SBSI 9.30.2012 10-Q
Table of Contents


 
 
 
 
 
UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

FORM 10-Q
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2012

OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ____________ to ____________
 
Commission file number 0-12247
SOUTHSIDE BANCSHARES, INC.
(Exact name of registrant as specified in its charter)
TEXAS
 
75-1848732
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
 
 
1201 S. Beckham, Tyler, Texas
 
75701
(Address of principal executive offices)
 
(Zip Code)
903-531-7111
(Registrant's telephone number, including area code)

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

Large accelerated filer o
Accelerated filer x
Non-accelerated filer o
Smaller reporting company o
(Do not check if a smaller reporting company)
 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o  No x

The number of shares of the issuer's common stock, par value $1.25, outstanding as of October 31, 2012 was 17,373,835 shares.
 



TABLE OF CONTENTS
 
PART I.  FINANCIAL INFORMATION
 
PART II.  OTHER INFORMATION
 
EXHIBIT 31.1 – CERTIFICATION PURSUANT TO SECTION 302
 
EXHIBIT 31.2 – CERTIFICATION PURSUANT TO SECTION 302
 
EXHIBIT 32 – CERTIFICATION PURSUANT TO SECTION 906
 


Table of Contents


PART I.   FINANCIAL INFORMATION
ITEM 1.   FINANCIAL STATEMENTS
SOUTHSIDE BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(in thousands, except share amounts)
 
September 30,
2012
 
December 31,
2011
ASSETS
 
 
 
Cash and due from banks
$
44,670

 
$
40,989

Interest earning deposits
87,302

 
2,249

Total cash and cash equivalents
131,972

 
43,238

Investment securities:
 

 
 

Available for sale, at estimated fair value
558,634

 
282,956

Held to maturity, at amortized cost
1,009

 
1,496

Mortgage-backed and related securities:
 

 
 

Available for sale, at estimated fair value
865,952

 
716,126

Securities carried at fair value through income

 
647,759

Held to maturity, at amortized cost
293,300

 
365,631

FHLB stock, at cost
33,939

 
33,869

Other investments, at cost
2,064

 
2,064

Loans held for sale
1,158

 
3,552

Loans:
 

 
 

Loans
1,221,595

 
1,087,230

Less:  Allowance for loan losses
(20,848
)
 
(18,540
)
Net Loans
1,200,747

 
1,068,690

Premises and equipment, net
49,925

 
50,595

Goodwill
22,034

 
22,034

Other intangible assets, net
369

 
522

Interest receivable
14,728

 
19,426

Other assets
45,254

 
45,859

TOTAL ASSETS
$
3,221,085

 
$
3,303,817

LIABILITIES AND SHAREHOLDERS’ EQUITY
 

 
 

Deposits:
 

 
 

Noninterest bearing
$
567,062

 
$
505,594

Interest bearing
1,734,755

 
1,816,077

Total deposits
2,301,817

 
2,321,671

Short-term obligations:
 

 
 

Federal funds purchased and repurchase agreements
1,468

 
2,945

FHLB advances
151,315

 
361,811

Other obligations
219

 
219

Total short-term obligations
153,002

 
364,975

Long-term obligations:
 

 
 

FHLB advances
381,868

 
260,724

Long-term debt
60,311

 
60,311

Total long-term obligations
442,179

 
321,035

Deferred tax liability
1,359

 
3,458

Unsettled trades to purchase securities
17,326

 
1,196

Other liabilities
28,829

 
32,555

TOTAL LIABILITIES
2,944,512

 
3,044,890

 
 
 
 
Off-Balance-Sheet Arrangements, Commitments and Contingencies (Note 10)


 


 
 
 
 
Shareholders' equity:
 

 
 

Common stock - ($1.25 par, 40,000,000 shares authorized, 19,397,673 shares issued in 2012 and 18,517,101 shares issued in 2011)
24,247

 
23,146

Paid-in capital
194,485

 
176,791

Retained earnings
71,691

 
72,646

Treasury stock (2,023,838 shares at cost)
(28,377
)
 
(28,377
)
Accumulated other comprehensive income
14,527

 
14,721

TOTAL SHAREHOLDERS' EQUITY
276,573

 
258,927

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
$
3,221,085

 
$
3,303,817

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

1

Table of Contents


SOUTHSIDE BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(in thousands, except per share data)
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2012
 
2011
 
2012
 
2011
Interest income
 
 
 
 
 
 
 
Loans
$
17,847

 
$
16,229

 
$
52,143

 
$
50,630

Investment securities – taxable
22

 
11

 
73

 
49

Investment securities – tax-exempt
3,839

 
3,069

 
9,467

 
9,507

Mortgage-backed and related securities
6,695

 
13,292

 
27,730

 
37,899

FHLB stock and other investments
57

 
50

 
190

 
182

Other interest earning assets
4

 
2

 
19

 
15

Total interest income
28,464

 
32,653

 
89,622

 
98,282

Interest expense
 

 
 

 
 

 
 

Deposits
2,455

 
3,879

 
8,615

 
11,966

Short-term obligations
1,551

 
1,643

 
4,877

 
5,077

Long-term obligations
2,450

 
3,115

 
7,581

 
10,397

Total interest expense
6,456

 
8,637

 
21,073

 
27,440

Net interest income
22,008

 
24,016

 
68,549

 
70,842

Provision for loan losses
3,265

 
1,454

 
8,491

 
5,452

Net interest income after provision for loan losses
18,743

 
22,562

 
60,058

 
65,390

Noninterest income
 

 
 

 
 

 
 

Deposit services
3,907

 
4,098

 
11,493

 
12,005

Gain on sale of securities available for sale
4,302

 
3,609

 
13,571

 
9,080

Gain (loss) on sale of securities carried at fair value through income

 
254

 
(498
)
 
592




 


 


 


Total other-than-temporary impairment losses

 

 
(21
)
 

Portion of loss recognized in other comprehensive income (before taxes)

 

 
(160
)
 

Net impairment losses recognized in earnings

 

 
(181
)
 




 


 


 


Fair value gains – securities

 
3,274

 

 
7,357

FHLB advance option impairment charges
(195
)
 
(7,819
)
 
(2,031
)
 
(7,819
)
Gain on sale of loans
314

 
402

 
743

 
967

Trust income
705

 
672

 
2,051

 
1,968

Bank owned life insurance income
260

 
288

 
780

 
835

Other
1,205

 
957

 
3,439

 
3,021

Total noninterest income
10,498

 
5,735

 
29,367

 
28,006

Noninterest expense
 

 
 

 
 

 
 

Salaries and employee benefits
11,919

 
11,280

 
35,894

 
34,593

Occupancy expense
1,980

 
1,866

 
5,589

 
5,365

Equipment expense
506

 
540

 
1,570

 
1,558

Advertising, travel & entertainment
606

 
591

 
1,813

 
1,694

ATM and debit card expense
251

 
235

 
817

 
716

Director fees
261

 
193

 
802

 
584

Supplies
178

 
186

 
559

 
571

Professional fees
606

 
571

 
1,547

 
1,583

Postage
179

 
178

 
536

 
543

Telephone and communications
416

 
285

 
1,267

 
967

FDIC Insurance
429

 
212

 
1,313

 
1,710

Other
1,745

 
1,559

 
4,987

 
4,660

Total noninterest expense
19,076

 
17,696

 
56,694

 
54,544

 
 
 
 
 
 
 
 
Income before income tax expense
10,165

 
10,601

 
32,731

 
38,852

Provision for income tax expense
1,558

 
2,038

 
6,256

 
7,924

Net income
8,607

 
8,563

 
26,475

 
30,928

Less: Net income attributable to the noncontrolling interest

 

 

 
(1,358
)
Net income attributable to Southside Bancshares, Inc.
$
8,607

 
$
8,563

 
$
26,475

 
$
29,570

Earnings per common share – basic
$
0.50

 
$
0.50

 
$
1.53

 
$
1.71

Earnings per common share – diluted
$
0.50

 
$
0.50

 
$
1.53

 
$
1.71

Dividends paid per common share
$
0.20

 
$
0.18

 
$
0.58

 
$
0.52

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

2

Table of Contents


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

September 30,
 
September 30,
 
2012
 
2011
 
2012
 
2011
Net income
$
8,607

 
$
8,563

 
$
26,475

 
$
30,928

Other comprehensive income (loss):
 

 
 

 
 

 
 

Unrealized holding gains on available for sale securities during the period
15,469

 
20,722

 
11,446

 
47,002

Noncredit portion of other-than-temporary impairment losses on the AFS securities

 

 
160

 

Reclassification adjustment for gain on sale of available for sale securities included in net income
(4,302
)
 
(3,609
)
 
(13,571
)
 
(9,080
)
Reclassification of other-than-temporary impairment charges on available for sale securities included in net income

 

 
181

 

Amortization of net actuarial loss, included in net periodic benefit cost
505

 
366

 
1,516

 
1,099

Amortization of prior service credit included in net periodic benefit cost
(10
)
 
(11
)
 
(32
)
 
(33
)
Other comprehensive income (loss)
11,662

 
17,468

 
(300
)
 
38,988

Income tax benefit (expense) related to other items of comprehensive income
(4,081
)
 
(6,114
)
 
106

 
(13,646
)
Other comprehensive income (loss), net of tax
7,581

 
11,354

 
(194
)
 
25,342

Comprehensive income
$
16,188

 
$
19,917

 
$
26,281

 
$
56,270


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

3

Table of Contents


SOUTHSIDE BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(UNAUDITED)
(in thousands, except share amounts)
 
Common
Stock
 
Paid In
Capital
 
Retained
Earnings
 
Treasury
Stock
 
Accumulated Other Comprehensive Income (Loss)
 
Noncontrolling Interest
 
Total
Equity
Balance at December 31, 2010
$
22,075

 
$
162,877

 
$
64,179

 
$
(28,377
)
 
$
(6,293
)
 
$
1,113

 
$
215,574

Net Income
 

 
 

 
29,570

 
 

 
 

 
1,358

 
30,928

Other comprehensive income
 

 
 

 
 

 
 

 
25,342

 
 

 
25,342

Issuance of common stock (44,352 shares)
56

 
804

 
 

 
 

 
 

 
 

 
860

Stock compensation expense
 

 
143

 
 

 
 

 
 

 
 

 
143

Tax benefits related to stock compensation
 

 
2

 
 

 
 

 
 

 
 

 
2

Capital distribution to noncontrolling interest shareholders
 

 
 

 
 

 
 

 
 

 
(475
)
 
(475
)
Purchase of noncontrolling interest
 
 
(2,754
)
 
 
 
 
 
 
 
(1,996
)
 
(4,750
)
Dividends paid on common stock ($0.52 per share)
 

 
 

 
(8,414
)
 
 

 
 

 
 

 
(8,414
)
Stock dividend declared
981

 
15,014

 
(15,995
)
 
 

 
 

 
 

 

Balance at September 30, 2011
$
23,112

 
$
176,086

 
$
69,340

 
$
(28,377
)
 
$
19,049

 
$

 
$
259,210

Balance at December 31, 2011
$
23,146

 
$
176,791

 
$
72,646

 
$
(28,377
)
 
$
14,721

 
$

 
$
258,927

Net Income
 

 
 

 
26,475

 
 

 
 

 
 

 
26,475

Other comprehensive loss
 

 
 

 
 

 
 

 
(194
)
 
 

 
(194
)
Issuance of common stock (45,620 shares)
57

 
906

 
 

 
 

 
 

 
 

 
963

Stock compensation expense
 

 
303

 
 

 
 

 
 

 
 

 
303

Tax benefits related to stock compensation
 

 
11

 
 

 
 

 
 

 
 

 
11

Net issuance of common stock under employee stock plans
10

 
49

 
(63
)
 
 

 
 

 
 

 
(4
)
Dividends paid on common stock ($0.58 per share)
 

 
 

 
(9,908
)
 
 

 
 

 
 

 
(9,908
)
Stock dividend declared
1,034

 
16,425

 
(17,459
)
 
 

 
 

 
 

 

Balance at September 30, 2012
$
24,247

 
$
194,485

 
$
71,691

 
$
(28,377
)
 
$
14,527

 
$

 
$
276,573


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

4

Table of Contents


SOUTHSIDE BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
(UNAUDITED)
(in thousands)
 
Nine Months Ended
 
September 30,
 
2012
 
2011
OPERATING ACTIVITIES:
 
 
 
Net income
$
26,475

 
$
30,928

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

 
 

Depreciation
2,706

 
2,515

Amortization of premium
35,354

 
26,175

Accretion of discount and loan fees
(3,611
)
 
(3,386
)
Provision for loan losses
8,491

 
5,452

Stock compensation expense
303

 
143

Deferred tax (benefit) expense
(1,988
)
 
561

Excess tax benefits from stock-based compensation
(11
)
 

Loss (gain) on sale of securities carried at fair value through income
498

 
(592
)
Gain on sale of securities available for sale
(13,571
)
 
(9,080
)
Net other-than-temporary impairment losses
181

 

Fair value gain – securities

 
(7,357
)
FHLB advance option impairment charges
2,031

 
7,819

Loss on sale of assets

 
3

Loss on retirement of assets

 
90

Impairment on other real estate owned
28

 
184

Gain on sale of other real estate owned
(2
)
 
(242
)
Net change in:
 

 
 

Interest receivable
4,698

 
2,076

Other assets
(1,171
)
 
(2,413
)
Interest payable
(559
)
 
(861
)
Other liabilities
(1,683
)
 
3,598

Loans held for sale
2,394

 
1,092

Net cash provided by operating activities
60,563

 
56,705

 
 
 
 
INVESTING ACTIVITIES:
 

 
 

Securities held to maturity:
 

 
 

Purchases

 
(11,875
)
Maturities, calls and principal repayments
67,162

 
34,097

Securities available for sale:
 

 
 

Purchases
(1,446,425
)
 
(512,910
)
Sales
745,085

 
516,571

Maturities, calls and principal repayments
279,995

 
195,097

Securities carried at fair value through income:
 

 
 

Purchases
(57,606
)
 
(707,222
)
Sales
675,255

 
180,723

Maturities, calls and principal repayments
25,279

 
32,132

Proceeds from redemption of FHLB stock
12,266

 
16,461

Purchases of FHLB stock and other investments
(12,336
)
 
(10,806
)
Net (increase) decrease in loans
(142,126
)
 
27,344

Purchases of premises and equipment
(2,036
)
 
(2,951
)
Proceeds from sales of premises and equipment

 
6

Proceeds from sales of other real estate owned
401

 
676

Proceeds from sales of repossessed assets
3,416

 
3,933

Net cash provided by (used in) investing activities
148,330

 
(238,724
)
 
 
 
 
(continued)
 
 
 

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SOUTHSIDE BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
(UNAUDITED) (continued)
(in thousands)
 
Nine Months Ended
 
September 30,
 
2012
 
2011
FINANCING ACTIVITIES:
 
 
 
Net increase in demand and savings accounts
157,650

 
133,513

Net (decrease) increase in certificates of deposit
(178,046
)
 
30,099

Net decrease in federal funds purchased and repurchase agreements
(1,477
)
 
(847
)
Proceeds from FHLB advances
12,560,845

 
8,005,080

Repayment of FHLB advances
(12,650,197
)
 
(8,004,991
)
Net capital distributions to noncontrolling interest in consolidated entities

 
(475
)
Purchase of noncontrolling interest

 
(4,750
)
Excess tax benefits from stock-based compensation
11

 
2

Proceeds from the issuance of common stock
963

 
860

Dividends paid
(9,908
)
 
(8,414
)
Net cash (used in) provided by financing activities
(120,159
)
 
150,077

 
 
 
 
Net increase (decrease) in cash and cash equivalents
88,734

 
(31,942
)
Cash and cash equivalents at beginning of period
43,238

 
79,073

Cash and cash equivalents at end of period
$
131,972

 
$
47,131

 
 
 
 
 
 
 
 
 
 
 
 
SUPPLEMENTAL DISCLOSURES FOR CASH FLOW INFORMATION:
 

 
 


 
 
 
Interest paid
$
21,633

 
$
28,301

Income taxes paid
$
11,200

 
$
6,500

 
 
 
 
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES:
 

 
 


 
 
 
Loans transferred to other repossessed assets and real estate through foreclosure
$
4,028

 
$
4,790

Adjustment to pension liability
$
(1,484
)
 
$
(1,066
)
5% stock dividend
$
17,459

 
$
15,995

Unsettled trades to purchase securities
$
(17,326
)
 
$


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


6

Table of Contents


SOUTHSIDE BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS

1.    Basis of Presentation

In this report, the words “the Company,” “we,” “us,” and “our” refer to the combined entities of Southside Bancshares, Inc. and its subsidiaries.  The words “Southside” and “Southside Bancshares” refer to Southside Bancshares, Inc.  The words “Southside Bank” and “the Bank” refer to Southside Bank (which, subsequent to the internal merger of Fort Worth National Bank (“FWNB”) with and into Southside Bank, includes FWNB).  “FWBS” refers to Fort Worth Bancshares, Inc., a bank holding company acquired by Southside of which FWNB was a wholly-owned subsidiary.  “SFG” refers to SFG Finance, LLC (formerly Southside Financial Group, LLC) which is a wholly-owned subsidiary of the Bank as of July 15, 2011.  “SSI” refers to Southside Securities, Inc., which is a wholly-owned subsidiary of Southside Bancshares, Inc.

The consolidated balance sheet as of September 30, 2012, and the related consolidated statements of income, comprehensive income, changes in equity and cash flows and notes to the financial statements for the three and nine month periods ended September 30, 2012 and 2011 are unaudited; in the opinion of management, all adjustments necessary for a fair statement of such financial statements have been included.  Such adjustments consisted only of normal recurring items.  All significant intercompany accounts and transactions are eliminated in consolidation.  The preparation of these consolidated financial statements in conformity with U.S. generally accepted accounting principles (“GAAP”) requires the use of management’s estimates.  These estimates are subjective in nature and involve matters of judgment.  Actual amounts could differ from these estimates.

Interim results are not necessarily indicative of results for a full year.  These financial statements should be read in conjunction with the financial statements and notes thereto in our Annual Report on Form 10-K for the year ended December 31, 2011.  All share data has been adjusted to give retroactive recognition to stock splits and stock dividends.  For a description of our significant accounting and reporting policies, refer to Note 1 of the Notes to Financial Statements in our Annual Report on Form 10-K for the year ended December 31, 2011.

Accounting Standards

ASU No. 2011-03, “Transfers and Servicing (Topic 860) - Reconsideration of Effective Control for Repurchase Agreements.”  ASU 2011-03 is intended to improve financial reporting of repurchase agreements and other agreements that both entitle and obligate a transferor to repurchase or redeem financial assets before their maturity.  ASU 2011-03 removes from the assessment of effective control (i) the criterion requiring the transferor to have the ability to repurchase or redeem the financial assets on substantially the agreed terms, even in the event of default by the transferee, and (ii) the collateral maintenance guidance related to that criterion.  ASU 2011-03 became effective for us on January 1, 2012 and did not have a significant impact on our consolidated financial statements.

ASU 2011-04, “Fair Value Measurement (Topic 820) - Amendments to Achieve Common Fair Value Measurements and Disclosure Requirements in U.S. GAAP and IFRSs.”  ASU 2011-04 amends Topic 820, “Fair Value Measurements and Disclosures,” to converge the fair value measurement guidance in U.S. generally accepted accounting principles and International Financial Reporting Standards.  ASU 2011-04 clarifies the application of existing fair value measurement requirements, changes certain principles in Topic 820 and requires additional fair value disclosures.  We adopted ASU 2011-04 on January 1, 2012 and it did not have a significant impact on our consolidated financial statements.  See “Note 9 - Fair Value Measurement.”

ASU 2011-05, “Comprehensive Income (Topic 220) - Presentation of Comprehensive Income.”  ASU 2011-05 amends Topic 220, “Comprehensive Income,” to require that all nonowner changes in stockholders’ equity be presented in either a single continuous statement of comprehensive income or in two separate but consecutive statements.  Additionally, ASU 2011-05 requires entities to present, on the face of the financial statements, reclassification adjustments for items that are reclassified from other comprehensive income to net income in the statement or statements where the components of net income and the components of other comprehensive income are presented.  The option to present components of other comprehensive income as part of the statement of changes in stockholders’ equity was eliminated.   ASU 2011-05 is effective for annual and interim periods beginning after December 15, 2011; however, certain provisions related to the presentation of reclassification adjustments have been deferred by ASU 2011-12 “Comprehensive Income (Topic 220) – Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05.”  ASU 2011-05 did not have a significant impact on our consolidated financial statements.  See “Consolidated Statements of Comprehensive Income” directly following our Consolidated Statements of Income in our consolidated financial statements.

ASU 2011-08, “Intangibles - Goodwill and Other (Topic 350) - Testing Goodwill for Impairment.” ASU 2011-08 amends Topic 350, “Intangibles – Goodwill and Other,” to give entities the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit

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is less than its carrying amount.  If, after assessing the totality of events or circumstances, an entity determines it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing the two-step impairment test is unnecessary.  However, if an entity concludes otherwise, then it is required to perform the first step of the two-step impairment test by calculating the fair value of the reporting unit and comparing the fair value with the carrying amount of the reporting unit.  ASU 2011-08 is effective for annual and interim impairment tests beginning after December 15, 2011, and did not have a significant impact on our consolidated financial statements.

ASU 2011-11, “Balance Sheet (Topic 210) – Disclosures about Offsetting Assets and Liabilities.”  ASU 2011-11 amends Topic 210, “Balance Sheet,” to require an entity to disclose both gross and net information about financial instruments, such as sales and repurchase agreements and reverse sale and repurchase agreements and securities borrowing/lending arrangements, and derivative instruments that are eligible for offset in the statement of financial position and/or subject to a master netting arrangement or similar agreement.  ASU 2011-11 is effective for annual and interim periods beginning on January 1, 2013, and is not expected to have a significant impact on our consolidated financial statements.

2.     Earnings Per Share

Earnings per share attributable to Southside Bancshares, Inc. on a basic and diluted basis have been adjusted to give retroactive recognition to stock splits and stock dividends and is calculated as follows (in thousands, except per share amounts):
 
Three Months Ended September 30,
 
Nine Months Ended
September 30,
 
2012
 
2011
 
2012
 
2011
Basic and Diluted Earnings:
 
 
 
 
 
 
 
Net income – Southside Bancshares, Inc.
$
8,607

 
$
8,563

 
$
26,475

 
$
29,570

Basic weighted-average shares outstanding
17,363

 
17,279

 
17,342

 
17,263

Add:   Stock options
14

 
7

 
12

 
7

Diluted weighted-average shares outstanding
17,377

 
17,286

 
17,354

 
17,270

Basic Earnings Per Share:
 

 
 

 
 

 
 

Net Income - Southside Bancshares, Inc.
$
0.50

 
$
0.50

 
$
1.53

 
$
1.71

Diluted Earnings Per Share:
 

 
 

 
 

 
 

Net Income - Southside Bancshares, Inc.
$
0.50

 
$
0.50

 
$
1.53

 
$
1.71


On March 29, 2012 our board of directors declared a 5% stock dividend to common stock shareholders of record as of April 18, 2012, which was paid May 9, 2012.

During the third quarter of 2012, our board of directors approved equity grants in the form of stock options and restricted stock units.  These equity grants were made pursuant to the shareholder-approved Southside Bancshares, Inc. 2009 Incentive Plan.

For the three and nine month periods ended September 30, 2012, there were approximately 16,000 and 7,000 anti-dilutive shares, respectively.  For the three and nine month periods ended September 30, 2011, there were approximately 29,000 and 10,000 anti-dilutive shares, respectively.

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3.     Comprehensive (Loss) Income

The components of other comprehensive (loss) income are as follows (in thousands):
 

Nine Months Ended September 30, 2012
 
Before-Tax
Amount
 
Tax (Expense)
Benefit
 
Net-of-Tax
Amount
Unrealized losses on securities:
 
 
 
 
 
Unrealized holding gains arising during period
$
11,446

 
$
(4,006
)
 
$
7,440

Noncredit portion of other-than-temporary impairment losses on the AFS securities
160

 
(56
)
 
104

Less:  reclassification adjustment for gain on sale of AFS securities included in net income
13,571

 
(4,750
)
 
8,821

Less:  reclassification of other-than-temporary impairment charges of AFS securities included in net income
(181
)
 
63

 
(118
)
Net unrealized losses on securities
(1,784
)
 
625

 
(1,159
)
Change in pension plans
1,484

 
(519
)
 
965

Other comprehensive loss
$
(300
)
 
$
106

 
$
(194
)

 
Three Months Ended September 30, 2012
 
Before-Tax
Amount
 
Tax
Expense
 
Net-of-Tax
Amount
Unrealized gains on securities:
 
 
 
 
 
Unrealized holding gains arising during period
$
15,469

 
$
(5,414
)
 
$
10,055

Less:  reclassification adjustment for gain on sale of AFS securities included in net income
4,302

 
(1,506
)
 
2,796

Net unrealized gains on securities
11,167

 
(3,908
)
 
7,259

Change in pension plans
495

 
(173
)
 
322

Other comprehensive income
$
11,662

 
$
(4,081
)
 
$
7,581


 
Nine Months Ended September 30, 2011
 
Before-Tax
Amount
 
Tax
Expense
 
Net-of-Tax
Amount
Unrealized gains on securities:
 
 
 
 
 
Unrealized holding gains arising during period
$
47,002

 
$
(16,451
)
 
$
30,551

Less:  reclassification adjustment for gain on sale of AFS securities included in net income
9,080

 
(3,178
)
 
5,902

Net unrealized gains on securities
37,922

 
(13,273
)
 
24,649

Change in pension plans
1,066

 
(373
)
 
693

Other comprehensive income
$
38,988

 
$
(13,646
)
 
$
25,342



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Three Months Ended September 30, 2011
 
Before-Tax
Amount
 
Tax
Expense
 
Net-of-Tax
Amount
Unrealized gains on securities:
 
 
 
 
 
Unrealized holding gains arising during period
$
20,722

 
$
(7,253
)
 
$
13,469

Less:  reclassification adjustment for gain on sale of AFS securities included in net income
3,609

 
(1,263
)
 
2,346

Net unrealized gains on securities
17,113

 
(5,990
)
 
11,123

Change in pension plans
355

 
(124
)
 
231

Other comprehensive income
$
17,468

 
$
(6,114
)
 
$
11,354



4.     Securities

The amortized cost and estimated fair value of investment and mortgage-backed securities as of September 30, 2012 and December 31, 2011, are reflected in the tables below (in thousands):
 
 
September 30, 2012
 
Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Estimated Fair Value
AVAILABLE FOR SALE:
 
 
OTTI
 
Other
 
Investment Securities:
 
 
 
 
 
 
 
 
 
State and Political Subdivisions
$
520,975

 
$
34,110

 
$

 
$
71

 
$
555,014

Other Stocks and Bonds
5,579

 
84

 
2,041

 
2

 
3,620

Mortgage-backed Securities:
 

 
 

 
 

 
 

 
 

U.S. Government Agencies
99,394

 
3,630

 

 
102

 
102,922

Government-Sponsored Enterprises
745,316

 
18,288

 

 
574

 
763,030

Total
$
1,371,264

 
$
56,112

 
$
2,041

 
$
749

 
$
1,424,586

 
 
September 30, 2012
 
Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Estimated Fair Value
HELD TO MATURITY:
 
 
OTTI
 
Other
 
Investment Securities:
 
 
 
 
 
 
 
 
 
State and Political Subdivisions
$
1,009

 
$
146

 
$

 
$

 
$
1,155

Mortgage-backed Securities:
 

 
 

 
 

 
 

 
 

U.S. Government Agencies
20,968

 
1,298

 

 

 
22,266

Government-Sponsored Enterprises
272,332

 
9,391

 

 
2

 
281,721

Total
$
294,309

 
$
10,835

 
$

 
$
2

 
$
305,142

 

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December 31, 2011
 
Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Estimated Fair Value
AVAILABLE FOR SALE:
 
 
OTTI
 
Other
 
Investment Securities:
 
 
 
 
 
 
 
 
 
State and Political Subdivisions
$
251,281

 
$
31,221

 
$

 
$
45

 
$
282,457

Other Stocks and Bonds
2,925

 

 
2,426

 

 
499

Mortgage-backed Securities:
 

 
 

 
 

 
 

 
 

U.S. Government Agencies
99,974

 
7,158

 

 
80

 
107,052

Government-Sponsored Enterprises
589,687

 
20,127

 

 
740

 
609,074

Total
$
943,867

 
$
58,506

 
$
2,426

 
$
865

 
$
999,082

 
 
December 31, 2011
 
Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Estimated Fair Value
HELD TO MATURITY:
 
 
OTTI
 
Other
 
Investment Securities:
 
 
 
 
 
 
 
 
 
State and Political Subdivisions
$
1,010

 
$
196

 
$

 
$

 
$
1,206

Other Stocks and Bonds
486

 
15

 

 

 
501

Mortgage-backed Securities:
 

 
 

 
 

 
 

 
 

U.S. Government Agencies
22,999

 
1,159

 

 
43

 
24,115

Government-Sponsored Enterprises
342,632

 
14,848

 

 
11

 
357,469

Total
$
367,127

 
$
16,218

 
$

 
$
54

 
$
383,291


Securities carried at fair value through income were as follows (in thousands):
 
At
September 30,
 
At
December 31,
 
2012
 
2011
Mortgage-backed Securities:
 
 
 
U.S. Government Agencies
$

 
$
30,413

Government-Sponsored Enterprises

 
617,346

Total
$

 
$
647,759


Net gains and losses on securities carried at fair value through income were as follows (in thousands):

 
Nine Months Ended
September 30,
 
2012
 
2011
Net (loss) gain on sales transactions
$
(498
)
 
$
592

Net mark-to-market gains

 
7,357

Net (loss) gain on securities carried at fair value through income
$
(498
)
 
$
7,949


 
Three Months Ended
September 30,
 
2012
 
2011
Net gain on sales transactions
$

 
$
254

Net mark-to-market gains

 
3,274

Net gain on securities carried at fair value through income
$

 
$
3,528


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The following table represents the unrealized loss on securities for the nine months ended September 30, 2012 and year ended December 31, 2011 (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 September 30, 2012:
 
 
 
 
 
 
 
 
 
 
 
Available for Sale
 
 
 
 
 
 
 
 
 
 
 
State and Political Subdivisions
$
6,795

 
$
71

 
$

 
$

 
$
6,795

 
$
71

Other Stocks and Bonds
164

 
2

 
703

 
2,041

 
867

 
2,043

Mortgage-Backed Securities
149,765

 
632

 
8,205

 
44

 
157,970

 
676

Total
$
156,724

 
$
705

 
$
8,908

 
$
2,085

 
$
165,632

 
$
2,790

Held to Maturity
 

 
 

 
 

 
 

 
 

 
 

Mortgage-Backed Securities
$
332

 
$
2

 
$

 
$

 
$
332

 
$
2

Total
$
332

 
$
2

 
$

 
$

 
$
332

 
$
2

As of December 31, 2011:
 

 
 

 
 

 
 

 
 

 
 

Available for Sale
 

 
 

 
 

 
 

 
 

 
 

State and Political Subdivisions
$
1,668

 
$
42

 
$
307

 
$
3

 
$
1,975

 
$
45

Other Stocks and Bonds

 

 
499

 
2,426

 
499

 
2,426

Mortgage-Backed Securities
148,171

 
754

 
5,322

 
66

 
153,493

 
820

Total
$
149,839

 
$
796

 
$
6,128

 
$
2,495

 
$
155,967

 
$
3,291

Held to Maturity
 

 
 

 
 

 
 

 
 

 
 

Mortgage-Backed Securities
$
8,918

 
$
54

 
$

 
$

 
$
8,918

 
$
54

Total
$
8,918

 
$
54

 
$

 
$

 
$
8,918

 
$
54


When it is determined that a decline in fair value of Held to Maturity (“HTM”) and Available for Sale (“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.  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.  Additionally, 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.

The turmoil in the capital markets had a significant impact on our estimate of fair value for certain of our securities.  We believe the fair values are reflective of illiquidity and credit impairment.  At September 30, 2012, we have in AFS Other Stocks and Bonds, $2.7 million amortized cost basis in pooled trust preferred securities (“TRUPs”).  Those securities are structured products with cash flows dependent upon securities issued by U.S. financial institutions, including banks and insurance companies.  Our estimate of fair value at September 30, 2012 for the TRUPs is approximately $703,000 and reflects the market illiquidity.  With the exception of the TRUPs, 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 mortgage-backed securities portfolio at September 30, 2012 with an other-than-temporary impairment.

Given the facts and circumstances associated with the TRUPs we performed detailed cash flow modeling for each TRUP using an industry-accepted cash flow model.  Prior to loading the required assumptions into the model we reviewed the financial condition of each of the underlying issuing banks within the TRUP collateral pool that had not deferred or defaulted as of September 30, 2012.  Management’s best estimate of a deferral assumption was assigned to each issuing bank based on the category in which it fell.  Our analysis of the underlying cash flows contemplated various default, deferral and recovery scenarios to arrive at our best estimate of cash flows.  Based on that detailed analysis, we have concluded that the other-than-temporary impairment, which captures the credit component, was estimated at $3.3 million at September 30, 2012 and $3.1 million at December 31, 2011. The noncredit charge to other comprehensive income was estimated at $2.0 million and $2.4 million at September 30, 2012 and December 31, 2011, respectively.  The carrying amount of the TRUPs was written down with $75,000 and $3.0 million recognized in earnings for the years ended December 31, 2010 and 2009, respectively.  There was an additional write-down of the TRUPs recognized in earnings in the amount of approximately $181,000 for the nine months ended September 30, 2012 but there was no

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additional write-down for the three months ended September 30, 2012.  The cash flow model assumptions represent management’s best estimate and consider a variety of qualitative factors, which include, among others, the credit rating downgrades, the severity and duration of the mark-to-market loss, and the structural nuances of each TRUP.  Management believes that the detailed review of the collateral and cash flow modeling support the conclusion that the TRUPs had an other-than-temporary impairment at September 30, 2012.  We will continue to update our assumptions and the resulting analysis each reporting period to reflect changing market conditions.  Additionally, we do not currently intend to sell the TRUPs and it is not more likely than not that we will be required to sell the TRUPs before the anticipated recovery of their amortized cost basis.

The table below provides more detail on the TRUPs at September 30, 2012 (in thousands):

TRUP
 
Par
 
Credit
Loss
 
Amortized
Cost
 
Fair
Value
 
Tranche
 
Credit
Rating
1
 
$
2,000

 
$
1,256

 
$
744

 
$
117

 
C1
 
Ca
2
 
2,000

 
550

 
1,450

 
234

 
B1
 
C
3
 
2,000

 
1,450

 
550

 
352

 
B2
 
C
 
 
$
6,000

 
$
3,256

 
$
2,744

 
$
703

 
 
 
 

The following tables present a roll forward of the credit losses recognized in earnings, on AFS debt securities
(in thousands):
 
Nine Months Ended
September 30,
 
2012
 
2011
Balance, beginning of period
$
3,075

 
$
3,075

Additions for credit losses recognized on debt securities that had no previous impairment losses

 

Additions for credit losses recognized on debt securities that had previously incurred impairment losses
181

 

Balance, end of period
$
3,256

 
$
3,075

 
Three Months Ended
September 30,
 
2012
 
2011
Balance, beginning of period
$
3,256

 
$
3,075

Additions for credit losses recognized on debt securities that had no previous impairment losses

 

Additions for credit losses recognized on debt securities that had previously incurred impairment losses

 

Balance, end of period
$
3,256

 
$
3,075


Interest income recognized on securities for the periods presented (in thousands):
 
Nine Months Ended
September 30,
 
2012
 
2011
U.S. Treasury
$

 
$
6

State and Political Subdivisions
9,489

 
9,525

Other Stocks and Bonds
51

 
25

Mortgage-backed Securities
27,730

 
37,899

Total interest income on securities
$
37,270

 
$
47,455


 
Three Months Ended
September 30,
 
2012
 
2011
U.S. Treasury
$

 
$

State and Political Subdivisions
3,847

 
3,073

Other Stocks and Bonds
14

 
7

Mortgage-backed Securities
6,695

 
13,292

Total interest income on securities
$
10,556

 
$
16,372


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There were no securities transferred from AFS to HTM during the nine months ended September 30, 2012 or 2011.  There were no sales from the HTM portfolio during the nine months ended September 30, 2012 or 2011.  There were $294.3 million and $367.1 million of securities classified as HTM at September 30, 2012 and December 31, 2011, respectively.

Of the $13.6 million in net securities gains from the AFS portfolio for the nine months ended September 30, 2012, there were $13.8 million in realized gains and approximately $174,000 in realized losses.  Of the $9.1 million in net securities gains from the AFS portfolio for the nine months ended September 30, 2011, there were $9.2 million in realized gains and $121,000 in realized losses.

The amortized cost and fair value of securities at September 30, 2012, are presented below by contractual maturity.  Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations.  Mortgage-backed securities are presented in total by category due to the fact that mortgage-backed securities 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 security 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.
 
September 30, 2012
 
Amortized Cost
 
Fair Value
Available for sale securities:
(in thousands)
Investment Securities
 
 
 
Due in one year or less
$
4,031

 
$
4,053

Due after one year through five years
13,410

 
13,813

Due after five years through ten years
84,416

 
88,143

Due after ten years
424,697

 
452,625

 
526,554

 
558,634

Mortgage-backed securities
844,710

 
865,952

Total
$
1,371,264

 
$
1,424,586

 
September 30, 2012
 
Amortized Cost
 
Fair Value
Held to maturity securities:
(in thousands)
Investment Securities
 
 
 
Due in one year or less
$

 
$

Due after one year through five years

 

Due after five years through ten years

 

Due after ten years
1,009

 
1,155

 
1,009

 
1,155

Mortgage-backed securities
293,300

 
303,987

Total
$
294,309

 
$
305,142


Investment and mortgage-backed securities with book values of $950.9 million and $1.04 billion were pledged as of September 30, 2012 and December 31, 2011, respectively, to collateralize Federal Home Loan Bank (“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 its fair value and assessed for other-than-temporary impairment.  These securities have no maturity date.

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5.     Loans and Allowance for Probable Loan Losses

Loans in the accompanying consolidated balance sheets are classified as follows (in thousands):
 
At
September 30, 2012
 
At
December 31, 2011
Real Estate Loans:
 
 
 
Construction
$
116,079

 
$
111,361

1-4 Family residential
349,419

 
247,479

Other
225,854

 
206,519

Commercial loans
140,479

 
143,552

Municipal loans
220,590

 
207,261

Loans to individuals
169,174

 
171,058

Total loans
1,221,595

 
1,087,230

Less: Allowance for loan losses
20,848

 
18,540

Net loans
$
1,200,747

 
$
1,068,690


Allowance for Loan Losses

The allowance for loan losses is based on the most current review of the loan portfolio and is validated by multiple processes.  First, the bank utilizes historical data to establish general reserve amounts for each class of loans.  While we track several years of data, we primarily review one year data because we have found that longer periods will not respond quickly enough to market conditions.  Second, our lenders have the primary responsibility for identifying problem loans and estimating necessary reserves based on customer financial stress and underlying collateral.  These recommendations are reviewed by the Senior lender, the Special Assets department, and the Loan Review department.  Third, the Loan Review department does independent reviews of 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 metrics that takes into consideration the size of the loan, the type of credit extended, the seasoning of the loan along with 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 tracks specific reserves for loans by type 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 allocate 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 $50,000 or more is updated on a quarterly basis in order to properly allocate necessary allowances and keep management informed on the status of attempts to correct the deficiencies noted with respect to the loan.

For loans to individuals, the methodology associated with determining the appropriate allowance for losses on loans primarily consists of an evaluation of individual payment histories, remaining term to maturity and underlying collateral support.

Industry experience indicates that a portion of our loans will become delinquent and a portion of the loans will require partial or entire 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 adequacy 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, the views of the bank regulators (who have the authority to require additional allowances), and geographic and industry loan concentration.


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Consumer loans at SFG are reserved for based on general estimates of loss at the time of purchase for current loans.  SFG loans experiencing past due status or extension of maturity characteristics are reserved for at significantly higher levels based on the circumstances associated with each specific loan.  In general the reserves for SFG are calculated based on the past due status of the loan.  For reserve purposes, the portfolio has been segregated by past due status and by the remaining term variance from the original contract.  During repayment, loans that pay late will take longer to pay out than the original contract.  Additionally, some loans may be granted extensions for extenuating payment circumstances.  The remaining term extensions increase the risk of collateral deterioration and, accordingly, reserves are increased to recognize this risk.

New pools purchased are reserved at their estimated annual loss.  Thereafter, the reserve is adjusted based on the actual performance versus projected performance.  Additionally, we use data mining measures to track migration within risk tranches.  Reserves are adjusted quarterly to match the migration metrics.

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:

Satisfactory (Rating 1 – 4) – This rating is assigned to all satisfactory loans.  This category, by definition, should consist of completely acceptable credit.  Credit and collateral exceptions should not be present, although their presence would not necessarily prohibit a loan from being rated Satisfactory, if deficiencies are in process of correction.  These loans will not be included in the Watch List.

Satisfactory (Rating 5) – Special Treatment Required – (Pass Watch) – 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 by the Loan Review Officer or regulatory authorities; however, particular attention must be accorded such credits due to characteristics such as:

A lack of, or abnormally extended payment program;
A heavy degree of concentration of collateral without sufficient margin;
A vulnerability to competition through lesser or extensive financial leverage; and
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.

Loss (Rating 9) – Loans classified as Loss are considered uncollectible and of such little value that their continuance as bankable assets is not warranted.  This classification does not mean that the loan has absolutely no recovery or salvage value but rather it is not practical or desirable to defer writing off this basically worthless asset even though partial recovery may be affected in the future.

Loans not meeting risk ratings five through nine are reserved for as a group of similar type pass rated credits and included in the general portion of the allowance for loan losses.

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:

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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 loan review or Board oversight; and
Changes in the level of concentrations of credit.

The following tables detail activity in the Allowance for Loan Losses by portfolio segment for the periods presented (in thousands):
 
 
 
Nine Months Ended September 30, 2012
 
 
Real Estate
 
 
 
 
 
 
 
 
 
 
 
 
Construction
 
1-4 Family
Residential
 
Other
 
Commercial
Loans
 
Municipal
Loans
 
Loans to
Individuals
 
Unallocated
 
Total
Balance at beginning of period
 
$
2,620

 
$
1,957

 
$
3,051

 
$
2,877

 
$
619

 
$
6,244

 
$
1,172

 
$
18,540

Provision (reversal) for loan losses
 
134

 
371

 
353

 
312

 
25

 
7,276

 
20

 
8,491

Loans charged off
 
(15
)
 
(181
)
 
(99
)
 
(402
)
 

 
(7,367
)
 

 
(8,064
)
Recoveries of loans charged off
 
70

 
166

 
5

 
271

 

 
1,369