
the one-month LIBOR interest rate. Proceeds were used for general corporate purposes.
Years Ended December 31,
2015
2014
(in thousands)
Long-term debt
Southside Statutory Trust III Due 2033 (1) ..................................................................................... $
Southside Statutory Trust IV Due 2037 (2) .....................................................................................
Southside Statutory Trust V Due 2037 (3) ......................................................................................
Magnolia Trust Company I Due 2035 (4) .......................................................................................
Total Long-term Debt ................................................................................................................ $
20,619 $
23,196
12,887
3,609
60,311 $
20,619
23,196
12,887
3,609
60,311
(1) This debt carries an adjustable rate of 3.5467% through March 30, 2016 and adjusts quarterly at a rate equal to three-month
LIBOR plus 294 basis points.
(2) This debt carried an adjustable rate of 1.6219% through January 29, 2016 and reset to 1.9156% through April 29, 2016. This debt
adjusts quarterly at a rate equal to three-month LIBOR plus 130 basis points.
(3) This debt carries an adjustable rate of 2.762% through March 14, 2016 and adjusts quarterly at a rate equal to three-month LIBOR
plus 225 basis points.
(4) This debt carried an adjustable rate of 2.1776% through February 22, 2016 and reset to 2.4182% through May 22, 2016. This
debt adjusts quarterly at a rate equal to three-month LIBOR plus 180 basis points.
113
11. EMPLOYEE BENEFITS
Deferred Compensation Agreements
Southside Bank has deferred compensation agreements with 17 of its executive officers, which generally provide for payment of an
aggregate amount of $6.1 million over a maximum period of 15 years after retirement or death. Of the 17 executives included in the
agreements, payments have commenced to five former executives and/or their beneficiaries. In addition, one active executive was
eligible for retirement at December 31, 2015. Three executive officers became eligible to receive payments in 2016 as a result of the
acceptance of an early retirement package offered in late December of 2015. Payments to these three executives will commence in
2016. Deferred compensation expense was $553,000, $224,000 and $589,000 for the years ended December 31, 2015, 2014 and 2013,
respectively. At December 31, 2015 and 2014, the deferred compensation plan liability totaled $3.9 million and $3.8 million,
respectively.
Health Insurance
We provide accident and health insurance for substantially all employees through a self-funded insurance program. The cost of health
care benefits was $6.0 million, $4.6 million and $4.0 million for the years ended December 31, 2015, 2014 and 2013,
respectively. Our healthcare plan was amended to provide health insurance coverage for any retiree having 50 years of service with
the Company. In addition, the eligible retiree must have Medicare coverage, including part A, part B and part D. Premiums paid will
be billed at the Consolidated Omnibus Budget Reconciliation Act (“COBRA”) rates. There were two retirees participating in the
health insurance plan as of December 31, 2015. There were no retirees participating as of December 31, 2014 or 2013.
Employee Stock Ownership Plan
We have an Employee Stock Ownership Plan (the “ESOP”) which covers substantially all employees. Contributions to the ESOP are
at the sole discretion of the board of directors. We contributed $350,000 to the ESOP for the year ended December 31, 2015 and
$250,000 for each of the years ended December 31, 2014 and 2013. At December 31, 2015 and 2014, the ESOP owned 310,646 and
351,936 shares of common stock, respectively. The number of shares has been adjusted as a result of stock dividends. These shares
are treated as externally held shares for dividend and earnings per share calculations.
Long-term Disability
We have an officer’s long-term disability income policy which provides coverage in the event they become disabled as defined under
its terms. Individuals are automatically covered under the policy if they (a) have been elected as an officer, (b) have been an employee
of Southside Bank for three years and (c) receive earnings of $50,000 or more on an annual basis. The policy provides, among other
things, that should a covered individual become totally disabled he would receive two-thirds of his current salary, not to exceed
$15,000 per month. The benefits paid out of the policy are limited by the benefits paid to the individual under the terms of our other
Company-sponsored benefit plans.
Split Dollar Agreements
We entered into split dollar agreements with eight of our executive officers. The agreements provide we will be the beneficiary of
bank owned life insurance (“BOLI”) insuring the executives’ lives. The agreements provide the executives the right to designate the
beneficiaries of the death benefits guaranteed in each agreement. The agreements originally provided for death benefits of an initial
aggregate amount of $4.5 million. The individual amounts are increased annually on the anniversary date of the agreement by
inflation adjustment factors ranging from 3% to 5%. During 2013, death benefits of approximately $1.1 million were paid pursuant to
such agreements. As of December 31, 2015, the expected death benefits total $5.0 million. The agreements also state that after the
executive’s retirement, we shall also pay an annual gross-up bonus to the executive in an amount sufficient to enable the executive to
pay federal income tax on both the economic benefit and on the gross-up bonus. The expense required to record the post retirement
liability associated with the split dollar post retirement bonuses was $28,000, $7,000 and $26,000 for the years ended December 31,
2015, 2014 and 2013, respectively. For the years ended December 31, 2015 and 2014, the split dollar liability totaled $1.9 million and
$1.6 million, respectively.
401(k) Plan
We have a 401(k) defined contribution plan (the “401(k) Plan”) covering substantially all employees, who have completed one year of
service and are age 21 or older. A participant may elect to defer a percentage of their compensation subject to certain limits based on
federal tax laws. For the years ended December 31, 2015, 2014 and 2013, expense attributable to the 401(k) Plan amounted to
$447,000, $171,000 and $227,000, respectively.
114
Pension Plans
We have a defined benefit pension plan (“the Plan”) pursuant to which participants are entitled to benefits based on final average
monthly compensation and years of credited service determined in accordance with plan provisions.
Entrance into the Plan by new employees was frozen effective December 31, 2005. Employees hired after December 31, 2005 are not
eligible to participate in the plan. All participants in the Plan are fully vested. Benefits are payable monthly commencing on the later
of age 65 or the participant’s date of retirement. Eligible participants may retire at reduced benefit levels after reaching age 55. We
contribute amounts to the pension fund sufficient to satisfy funding requirements of the Employee Retirement Income Security Act.
Plan assets included 223,615 shares of our stock at December 31, 2015 and 2014. Our stock included in the Plan assets was purchased
at fair value. The number of shares has been adjusted as a result of stock dividends. During 2015, our funded status improved and at
December 31, 2015, we had an unfunded status of $3.7 million compared to an unfunded status of $4.3 million at December 31, 2014.
The improvement was a result of an increase in the discount rate and the updated mortality assumption at December 31, 2015
compared to December 31, 2014, partially offset by lower than expected returns on the fair value of plan assets since December 31,
2014. Additionally, the Plan provided special and contractual termination benefits of $176,000 to an employee that accepted an early
retirement package during the year ended December 31, 2015.
In late December 2015, we offered an early retirement package to 24 of our employees, of which 16 accepted the early retirement offer
by the acceptance deadline of January 29, 2016.
In connection with the acquisition of Omni, we acquired the OmniAmerican Bank Defined Benefit Plan ( “the Acquired Plan”) which
was remeasured at fair value. The Acquired Plan originally called for benefits to be paid to eligible employees at retirement based
primarily upon years of service and the compensation levels at retirement. As of December 31, 2006, the benefits under the Acquired
Plan were frozen. No further benefits will be earned by employees after that date. In addition, no new participants may be added to
the Acquired Plan after December 31, 2006. During 2015, our funded status improved and at December 31, 2015, we had an unfunded
status of $945,000 compared to an unfunded status of $1.5 million at December 31, 2014. The improvement was primarily a result of
an increase in the discount rate.
We have a nonfunded supplemental retirement plan (the “Restoration Plan”) for our employees whose benefits under the principal
retirement plan are reduced because of compensation deferral elections or limitations under federal tax laws.
Both the Plan and the Restoration Plan were amended effective January 1, 2013 to change the formula for determining death benefits
for participants who die while in service of the employer and who are early retirement eligible on their date of death.
We use a measurement date of December 31 for our plans.
115
2015
Defined
Benefit
Pension
Plan
Acquired
Defined
Benefit
Pension
Plan
Restoration
Plan
Defined
Benefit
Pension
Plan
2014
Defined
Benefit
Pension
Plan
Acquired
(in thousands)
2013
Restoration
Plan
Defined
Benefit
Pension
Plan
Restoration
Plan
9,801
298
468
344
(120)
—
—
57
—
—
Change in Projected
Benefit Obligation:
Benefit obligation at end
of prior year ................... $
Service cost ....................
Interest cost ....................
Actuarial (gain) loss ........
Benefits paid ..................
Expenses paid .................
$
84,050
1,838
3,410
(6,777)
(2,590)
(67)
5,977 $
—
238
(753)
(28)
(30)
13,259 $
334
668
(1,968)
(269)
—
70,046 $
1,697
3,497
13,146
(4,118)
(175)
— $
—
—
—
—
—
$
10,848
275
563
1,813
(240)
—
78,002 $
2,118
3,155
(11,642)
(1,776)
(111)
Plan acquired through
acquisition (1) ..................
Plan amendments ............
Settlements ....................
Special and contractual
termination benefits ........
Benefit obligation at end
of year ...........................
Change in Plan Assets:
Fair value of plan assets
at end of prior year ..........
Actual return ..................
Employer contributions ...
Benefits paid ..................
Expenses paid .................
Settlements ....................
Plan acquired through
acquisition (1) ..................
Fair value of plan assets
at end of year ..................
(Un)Funded status at end
of year ...........................
Accrued benefit
(liability) asset
recognized ..................... $
Accumulated benefit
obligation at end of year .. $
—
—
—
176
—
—
(719)
—
—
—
—
—
—
(43)
—
—
5,977
—
—
—
—
—
—
—
—
300
—
—
80,040
4,685
12,024
84,050
5,977
13,259
70,046
10,848
79,730
(718)
—
(2,590)
(67)
—
4,512
5
—
(28)
(30)
(719)
—
—
76,355
3,740
—
—
269
(269)
—
—
—
—
78,990
5,033
—
(4,118)
(175)
—
—
—
—
—
—
—
—
4,512
79,730
4,512
—
—
240
(240)
—
—
—
—
63,165
12,712
5,000
(1,776)
(111)
—
—
78,990
—
—
120
(120)
—
—
—
—
(3,685)
(945)
(12,024)
(4,320)
(1,465)
(13,259)
8,944
(10,848)
(3,685) $
(945) $
(12,024) $
(4,320) $ (1,465) $
(13,259 ) $
8,944 $
(10,848)
69,737
$
4,685 $
10,290 $
71,201 $
5,977 $
10,811
$
57,283 $
8,088
(1) Defined benefit plan acquired with the acquisition of Omni on December 17, 2014.
116
Amounts related to our defined benefit pension plans and restoration plan recognized as a component of other comprehensive (loss)
income were as follows (in thousands):
2015
Defined
Benefit
Pension
Plan
Acquired
Defined
Benefit
Pension
Plan
2014
2013
Restoration
Plan
Defined
Benefit
Pension
Plan
Restoration
Plan
Defined
Benefit
Pension
Plan
Restoration
Plan
1,505 $
— $
943 $
543 $
499 $
2,197 $
590
(23)
—
375
—
1,857
(650)
—
(62)
463
—
401
(141)
7
—
(19)
—
5
—
(42)
—
(1)
—
1,968
(13,761)
(1,813)
19,559
(344)
—
2,918
(1,021)
43
(13,194)
4,618
—
(1,309)
458
(300)
21,414
(7,495)
1,207
$
260 $
1,897 $
(8,576) $
(851) $
13,919 $
(57)
188
(66)
122
Recognition of net loss ................. $
Recognition of prior service
(credit) cost .................................
Recognition of gain due to
settlement ....................................
Net gain (loss) occurring during
the year .......................................
Net prior service credit (cost)
occurring during the year ..............
Deferred tax (expense) benefit .......
Other comprehensive income
(loss), net of tax ........................... $
Net amounts recognized in net periodic benefit cost and other comprehensive loss as of December 31, 2015 and 2014 were as follows
(in thousands):
Net loss .................................................................... $
Prior service (credit) cost ........................................
Gain recognized due to settlement ..........................
Deferred tax (expense) benefit ................................
Accumulated other comprehensive income (loss),
net of tax.................................................................. $
2015
Defined
Benefit
Pension
Plan
Acquired
2014
Restoration
Plan
Defined
Benefit
Pension
Plan
Restoration
Plan
— $
—
(62)
(62)
22
943 $
7
—
950
(333)
543 $
(19)
—
524
(183)
499
5
—
504
(176)
Defined
Benefit
Pension
Plan
1,505 $
(23)
—
1,482
(519)
963 $
(40) $
617
$
341 $
328
Amounts recognized as a component of accumulated other comprehensive loss as of December 31, 2015 and 2014 were as follows (in
thousands):
Net (loss) gain .......................................................... $
Prior service credit (cost) .........................................
Deferred tax benefit ..................................................
Accumulated other comprehensive (loss) income,
net of tax................................................................... $
2015
Defined
Benefit
Pension
Plan
Acquired
Restoration
Plan
401 $
—
401
(141)
(2,816) $
(44)
(2,860)
1,001
2014
Defined
Benefit
Pension
Plan
(27,836) $
62
(27,774)
9,721
Restoration
Plan
(5,727)
(50)
(5,777)
2,022
Defined
Benefit
Pension
Plan
(25,956) $
40
(25,916)
9,071
(16,845) $
260 $
(1,859) $
(18,053) $
(3,755)
117
Net periodic pension cost and postretirement benefit cost for the years ended December 31, 2015, 2014 and 2013 included the
following components (in thousands):
Defined Benefit Pension Plan
Service cost ....................................................................................................... $
Interest cost .......................................................................................................
Expected return on assets ..................................................................................
Net loss amortization ........................................................................................
Prior service credit amortization .......................................................................
Special and contractual termination benefits ....................................................
Net periodic benefit cost ................................................................................... $
Defined Benefit Pension Plan Acquired
Service cost ....................................................................................................... $
Interest cost .......................................................................................................
Expected return on assets ..................................................................................
Net loss amortization ........................................................................................
Prior service credit amortization .......................................................................
Gain recognized due to settlement ....................................................................
Net periodic benefit cost ................................................................................... $
Restoration Plan
Service cost ....................................................................................................... $
Interest cost .......................................................................................................
Net loss amortization ........................................................................................
Prior service cost (credit) amortization .............................................................
Net periodic benefit cost ................................................................................... $
2015
2014
2013
1,838 $
3,410
(5,684)
1,505
(23)
176
1,222 $
— $
238
(294)
—
—
(62)
(118) $
334 $
668
943
7
1,952 $
1,697 $
3,497
(5,648 )
543
(19 )
—
70 $
2,118
3,155
(4,795)
2,197
(42)
—
2,633
— $
—
—
—
—
—
— $
—
—
—
—
—
—
—
275 $
563
499
5
1,342 $
298
468
590
(1)
1,355
The amounts in accumulated other comprehensive income (loss) that are expected to be recognized as components of net periodic
benefit cost during 2016 are as follows (in thousands):
Net loss ................................................................................................................... $
Prior service (credit) cost .......................................................................................
Deferred tax benefit ................................................................................................
Accumulated other comprehensive loss, net of tax ................................................ $
Defined
Benefit
Pension
Plan
Defined
Benefit
Pension
Plan
Acquired
Restoration
Plan
1,408 $
(23)
1,385
(485)
900 $
— $
—
—
—
— $
214
6
220
(77)
143
The Plan and Acquired Plan assets, which consist primarily of marketable equity and debt instruments, are valued using market
quotations in active markets for identical assets, market quotations for similar assets in active or non-active markets or the net asset
value (NAV) provided by the plan administrator. The Plans' obligations and the annual pension expense are determined by
independent actuaries and through the use of a number of assumptions. Key assumptions in measuring the Plans' obligations include
the discount rate, the rate of salary increases and the estimated future return on plan assets.
118
In determining the discount rate, we utilized a cash flow matching analysis to determine a range of appropriate discount rates for the
defined benefit pension plan and restoration plan. In developing the cash flow matching analysis, we had our actuaries construct a
portfolio of high quality noncallable bonds to match as closely as possible the timing of future benefit payments of the plans at
December 31, 2015. We utilized a bond selection-settlement approach that selects a portfolio of bonds from a universe of high quality
corporate bonds rated Aa by at least half of the rating agencies available. Based on the results of this cash flow matching analysis, we
were able to determine an appropriate discount rate.
Salary increase assumptions are based upon historical experience and anticipated future management actions. The expected long-term
rate of return assumption reflects the average return expected based on the investment strategies and asset allocation of the assets
invested to provide for the Plans' liabilities. We considered broad equity and bond indices, long-term return projections, and actual
long-term historical Plan performance when evaluating the expected long-term rate of return assumption.
At December 31, 2015 and 2014, the assumptions used to determine the benefit obligation were as follows:
2015
Defined
Benefit
Pension
Plan
Acquired
Defined
Benefit
Pension
Plan
Restoration
Plan
Defined
Benefit
Pension
Plan
2014
Defined
Benefit
Pension
Plan
Acquired
Restoration
Plan
Discount rate .......................................
Compensation increase rate .................
4.56%
3.50%
4.56%
—
4.56%
3.50%
4.14%
3.50%
4.14%
—
4.14%
3.50%
For the years ended December 31, 2015, 2014, and 2013, the assumptions used to determine net periodic pension cost and
postretirement benefit cost were as follows:
Defined Benefit Pension Plan
Discount rate ...........................................................................................................
Expected long-term rate of return on plan assets ....................................................
Compensation increase rate ....................................................................................
Defined Benefit Pension Plan Acquired
Discount rate ...........................................................................................................
Expected long-term rate of return on plan assets ....................................................
Compensation increase rate ....................................................................................
Restoration Plan
Discount rate ...........................................................................................................
Compensation increase rate ....................................................................................
2015
2014
2013
4.14%
7.25%
3.50%
4.14%
7.25%
—
4.14%
3.50%
5.06%
7.25%
4.50%
—
—
—
4.08%
7.25%
4.50%
—
—
—
5.06%
4.50%
4.08%
4.50%
Material changes in pension benefit costs may occur in the future due to changes in these assumptions. Future annual amounts could
be impacted by changes in the number of SSB Plan participants, changes in the level of benefits provided, changes in the discount
rates, changes in the expected long-term rate of return, changes in the level of contributions to the Plan and other factors.
119
The major categories of assets in our Plan and the Acquired Plan are presented in the following table. Assets are segregated by the
level of the valuation inputs within the fair value hierarchy established by ASC Topic 820 “Fair Value Measurements and Disclosures,”
utilized to measure fair value (see “Note 12 – Fair Value Measurement”). Our Restoration Plan is unfunded.
December 31,
2015
2014
Defined
Benefit
Pension
Plan
Defined
Benefit
Pension
Plan
Acquired
Defined
Benefit
Pension
Plan
Defined
Benefit
Pension
Plan
Acquired
Level 1:
Cash ............................................................................................................. $
Equity Securities:
U.S. large cap (1) .....................................................................................
U.S. mid cap (2) .......................................................................................
U.S. small cap (3) .....................................................................................
Fixed Income Securities:
Corporate bonds (4) .................................................................................
International developed (5) ......................................................................
International emerging (2)........................................................................
Level 2:
Cash Equivalents ..........................................................................................
Equity Securities:
U.S. large cap ..........................................................................................
U.S. mid cap ............................................................................................
U.S. small cap ........................................................................................
International ...........................................................................................
Fixed Income Securities:
Corporate bonds (4) .................................................................................
U.S. government agencies (4) ..................................................................
Municipal bonds (4) .................................................................................
U.S. agency mortgage-backed securities (6) ............................................
Asset-backed securities (7) ......................................................................
Real estate (8) ..........................................................................................
Balanced Asset Allocation (9) .........................................................................
Other (10) .......................................................................................................
588 $
(in thousands)
— $
2,176 $
26,098
7,527
6,186
—
2,975
1,108
13,491
—
—
—
—
1,443
9,116
7,365
458
—
—
—
—
—
—
—
—
—
—
25,550
7,653
7,000
—
3,320
1,302
—
17,548
1,231
157
156
514
376
—
—
—
729
189
189
199
—
—
—
—
794
3,583
10,202
602
—
—
—
—
—
752
387
1,159
357
340
359
—
382
415
—
—
—
—
—
361
—
—
—
—
Total fair value of plan assets .......................................................................... $
76,355 $
3,740
$
79,730 $
4,512
(1) This category is comprised of individual securities that are actively managed and a broadly diversified "passive" mutual fund.
(2) This category is comprised of broadly diversified ‘passive’ mutual funds.
(3) For the defined benefit pension plan, this category is comprised primarily of Southside Bancshares stock that is owned in the Plan and a
broadly diversified "passive" mutual fund.
(4) This category is comprised of individual investment grade securities that are generally held to maturity in the Plan. The Acquired Plan
assets in this category consist of investment grade and below investment grade bonds.
(5) This category is comprised of a broadly ‘passive’ mutual fund.
(6) This category is comprised of individual securities that are generally not held to maturity.
(7) This category is mainly comprised of asset backed securities, residential mortgage backed securities, commercial mortgage backed
securities and corporate bonds.
(8) This category is comprised of commercial real estate and includes mortgage loans which are backed by the associated properties.
(9) This category is comprised of a combination of fixed income and equity investment options.
(10) This category is comprised of a broad range of instruments including, but not limited to, equities, bonds, currencies, convertible securities
and derivatives such as futures, options, swaps and forwards.
120
We did not have any plan assets with Level 3 input fair value measurements at December 31, 2015 or 2014. Due to asset allocation
model changes, there were transfers between Level 1 and Level 2 during the year ended December 31, 2015.
Our overall investment strategy is to realize long-term growth of the plan within acceptable risk parameters, while funding benefit
payments from dividend and interest income, to the extent possible. The target allocations for plan assets are 55.0% equities, 44.5%
fixed income and 0.5% cash equivalents. Equity securities are diversified among U.S. and international (both developed and
emerging), large, mid and small caps, and value and growth securities. The investment objective of equity funds is long-term capital
appreciation with current income. Fixed income securities include U.S. Treasury securities, agencies, CDs, corporate bonds, and MBS.
The investment objective of fixed income funds is to maximize investment return while preserving investment principal. Mutual
funds, primarily because of the superior diversification they provide, are used to provide specific international developed and emerging
market exposure.
As of December 31, 2015, expected future benefit payments related to our defined benefit pension plan, defined benefit pension plan
acquired and restoration plan were as follows (in thousands):
2016 ...................................................$
2017 ...................................................
2018 ...................................................
2019 ...................................................
2020 ...................................................
2021 through 2025 ..............................
$
Defined Benefit
Pension Plan
Defined Benefit
Pension Plan
Acquired
Restoration
Plan
2,921 $
3,243
3,565
3,779
3,980
22,707
40,195 $
112 $
56
67
76
230
842
1,383 $
346
570
618
668
726
4,406
7,334
We expect to contribute $3.0 million to the Plan in 2016. We expect to contribute approximately $258,000 to our restoration plan in
2016. We do not expect to make additional contributions to the Acquired Plan in 2016.
Share-based Incentive Plans
2009 Incentive Plan
On April 16, 2009, our shareholders approved the Southside Bancshares, Inc. 2009 Incentive Plan (the “2009 Incentive Plan”), which
is a stock-based incentive compensation plan. A total of 1,407,103 shares of our common stock were reserved and available for
issuance pursuant to awards granted under the 2009 Incentive Plan. Under the 2009 Incentive Plan, we were authorized to grant
nonqualified stock options (“NQSOs”), restricted stock units (“RSUs”) or any combination thereof to certain officers. During the
years ended December 31, 2015 and 2013, we granted RSUs and NQSOs pursuant to the 2009 Incentive Plan. There were no awards
granted during 2014.
As of December 31, 2015, there were 520,756 unvested awards outstanding. For the year ended December 31, 2015, there was $1.4
million of share-based compensation expense related to the 2009 Incentive Plan. For the year ended December 31, 2015, there was
$488,000 of income tax benefit related to the stock compensation expense. As of December 31, 2014, there were 244,147 unvested
awards outstanding. As of December 31, 2013, there were 437,578 unvested awards outstanding. There was share-based
compensation expense and income tax benefit for the year ended December 31, 2014 of $1.1 million and $379,000, respectively.
There was share-based compensation expense and income tax benefit for the year ended December 31, 2013 of $911,000 and
$319,000, respectively.
As of December 31, 2015 and December 31, 2014, there was $4.0 million and $1.8 million of unrecognized compensation cost related
to the 2009 Incentive Plan, respectively. The remaining cost at December 31, 2015 is expected to be recognized over a weighted-
average period of 2.92 years. There was $3.2 million unrecognized compensation expense related to the 2009 Incentive Plan as of
December 31, 2013.
The NQSOs have contractual terms of 10 years and vest in equal annual installments over either a three- or four-year period.
The fair value of each RSU is the ending stock price on the date of grant. The RSUs vest in equal annual installments over either a
three- or four-year period.
Each award is evidenced by an award agreement that specifies the option price, if applicable, the duration of the award, the number of
shares to which the award pertains, and such other provisions as the Board determines.
121
Shares issued in connection with stock compensation awards are issued from available authorized shares and not from treasury
shares. During 2015, 28,651 shares were issued in connection with stock compensation awards. During 2014 and 2013, 88,908 shares
and 33,802 shares, respectively, were issued in connection with stock compensation awards.
The estimated weighted-average grant-date fair value per option and the underlying Black-Scholes option-pricing model assumptions
are summarized in the following table for years in which we granted NQSO's pursuant to the 2009 plan:
Weighted-average grant date fair value per option ..............................................
Weighted-average assumptions:
Years Ended December 31,
2014
$—
2015
$6.29
2013
$8.58
Risk-free interest rates .....................................................................................
Expected dividend yield ..................................................................................
Expected volatility factors of the market price of Southside Bancshares
common stock .................................................................................................
Expected option life (in years) ........................................................................
2.01%
3.24%
30.91%
6.3
—
—
—
—
2.23%
3.10%
40.88%
6.9
A combined summary of activity in our share-based plans as of December 31, 2015 is presented below:
Restricted Stock Units
Outstanding
Stock Options Outstanding
Shares
Available for
Grant
Number
of Shares
Weighted-
Average
Grant-Date
Fair
Value
Number
of Shares
Weighted-
Average
Exercise
Price
Weighted-
Average
Grant-Date
Fair
Value
Balance, January 1, 2015...............
Granted .......................................
Stock options exercised ..............
Stock awards vested ....................
Forfeited ......................................
Canceled/expired ........................
Balance, December 31, 2015 .........
821,604
(427,587)
—
—
32,018
1,254
427,289
31,753 $
57,482
—
(16,497)
(3,324)
—
69,414 $
21.75
27.63
—
20.33
25.14
—
26.79
419,334 $
370,105
(12,895)
—
(28,694)
(1,254)
746,596 $
19.88 $
28.08
18.27
—
24.29
24.62
23.79 $
6.00
6.29
5.45
—
6.69
7.78
6.12
Other information regarding options outstanding and exercisable as of December 31, 2015 is as follows:
Options Outstanding
Options Exercisable
Number
of Shares
248,088 $
142,574
355,934
746,596 $
Weighted-
Average
Exercise
Price
17.11
24.62
28.12
23.79
Weighted-
Average
Remaining
Contractual
Life in Years
6.08
7.92
9.39
8.01
Number
of Shares
219,829 $
75,425
—
295,254 $
Weighted-
Average
Exercise
Price
16.98
24.62
—
18.93
$
Range of Exercise Prices
20.00
-
25.00
-
28.51
-
15.79
20.01
25.01
Total
The total intrinsic value of outstanding in-the-money stock options and outstanding in-the-money exercisable stock options was $1.7
million and $1.5 million at December 31, 2015, respectively.
The total intrinsic value of stock options exercised during the years ended December 31, 2015, 2014 and 2013 was $119,000, $1.0
million and $97,000, respectively.
Cash received from stock option exercises for the years ended December 31, 2015, 2014 and 2013 was $236,000, $1.2 million and
$206,000, respectively. The tax benefit realized for the deductions related to stock awards was $75,000 and $65,000 for the years
122
ended December 31, 2015 and 2013, respectively. The tax expense related to stock awards was $76,000 for the year ended
December 31, 2014.
12. FAIR VALUE MEASUREMENT
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market
participants. A fair value measurement assumes that the transaction to sell the asset or transfer the liability occurs in the principal
market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability. The
price in the principal (or most advantageous) market used to measure the fair value of the asset or liability shall not be adjusted for
transaction costs. An orderly transaction is a transaction that assumes exposure to the market for a period prior to the measurement
date to allow for marketing activities that are usual and customary for transactions involving such assets and liabilities; it is not a
forced transaction. Market participants are buyers and sellers in the principal market that are (i) independent, (ii) knowledgeable,
(iii) able to transact and (iv) willing to transact.
Valuation techniques including the market approach, the income approach and/or the cost approach are utilized to determine fair
value. Inputs to valuation techniques refer to the assumptions that market participants would use in pricing the asset or
liability. Valuation policies and procedures are determined by our investment department and reported to our Asset/Liability
Committee ("ALCO") for review. An entity must consider all aspects of nonperforming risk, including the entity’s own credit
standing when measuring fair value of a liability. Inputs may be observable, meaning those that reflect the assumptions market
participants would use in pricing the asset or liability developed based on market data obtained from independent sources, or
unobservable, meaning those that reflect the reporting entity’s own assumptions about the assumptions market participants would
use in pricing the asset or liability developed based on the best information available in the circumstances. A fair value hierarchy for
valuation inputs gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority
to unobservable inputs. The fair value hierarchy is as follows:
Level 1 Inputs – Unadjusted quoted prices in active markets for identical assets or liabilities that the reporting entity has the
ability to access at the measurement date.
Level 2 Inputs – Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either
directly or indirectly. These might include quoted prices for similar assets or liabilities in active markets, quoted prices for identical
or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or
liability (such as interest rates, volatilities, prepayment speeds, credit risks, etc.) or inputs that are derived principally from or
corroborated by market data by correlation or other means.
Level 3 Inputs –- Unobservable inputs for determining the fair values of assets or liabilities that reflect an entity's own
assumptions about the assumptions that market participants would use in pricing the assets or liabilities.
Level 3 assets recorded at fair value on a nonrecurring basis at December 31, 2015 and 2014, included loans for which a specific
allowance was established based on the fair value of collateral and commercial real estate for which fair value of the properties was
less than the cost basis. For both asset classes, the unobservable inputs were the additional adjustments applied by management to
the appraised values to reflect such factors as non-current appraisals and revisions to estimated time to sell. These adjustments are
determined based on qualitative judgments made by management on a case-by-case basis and are not quantifiable inputs, although
they are used in the determination of fair value.
A description of the valuation methodologies used for assets and liabilities measured at fair value, as well as the general
classification of such instruments pursuant to the valuation hierarchy, is set forth below.
Certain financial assets are measured at fair value in accordance with GAAP. Adjustments to the fair value of these assets usually
result from the application of fair value accounting or write-downs of individual assets. Transfers between levels of the fair value
hierarchy are recognized on the actual date of the event or circumstances that caused the transfer, which generally coincides with our
monthly and/or quarterly valuation process. There were no transfers between Level 1 and Level 2 during the year ended
December 31, 2015.
Securities Available for Sale – U.S. Treasury securities and other equity securities are reported at fair value utilizing Level 1
inputs. Other securities classified as available for sale are reported at fair value utilizing Level 2 inputs. For these securities, we
obtain fair value measurements from an independent pricing service. The fair value measurements consider observable data that
may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data,
market consensus prepayment speeds, credit information and the bond’s terms and conditions, among other things.
123
We review the prices supplied by the independent pricing service for reasonableness and to ensure such prices are aligned with
traditional pricing matrices. In addition, we obtain an understanding of their underlying pricing methodologies and their Statement
on Standards for Attestation Engagements-Reporting on Controls of a Service Organization (“SSAE 16”). We validate prices
supplied by the independent pricing service by comparison to prices obtained from, in most cases, three additional third party
sources. For securities where prices are outside a reasonable range, we further review those securities to determine what a
reasonable price estimate is for that security, given available data.
Certain financial assets and financial liabilities are measured at fair value on a nonrecurring basis, that is, the instruments are not
measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when
there is evidence of impairment). Financial assets and financial liabilities measured at fair value on a nonrecurring basis include the
following at December 31, 2015 and 2014.
Foreclosed Assets – Foreclosed assets are initially carried at fair value less costs to sell. The fair value measurements of foreclosed
assets can include Level 2 measurement inputs such as real estate appraisals and comparable real estate sales information, in
conjunction with Level 3 measurement inputs such as cash flow projections, qualitative adjustments, and sales cost estimates. As a
result, the categorization of foreclosed assets is Level 3 of the fair value hierarchy. In connection with the measurement and initial
recognition of certain foreclosed assets, we may recognize charge-offs through the allowance for loan losses.
Impaired Loans – Certain impaired loans may be reported at the fair value of the underlying collateral if repayment is expected
solely from the collateral. Collateral values are estimated using Level 3 inputs based on customized discounting criteria or
appraisals. At December 31, 2015 and 2014, the impact of loans with specific reserves based on the fair value of the collateral was
reflected in our allowance for loan losses.
Certain nonfinancial assets and nonfinancial liabilities measured at fair value on a recurring basis include reporting units measured at
fair value and tested for goodwill impairment.
124
The following tables summarize assets measured at fair value on a recurring and nonrecurring basis segregated by the level of the
valuation inputs within the fair value hierarchy utilized to measure fair value (in thousands):
As of December 31, 2015:
Fair Value Measurements at the End of the
Reporting Period Using
Quoted
Prices in
Active
Markets for
Identical
Assets
(Level 1)
Carrying
Amount
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Recurring fair value measurements
Investment Securities:
U.S. Treasury .............................................................................$
State and Political Subdivisions .................................................
Other Stocks and Bonds .............................................................
Other Equity Securities ..............................................................
Mortgage-backed Securities: (1)
103,587 $
244,246
12,790
6,016
103,587 $
—
—
6,016
Residential .................................................................................
Commercial ................................................................................
588,502
505,351
—
—
— $
244,246
12,790
—
588,502
505,351
Total recurring fair value measurements ......................................$ 1,460,492 $
109,603 $ 1,350,889 $
—
—
—
—
—
—
—
Nonrecurring fair value measurements
Foreclosed assets ..........................................................................$
Impaired loans (2) ..........................................................................
808 $
24,283
— $
—
— $
—
808
24,283
Total nonrecurring fair value measurements ................................$
25,091 $
— $
—
$
25,091
125
As of December 31, 2014:
Fair Value Measurements at the End of
the Reporting Period Using
Quoted
Prices in
Active
Markets for
Identical
Assets
(Level 1)
Carrying
Amount
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Recurring fair value measurements
Investment Securities:
U.S. Treasury .....................................................................................$
U.S. Government Agency Debentures ...............................................
State and Political Subdivisions .........................................................
Other Stocks and Bonds .....................................................................
Other Equity Securities .....................................................................
Mortgage-backed Securities: (1)
14,906 $
4,828
267,684
13,239
6,049
14,906 $
—
—
—
6,049
— $
4,828
267,684
13,239
—
Residential .........................................................................................
Commercial ........................................................................................
964,298
177,704
—
—
964,298
177,704
Total recurring fair value measurements ..............................................$ 1,448,708 $
20,955 $ 1,427,753 $
—
—
—
—
—
—
—
—
Nonrecurring fair value measurements
Foreclosed assets ..................................................................................$
Impaired loans (2) ..................................................................................
2,303 $
9,404
— $
—
— $
—
2,303
9,404
Total nonrecurring fair value measurements ........................................$
11,707 $
—
$
— $
11,707
(1) All mortgage-backed securities issued and/or guaranteed by U.S. government agencies or U.S. government-sponsored enterprises.
(2) Loans represent collateral dependent impaired loans with a specific valuation allowance. Losses on these loans represent charge-
offs which are netted against the allowance for loan losses.
Disclosure of fair value information about financial instruments, whether or not recognized in the balance sheet is required, for
which it is practicable to estimate that value. In cases where quoted market prices are not available, fair values are based on
estimates using present value or other estimation techniques. Those techniques are significantly affected by the assumptions used,
including the discount rate and estimates of future cash flows. Such techniques and assumptions, as they apply to individual
categories of our financial instruments, are as follows:
Cash and cash equivalents – The carrying amounts for cash and cash equivalents is a reasonable estimate of those assets'
fair value.
Investment and mortgage-backed securities held to maturity – Fair values for these securities are based on quoted market
prices, where available. If quoted market prices are not available, fair values are based on quoted market prices for similar
securities or estimates from independent pricing services.
FHLB stock and other investments – The carrying amount of FHLB stock and other investments is a reasonable estimate of
those assets’ fair value.
Loans receivable – For adjustable rate loans that reprice frequently and with no significant change in credit risk, the
carrying amounts are a reasonable estimate of those assets' fair value. The fair value of fixed rate loans is estimated by
discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar
credit ratings and for the same remaining maturities. Nonperforming loans are estimated using discounted cash flow
analyses or the underlying value of the collateral where applicable.
Loans held for sale – The fair value of loans held for sale is determined based on expected proceeds, which are based on
sales contracts and commitments.
126
Deposit liabilities – The fair value of demand deposits, savings accounts, and certain money market deposits is the amount
on demand at the reporting date, which is the carrying value. Fair values for fixed rate CDs are estimated using a
discounted cash flow calculation that applies interest rates currently being offered for deposits of similar remaining
maturities.
Federal funds purchased and repurchase agreements – Federal funds purchased generally have original terms to maturity
of one day and repurchase agreements generally have terms of less than one year, and therefore both are considered short-
term borrowings. Consequently, their carrying value is a reasonable estimate of fair value.
FHLB advances – The fair value of these advances is estimated by discounting the future cash flows using rates at which
advances would be made to borrowers with similar credit ratings and for the same remaining maturities.
Long-term debt – The carrying amount for the long-term debt is estimated by discounting future cash flows using estimated
rates at which long-term debt would be made to borrowers with similar credit ratings and for the remaining maturities.
The following tables present our financial assets, financial liabilities, and unrecognized financial instruments measured on a
nonrecurring basis at both their respective carrying amounts and estimated fair value (in thousands):
December 31, 2015
Financial Assets:
Cash and cash equivalents .........................................$
Investment securities:
Carrying
Amount
Total
Level 1
Level 2
Level 3
Estimated Fair Value
80,975 $
80,975 $
80,975 $
— $
Held to maturity, at carrying value .........................
385,496
397,194
Mortgage-backed securities:
Held to maturity, at carrying value .........................
FHLB stock and other investments, at cost ...............
Loans, net of allowance for loan losses ....................
Loans held for sale ....................................................
398,800
56,509
2,412,017
3,811
402,569
56,509
2,364,968
3,811
Financial Liabilities:
—
—
—
—
—
397,194
402,569
56,509
—
—
— 2,364,968
—
3,811
Retail deposits ...........................................................$ 3,455,407 $ 3,449,002 $
Federal funds purchased and repurchase
agreements ................................................................
FHLB advances .........................................................
Long-term debt..........................................................
2,429
1,143,218
43,695
2,429
1,147,688
60,311
— $ 3,449,002 $
—
—
—
2,429
1,143,218
43,695
—
—
—
—
December 31, 2014
Financial Assets:
Cash and cash equivalents .........................................$
Investment securities:
Carrying
Amount
Total
Level 1
Level 2
Level 3
Estimated Fair Value
84,655 $
84,655 $
84,655 $
— $
Held to maturity, at carrying value .........................
388,823
400,248
Mortgage-backed securities:
Held to maturity, at carrying value .........................
FHLB stock and other investments, at cost ...............
Loans, net of allowance for loan losses ....................
Loans held for sale ....................................................
253,496
43,871
2,167,841
2,899
261,339
43,871
2,140,088
2,899
Financial Liabilities:
—
—
—
—
—
400,248
261,339
43,871
—
—
— 2,140,088
—
2,899
Retail deposits ...........................................................$ 3,374,417 $ 3,369,784 $
Federal funds purchased and repurchase
agreements ................................................................
FHLB advances .........................................................
Long-term debt..........................................................
4,237
897,420
60,311
4,237
886,087
43,860
— $ 3,369,784 $
—
—
—
4,237
886,087
43,860
—
—
—
—
As discussed earlier, the fair value estimate of financial instruments for which quoted market prices are unavailable is dependent
upon the assumptions used. Consequently, those estimates cannot be substantiated by comparison to independent markets and, in
127
—
—
—
—
many cases, could not be realized in immediate settlement of the instruments. Accordingly, the aggregate fair value amounts
presented in the above fair value table do not necessarily represent their underlying value.
13. SHAREHOLDERS' EQUITY
Cash dividends declared and paid were $1.00, $0.96 and $0.91 per share for the years ended December 31, 2015, 2014 and 2013,
respectively. Future dividends will depend on our earnings, financial condition and other factors which the board of directors
considers to be relevant. Our dividend policy requires that any cash dividend payments made may not exceed consolidated earnings
for that year.
We are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum
capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken,
could have a direct material effect on our financial statements. Under capital adequacy guidelines and the regulatory framework for
prompt corrective action, we must meet specific capital guidelines that involve quantitative measures of our assets, liabilities, and
certain off-balance-sheet items as calculated under regulatory accounting practices. Our capital amounts and classification are also
subject to qualitative judgments by the regulators regarding components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy require us to maintain minimum amounts and ratios (set
forth in the table below) of Common Equity Tier 1, Tier 1 and Total Capital (as defined in the regulations) to risk-weighted assets (as
defined), and of Tier 1 Capital (as defined) to average assets (as defined). At December 31, 2015, we exceeded all regulatory
minimum capital requirements.
As of December 31, 2015, the most recent notification from the FDIC categorized us as well capitalized under the regulatory
framework for prompt corrective action. To be categorized as well capitalized we must maintain minimum Common Equity Tier 1
risk-based, Tier 1 risk-based, Total risk-based and Tier 1 leverage ratios as set forth in the table. There are no conditions or events
since that notification that management believes have changed our category.
128
Actual
Amount
Ratio
To Be Well Capitalized
Under Prompt
Corrective Actions
Provisions
Amount
Ratio
For Capital
Adequacy Purposes
Amount
Ratio
(dollars in thousands)
As of December 31, 2015:
Common Equity Tier 1 (to Risk Weighted
Assets)
Consolidated ............................................ $
368,865
12.71% $
130,549
4.50%
N/A
Bank Only ................................................ $
416,378
14.36% $
130,446
4.50% $
188,422
Tier 1 Capital (to Risk Weighted Assets)
Consolidated ............................................ $
422,513
14.56% $
174,065
6.00%
N/A
Bank Only ................................................ $
416,378
14.36% $
173,928
6.00% $
231,904
N/A
6.50%
N/A
8.00%
Total Capital (to Risk Weighted Assets)
Consolidated ............................................ $
443,106
15.27% $
232,087
8.00%
N/A
N/A
Bank Only ................................................ $
436,971
15.07% $
231,904
8.00% $
289,881
10.00%
Tier 1 Capital (to Average Assets) (1)
Consolidated ............................................ $
422,513
8.61% $
196,347
4.00%
N/A
Bank Only ................................................ $
416,378
8.49% $
196,209
4.00% $
245,261
N/A
5.00%
As of December 31, 2014:
Tier 1 Capital (to Risk Weighted Assets)
Consolidated ............................................ $
398,798
16.12% $
Bank Only ................................................ $
384,009
15.55% $
98,932
98,751
4.00%
N/A
4.00% $
148,127
N/A
6.00%
Total Capital (to Risk Weighted Assets)
Consolidated ............................................ $
412,893
16.69% $
197,863
8.00%
N/A
N/A
Bank Only ................................................ $
398,104
16.13% $
197,503
8.00% $
246,878
10.00%
Tier 1 Capital (to Average Assets) (1)
Consolidated ............................................ $
398,798
11.35% $
140,492
4.00%
N/A
Bank Only ................................................ $
384,009
10.95% $
140,329
4.00% $
175,412
N/A
5.00%
(1) Refers to quarterly average assets as calculated in accordance with policies established by bank regulatory agencies.
Our payment of dividends is limited under regulation. The amount that can be paid in any calendar year without prior approval of
our regulatory agencies cannot exceed the lesser of net profits (as defined) for that year plus the net profits for the preceding two
calendar years, or retained earnings.
129
14. DIVIDEND REINVESTMENT AND COMMON STOCK REPURCHASE PLAN
We have a Dividend Reinvestment Plan funded by stock authorized but not yet issued. Proceeds from the sale of the common stock
will be used for general corporate purposes and could be directed to our subsidiaries. For the year ended December 31, 2015, 49,908
shares were sold under this plan at an average price of $27.46 per share, reflective of other trades at the time of each sale. For the
year ended December 31, 2014, 40,142 shares were sold under this plan at an average price of $30.23 per share, reflective of other
trades at the time of each sale.
We have a Common Stock Repurchase Plan. Under the repurchase plan, our board of directors establishes, on a quarterly basis, total
dollar limitations and price per share for stock to be repurchased. Our board reviews this plan in conjunction with our capital needs
and those of Southside Bank and may, at their discretion, modify or discontinue the plan. During 2013, 90,300 shares of common
stock were purchased under this plan at a cost of $1.9 million. There were no additional purchases of shares of common stock under
this plan during 2014.
15. INCOME TAXES
The income tax expense (benefit) included in the accompanying statements of income consists of the following (in thousands):
Current income tax (benefit) expense ........................................................................ $
Deferred income tax (benefit) expense ......................................................................
Income tax (benefit) expense ..................................................................................... $
Years Ended December 31,
2014
2013
2015
10,671 $
(3,392)
7,279 $
(1,239) $
(925)
(2,164) $
6,041
(944)
5,097
The components of the net deferred tax asset (liability) as of December 31, 2015 and 2014 are summarized below (in thousands):
Allowance for loan losses .................................................................................................................. $
Retirement and other benefit plans ....................................................................................................
Unrealized gains on securities available for sale ...............................................................................
Premises and equipment ....................................................................................................................
Core deposit intangible ......................................................................................................................
Fair value adjustment on loans ..........................................................................................................
Fair value adjustment on time deposits .............................................................................................
Alternative minimum tax credit .........................................................................................................
Unfunded status of defined benefit plan ............................................................................................
State business tax credit ....................................................................................................................
Stock-based compensation ................................................................................................................
Other ..................................................................................................................................................
Gross deferred tax assets (liabilities) ..............................................................................................
Net deferred tax asset at December 31, 2015 ............................................................................. $
Allowance for loan losses .................................................................................................................. $
Retirement and other benefit plans ....................................................................................................
Unrealized losses on securities available for sale ..............................................................................
Premises and equipment ....................................................................................................................
Core deposit intangible ......................................................................................................................
Fair value adjustment on loans ..........................................................................................................
Fair value adjustment on time deposits .............................................................................................
Alternative minimum tax credit .........................................................................................................
Unfunded status of defined benefit plan ............................................................................................
State business tax credit ....................................................................................................................
Stock-based compensation ................................................................................................................
Other ..................................................................................................................................................
Gross deferred tax assets (liabilities) ..............................................................................................
Net deferred tax asset at December 31, 2014 ............................................................................. $
130
Assets
6,907
Liabilities
$
(2,220)
(1,298)
(5,797)
(2,213)
5,143
302
7,465
9,931
622
841
220
31,431
19,903
4,625
$
6,381
767
5,613
11,743
639
494
803
31,065
12,707
(11,528)
(3,250)
(5,112)
(7,033)
(2,963)
(18,358)
A reconciliation of tax at statutory rates and total tax expense is as follows (dollars in thousands):
2015
Years Ended December 31,
2014
2013
Statutory tax expense ........................................... $
Increase (decrease) in taxes from:
Tax exempt interest ..............................................
Bank owned life insurance....................................
Share based compensation ....................................
Acquisition costs .................................................
State business tax ................................................
Other, net ............................................................
Income tax (benefit) expense ................................ $
Amount
17,946
Percent of
Pre-Tax
Income
Amount
35.0 % $
6,348
Percent of
Pre-Tax
Income
Amount
15,738
34.0 % $
(9,975)
(914)
(75)
—
—
297
7,279
(19.5)%
(1.8)%
(0.1)%
— %
— %
0.6 %
14.2 % $
(9,942)
(451)
766
787
146
182
(2,164)
(53.3)%
(2.4)%
4.1 %
4.2 %
0.8 %
1.0 %
(11.6)% $
(10,298)
(1,059)
—
—
350
366
5,097
Percent of
Pre-Tax
Income
34.0 %
(22.2)%
(2.3)%
— %
— %
0.7 %
0.8 %
11.0 %
We file income tax returns in the U.S. federal jurisdiction and in certain states. We are no longer subject to U.S. federal income tax
examinations by tax authorities for years before 2012. No valuation allowance for deferred tax assets was recorded at December 31,
2015 or 2014 as management believes it is more likely than not that all of the deferred tax assets will be realized in future years.
Unrecognized tax benefits were not material at December 31, 2015 or 2014.
16. OFF-BALANCE-SHEET ARRANGEMENTS, COMMITMENTS AND CONTINGENCIES
Financial Instruments with Off-Balance-Sheet Risk. In the normal course of business, we are a party to certain financial instruments
with off-balance-sheet risk to meet the financing needs of our customers. These off-balance-sheet instruments include commitments
to extend credit and standby letters of credit. These instruments involve, to varying degrees, elements of credit and interest rate risk
in excess of the amount reflected in the financial statements. The contract or notional amounts of these instruments reflect the extent
of involvement and exposure to credit loss that we have in these particular classes of financial instruments.
Commitments to extend credit are agreements to lend to a customer provided that the terms established in the contract are
met. Commitments generally have fixed expiration dates and may require the payment of fees. Since some commitments are
expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements.
Standby letters of credit are conditional commitments issued to guarantee the performance of a customer to a third party. These
guarantees are primarily issued to support public and private borrowing arrangements. The credit risk involved in issuing letters of
credit is essentially the same as that involved in extending loan commitments to customers and similarly do not necessarily represent
future cash obligations.
Financial instruments with off-balance-sheet risk were as follows (in thousands):
At
December 31,
2015
At
December 31,
2014
Unused commitments:
Commitments to extend credit .............................................................................$
Standby letters of credit .......................................................................................
Total ................................................................................................................$
546,660 $
7,752
554,412 $
373,255
6,222
379,477
We apply the same credit policies in making commitments and standby letters of credit as we do for on-balance-sheet
instruments. We evaluate each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed
necessary, upon extension of credit is based on management's credit evaluation of the borrower. Collateral held varies but may
include cash or cash equivalents, negotiable instruments, real estate, accounts receivable, inventory, oil, gas and mineral interests,
property, plant, and equipment.
131
Lease Commitments. We lease certain branch facilities and office equipment under operating leases.
Future minimum rental commitments due under non-cancelable operating leases at December 31, 2015 were as follows (in
thousands):
2016 ...........$
2017 ...........
2018 ...........
2019 ...........
2020 ...........
Thereafter ..
$
1,988
1,523
1,245
861
580
267
6,464
Rent expense for branch facilities was $2.5 million, $1.6 million, and $1.4 million for the years ended December 31, 2015, 2014 and
2013, respectively. Rent expense for leased equipment was $297,000, $235,000, and $251,000 for the years ended December 31,
2015, 2014, and 2013, respectively.
We acquired a 202,000 square-foot office building in Fort Worth, Texas upon completion of the Omni acquisition that is used for a
branch location and certain bank operations. We occupy approximately 42,000 square feet of the building and lease the remaining
space to various tenants. Gross rental income from these leases of $2.8 million and $116,000 was recognized for the years ended
December 31, 2015 and 2014, respectively. At December 31, 2015, non-cancelable operating leases for the building with future
minimum lease payments are as follows (in thousands):
2016 ...........$
2017 ...........
2018 ...........
2019 ...........
2020 ...........
Thereafter ..
$
3,093
2,746
2,023
1,684
1,572
4,002
15,120
It is expected that certain leases will be renewed, or equipment replaced with new leased equipment, as these leases expire.
Securities. In the normal course of business we buy and sell securities. There were $19.4 million and $6.0 million of unsettled trades
to purchase securities at December 31, 2015 and December 31, 2014, respectively. There were $9.3 million and $57.2 million
unsettled trades to sell securities at December 31, 2015 and December 31, 2014, respectively.
Deposits. There were no unsettled issuances of brokered CDs at December 31, 2015 or December 31, 2014.
Litigation. We are involved with various litigation in the normal course of business. Management, after consulting with our legal
counsel, believes that any liability resulting from litigation will not have a material effect on our financial position, results of
operations or liquidity.
132
17. SIGNIFICANT GROUP CONCENTRATIONS OF CREDIT RISK
Although we have a diversified loan portfolio, a significant portion of our loans are collateralized by real estate. Repayment of these
loans is in part dependent upon the economic conditions in the market area. Part of the risk associated with real estate loans has
been mitigated since 37.9% of this group represents loans collateralized by residential dwellings that are primarily owner-
occupied. Losses on this type of loan have historically been less than those on speculative properties. Many of the remaining real
estate loans are collateralized primarily with non owner-occupied commercial real estate. We currently have a concentration of
credit risk greater than 10% of loans secured by retail investment real estate properties, such as shopping malls and strip centers.
Additionally, the oil and gas industry remains a component of the East Texas economy and as such the health of the oil and gas
industry may have an effect on our business. Our oil and gas exposure in the loan portfolio remained minimal at 1.34% of the loan
portfolio at December 31, 2015.
The medical community is another significant portion of our loan portfolio. Medical loan types include commercial loans and
commercial real estate loans. Collateral for these loans varies depending on the type of loan and financial strength of the
borrower. The primary source of repayment for loans in the medical community is cash flow from continuing operations. The
medical community represents a concentration of risk in our Commercial loan and Commercial Real Estate loan portfolio. See
“Item 1. Business – Market Area.” We believe that risk in the medical community is mitigated because it is spread among multiple
practice types and multiple specialties. Should the government change the amount it pays the medical community through the
various government health insurance programs or if new government regulation impacts the profitability of the medical community,
the medical community could be adversely impacted which in turn could result in higher default rates by borrowers in the medical
industry.
The MBS we hold consist exclusively of U.S. agency pass-through securities which are either directly or indirectly backed by the
full faith and credit of the United States Government or guaranteed by GSEs. The GNMA mortgage-backed securities are backed by
the full faith and credit of the United States Government and the Fannie Mae and Freddie Mac U.S. agency GSE guaranteed MBS
are not backed by the full faith and credit of the United States government.
133
18. PARENT COMPANY FINANCIAL INFORMATION
Condensed financial information for Southside Bancshares, Inc. (parent company only) was as follows (in thousands, except share
amounts):
CONDENSED BALANCE SHEETS
ASSETS
December 31,
2015
2014
Cash and due from banks ............................................................................................................ $
Investment in bank subsidiaries at equity in underlying net assets .............................................
Investment in nonbank subsidiaries at equity in underlying net assets .......................................
Other assets .................................................................................................................................
$
1,766
494,130
1,826
7,282
11,696
466,374
1,826
9,998
TOTAL ASSETS ....................................................................................................................... $
505,004
$
489,894
LIABILITIES
Long-term debt ............................................................................................................................ $
Other liabilities ............................................................................................................................
$
60,311
631
TOTAL LIABILITIES ..............................................................................................................
60,942
60,311
4,340
64,651
SHAREHOLDERS' EQUITY
Common stock ($1.25 par, 40,000,000 shares authorized, 27,865,798 shares issued in 2015
and 26,578,127 shares issued in 2014) ........................................................................................
Paid-in capital ..............................................................................................................................
Retained earnings ........................................................................................................................
Treasury stock (2,469,638 shares at cost) ....................................................................................
Accumulated other comprehensive loss ......................................................................................
34,832
424,078
41,527
(37,692)
(18,683)
33,223
389,886
55,396
(37,692)
(15,570)
TOTAL SHAREHOLDERS' EQUITY .....................................................................................
444,062
425,243
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY .................................................... $
505,004
$
489,894
CONDENSED STATEMENTS OF INCOME
INCOME
Dividends from subsidiary ........................................................................................ $
Interest income ..........................................................................................................
TOTAL INCOME ...................................................................................................
2015
Years Ended December 31,
2014
(in thousands)
2013
17,600 $
44
17,644
177,000 $
53
177,053
15,000
43
15,043
EXPENSE
Interest expense .........................................................................................................
Other ..........................................................................................................................
TOTAL EXPENSE .................................................................................................
1,455
3,193
4,648
1,424
16,144
17,568
Income before income tax expense ...........................................................................
Income tax benefit .....................................................................................................
Income before equity in undistributed earnings of subsidiaries ................................
Equity in undistributed earnings of subsidiaries ........................................................
NET INCOME ........................................................................................................ $
12,996
1,612
14,608
29,389
43,997 $
159,485
4,043
163,528
(142,695)
20,833 $
1,449
2,461
3,910
11,133
1,315
12,448
28,742
41,190
134
CONDENSED STATEMENTS OF CASH FLOW
2015
Years Ended December 31,
2014
(in thousands)
2013
OPERATING ACTIVITIES:
Net Income .............................................................................................................. $
Adjustments to reconcile net income to net cash provided by operations:
43,997 $
20,833 $
41,190
Equity in undistributed earnings of subsidiaries ................................................
Decrease (increase) in other assets .....................................................................
(Decrease) increase in other liabilities ...............................................................
Net cash provided by operating activities ........................................................
(29,389)
2,716
(3,709)
13,615
142,695
(6,477)
3,904
160,955
(28,742)
1,032
319
13,799
INVESTING ACTIVITIES:
Investment in subsidiaries .......................................................................................
Net cash paid for acquisition ...................................................................................
Dissolution of subsidiaries ......................................................................................
Net cash (used in) provided by investing activities .........................................
(10)
—
—
(10)
—
(136,078)
—
(136,078)
—
—
1,153
1,153
(1,899)
1,551
(16,088)
—
(16,436)
(1,484)
4,534
—
2,287
(17,919)
(599)
(16,231)
8,646
3,050
11,696 $
3,050
FINANCING ACTIVITIES:
Purchase of common stock .....................................................................................
Proceeds from issuance of common stock ..............................................................
Dividends paid ........................................................................................................
Payments for other financing activities ...................................................................
Net cash used in financing activities ................................................................
Net (decrease) increase in cash and cash equivalents .............................................
Cash and cash equivalents at beginning of year ......................................................
Cash and cash equivalents at end of year ................................................................ $
—
1,536
(25,071)
—
(23,535)
(9,930)
11,696
1,766 $
135
19. QUARTERLY FINANCIAL INFORMATION OF REGISTRANT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(in thousands, except share amounts)
2015
Fourth
Quarter
Third
Quarter
Second
Quarter
First
Quarter
Interest income .................................................................................. $
Interest expense .................................................................................
Net interest income ............................................................................
Provision for loan losses ....................................................................
Net gain on sale of securities available for sale .................................
Noninterest income excluding net securities gains ............................
Noninterest expense ..........................................................................
Income before income tax expense ...................................................
Provision for income tax expense ......................................................
Net income ........................................................................................
39,964 $
5,267
34,697
1,951
204
8,611
28,431
13,130
1,438
11,692
38,211 $
4,926
33,285
2,276
875
8,486
26,637
13,733
1,971
11,762
37,750 $
4,845
32,905
268
105
8,826
28,437
13,131
1,967
11,164
38,607
4,816
33,791
3,848
2,476
8,312
29,449
11,282
1,903
9,379
Earnings per common share
Basic ............................................................................................... $
Diluted ............................................................................................ $
0.46 $
0.46 $
0.46 $
0.46 $
0.44 $
0.44 $
0.37
0.37
2014
Fourth
Quarter
Third
Quarter
Second
Quarter
First
Quarter
Interest income .................................................................................. $
Interest expense .................................................................................
Net interest income ............................................................................
Provision for loan losses ....................................................................
Net gain on sale of securities available for sale .................................
Noninterest income excluding net securities gains ............................
Noninterest expense ..........................................................................
(Loss) income before income tax expense ........................................
Provision for income tax (benefit) expense .......................................
Net (loss) income ..............................................................................
29,613 $
4,259
25,354
3,287
1,170
5,979
37,079
(7,863)
(3,918)
(3,945)
29,840 $
4,120
25,720
4,868
1,151
3,868
20,017
5,854
(243)
6,097
32,086 $
4,230
27,856
2,650
498
6,017
20,426
11,295
838
10,457
32,239
4,347
27,892
4,133
11
5,795
20,182
9,383
1,159
8,224
(Loss) earnings per common share
Basic ............................................................................................... $
Diluted ............................................................................................ $
(0.19) $
(0.19) $
0.31 $
0.31 $
0.53 $
0.53 $
0.41
0.41
136
INDEX TO EXHIBITS
Exhibit No.
2
– Agreement and Plan of Merger, dated April 28, 2014, by and among Southside Bancshares, Inc., Omega
Merger Sub, Inc. and OmniAmerican Bancorp, Inc. (filed as Exhibit 2 to the Registrant's Form 10-Q for
the quarter ended March 31, 2014, and incorporated herein by reference).
3 (a)
– Restated Certificate of Formation of Southside Bancshares, Inc. effective May 2, 2014 (filed as Exhibit 3
(a) to the Registrant's Form 10-Q for the quarter ended March 31, 2014, and incorporated herein by
reference).
3 (b)(i)
– Amended and Restated Bylaws of Southside Bancshares, Inc. effective November 20, 2014 (filed as
Exhibit 3.1 to the Registrant's Form 8-K, filed November 24, 2014, and incorporated herein by
reference).
4
– Management agrees to furnish to the Securities and Exchange Commission, upon request, a copy of any
other agreements or instruments of Southside Bancshares, Inc. and its subsidiaries defining the rights of
holders of any long-term debt whose authorization does not exceed 10% of total assets.
** 10 (a)(i)
–
Deferred Compensation Plan for B. G. Hartley effective February 13, 1984, as amended June 28, 1990,
December 15, 1994, November 20, 1995, December 21,1999 and June 29, 2001 (filed as Exhibit 10(a)(i)
to the Registrant's Form 10-Q for the quarter ended June 30, 2001, and incorporated herein by reference).
** 10 (b)
– Officers Long-term Disability Income Plan effective June 25, 1990 (filed as Exhibit 10(b) to the
Registrant's Form 10-K for the year ended June 30, 1990, and incorporated herein by reference).
** 10 (c)
– Retirement Plan Restoration Plan for the subsidiaries of SoBank, Inc. (now named Southside Bancshares,
Inc.) (filed as Exhibit 10(c) to the Registrant's Form 10-K for the year ended December 31, 1992, and
incorporated herein by reference).
** 10 (d)
–
Form of Deferred Compensation Agreements dated June 30, 1994 with each of Sam Dawson, Lee Gibson
and Jeryl Story, as amended October 15, 1997 (filed as Exhibit 10(f) to the Registrant's Form 10-K for
the year ended December 31, 1997, and incorporated herein by reference).
** 10 (f)
–
Split dollar compensation plan dated September 7, 2004 with Lee R. Gibson, III (filed as exhibit 10(i) to
the Registrant's Form 8-K, filed October 19, 2004, and incorporated herein by reference).
** 10 (g)
–
Split dollar compensation plan dated August 27, 2004 with B. G. Hartley (filed as exhibit 10 (j) to the
Registrant's Form 8-K, filed October 19, 2004, and incorporated herein by reference).
** 10 (h)
–
Split dollar compensation plan dated August 31, 2004 with Charles E. Dawson (filed as exhibit 10(k) to
the Registrant's Form 8-K, filed October 19, 2004, and incorporated herein by reference).
** 10 (i)
– Employment Agreement dated October 22, 2007, by and between Southside Bank and Lee R. Gibson
(filed as exhibit 10 (l) to the Registrant's Form 8-K, filed October 26, 2007, and incorporated herein by
reference).
** 10 (j)
– Employment Agreement dated October 22, 2007, by and between Southside Bank and Sam Dawson
(filed as exhibit 10 (m) to the Registrant's Form 8-K, filed October 26, 2007, and incorporated herein by
reference).
** 10 (k)
– Employment Agreement dated April 28, 2014, by and between Southside Bank, Southside Bancshares,
Inc, and Tim Carter (filed as exhibit 10.2 to the Registrant's Amendment No. 1 to Form S-4, filed July 18,
2014, and incorporated herein by reference).
** 10 (l)
– Master Software License Maintenance and Services Agreement dated February 4, 2008, by and between
Southside Bank and Jack Henry & Associates, Inc. (filed as Item 1.01 to the Registrant's Form 8-K, filed
February 8, 2008, and incorporated herein by reference).
** 10 (m)
– Retirement Agreement dated November 7, 2008, by and between Southside Bank, Southside Bancshares,
Inc. and B. G. Hartley (filed as exhibit 10 (o) to the Registrant's Form 10-Q, filed November 7, 2008, and
incorporated herein by reference).
137
** 10 (n)
–
Southside Bancshares, Inc. 2009 Incentive Plan (filed as Exhibit 99.1 to the Registrant's Form 8-K, filed
April 20, 2009, and incorporated herein by reference).
** 10 (o)
–
Form of Southside Bancshares, Inc. Nonstatutory Stock Option Award Certificate for purchase of Options
pursuant to the Southside Bancshares, Inc. 2009 Incentive Plan (filed as Exhibit 10.1 to the Registrant's
Form 10-Q filed August 8, 2011, and incorporated herein by reference).
** 10 (p)
–
Form of Southside Bancshares, Inc. Restricted Stock Unit Award Certificate for grant of Units pursuant to
the Southside Bancshares, Inc. 2009 Incentive Plan (filed as Exhibit 10.2 to the Registrant's Form 10-Q
filed August 8, 2011, and incorporated herein by reference).
* 21
–
Subsidiaries of the Registrant.
* 23.1
– Consent of Independent Registered Public Accounting Firm
* 31.1
– Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
* 31.2
– Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
* 32
– Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
* 101.INS
– XBRL Instance Document.
* 101.SCH
– XBRL Taxonomy Extension Schema Document.
* 101.CAL
– XBRL Taxonomy Extension Calculation Linkbase Document.
* 101.LAB
– XBRL Taxonomy Extension Label Linkbase Document.
* 101.PRE
– XBRL Taxonomy Extension Presentation Linkbase Document.
* 101.DEF
– XBRL Taxonomy Extension Definition Linkbase Document.
*Filed herewith.
**Compensation plan, benefit plan or employment contract or arrangement.
138
3/14/16 3:14 PM
South Beckham at East Lake
Post Office Box 1079, Tyler, Texas 75710-1079
Telephone: 903.531.7111
45428cov.indd 1