Edgar Filing: SOUTHSIDE BANCSHARES INC

SBSI 6.30.2013 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)



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

For the quarterly period ended June 30, 2013



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 July 31, 2013 was 17,866,716 shares.

TABLE OF CONTENTS



PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS	1
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	38
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	59
ITEM 4. CONTROLS AND PROCEDURES	60
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS	61
ITEM 1A. RISK FACTORS	61
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	61
ITEM 3. DEFAULTS UPON SENIOR SECURITIES	61
ITEM 4. MINE SAFETY DISCLOSURES	61
ITEM 5. OTHER INFORMATION	61
ITEM 6. EXHIBITS	61
SIGNATURES	62
EXHIBIT INDEX	63
EXHIBIT 31.1 – CERTIFICATION PURSUANT TO SECTION 302
EXHIBIT 31.2 – CERTIFICATION PURSUANT TO SECTION 302
EXHIBIT 32 – CERTIFICATION PURSUANT TO SECTION 906

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PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

SOUTHSIDE BANCSHARES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (UNAUDITED) (in thousands, except share amounts)

	June 30, 2013			December 31, 2012
ASSETS
Cash and due from banks	$	45,628		$	47,312
Interest earning deposits	4,169			103,318
Total cash and cash equivalents	49,797			150,630
Investment securities:
Available for sale, at estimated fair value	488,321			617,707
Held to maturity, at amortized cost	302,775			1,009
Mortgage-backed and related securities:
Available for sale, at estimated fair value	821,760			806,360
Held to maturity, at amortized cost	240,514			245,538
FHLB stock, at cost	27,153			27,889
Other investments, at cost	2,064			2,064
Loans held for sale	724			3,601
Loans:
Loans	1,293,429			1,262,977
Less: Allowance for loan losses	(18,370		)	(20,585		)
Net Loans	1,275,059			1,242,392
Premises and equipment, net	50,186			50,075
Goodwill	22,034			22,034
Other intangible assets, net	245			324
Interest receivable	20,883			18,936
Deferred tax asset	20,883			4,120
Unsettled issuances of brokered CDs	11,069			—
Other assets	51,511			44,724
TOTAL ASSETS	$	3,384,978		$	3,237,403
LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits:
Noninterest bearing	$	663,594		$	595,093
Interest bearing	1,835,744			1,756,804
Total deposits	2,499,338			2,351,897
Short-term obligations:
Federal funds purchased and repurchase agreements	857			984
FHLB advances	84,882			150,985
Other obligations	219			219
Total short-term obligations	85,958			152,188
Long-term obligations:
FHLB advances	441,808			369,097
Long-term debt	60,311			60,311
Total long-term obligations	502,119			429,408
Unsettled trades to purchase securities	27,814			10,047
Other liabilities	34,316			36,100
TOTAL LIABILITIES	3,149,545			2,979,640

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

Shareholders' equity:
Common stock ($1.25 par, 40,000,000 shares authorized, 20,335,929 shares issued in 2013 and 19,446,187 shares issued in 2012)	25,420			24,308
Paid-in capital	212,648			195,602
Retained earnings	65,219			70,708
Treasury stock (2,469,638 and 2,379,338 shares at cost)	(37,692		)	(35,793		)
Accumulated other comprehensive (loss) income	(30,162		)	2,938
TOTAL SHAREHOLDERS' EQUITY	235,433			257,763
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	3,384,978		$	3,237,403

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

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SOUTHSIDE BANCSHARES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) (in thousands, except per share data)

	Three Months Ended					Six Months Ended
	June 30,					June 30,
	2013		2012			2013			2012
Interest income
Loans	$	18,390	$	17,526		$	36,055		$	34,296
Investment securities – taxable	169		20			533			51
Investment securities – tax-exempt	4,877		2,961			8,835			5,628
Mortgage-backed and related securities	4,680		8,872			8,616			21,035
FHLB stock and other investments	34		54			99			133
Other interest earning assets	35		9			78			15
Total interest income	28,185		29,442			54,216			61,158
Interest expense
Deposits	2,001		2,765			4,071			6,160
Short-term obligations	389		1,734			1,639			3,326
Long-term obligations	1,954		2,398			3,735			5,131
Total interest expense	4,344		6,897			9,445			14,617
Net interest income	23,841		22,545			44,771			46,541
Provision for loan losses	2,021		2,174			2,513			5,226
Net interest income after provision for loan losses	21,820		20,371			42,258			41,315
Noninterest income
Deposit services	3,904		3,838			7,657			7,586
Gain on sale of securities available for sale	5,052		3,297			9,417			9,269
Loss on sale of securities carried at fair value through income	—		(13		)	—			(498		)

Total other-than-temporary impairment losses	—		(21		)	(52		)	(21		)
Portion of loss recognized in other comprehensive income (before taxes)	—		(19		)	10			(160		)
Net impairment losses recognized in earnings	—		(40		)	(42		)	(181		)

FHLB advance option impairment charges	—		(1,364		)	—			(1,836		)
Gain on sale of loans	241		298			560			429
Trust income	733		669			1,453			1,346
Bank owned life insurance income	264		254			518			520
Other	953		1,123			1,844			2,234
Total noninterest income	11,147		8,062			21,407			18,869
Noninterest expense
Salaries and employee benefits	13,401		12,142			26,610			23,975
Occupancy expense	1,897		1,851			3,768			3,609
Advertising, travel & entertainment	656		603			1,297			1,207
ATM and debit card expense	303		287			684			566
Director fees	273		273			537			541
Supplies	169		222			419			381
Professional fees	562		612			1,202			1,303
Telephone and communications	384		445			835			851
FDIC insurance	409		414			830			884
FHLB prepayment fees	988		—			988			—
Other	2,124		2,247			4,315			4,301
Total noninterest expense	21,166		19,096			41,485			37,618

Income before income tax expense	11,801		9,337			22,180			22,566
Provision for income tax expense	1,729		1,608			3,583			4,698
Net income	$	10,072	$	7,729		$	18,597		$	17,868
Earnings per common share – basic	$	0.56	$	0.42		$	1.04		$	0.98
Earnings per common share – diluted	$	0.56	$	0.42		$	1.04		$	0.98
Dividends paid per common share	$	0.20	$	0.20		$	0.40		$	0.38

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

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

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2013			2012			2013			2012
Net income	$	10,072		$	7,729		$	18,597		$	17,868
Other comprehensive income (loss):
Unrealized holding (losses) gains on available for sale securities during the period	(37,666		)	842			(42,881		)	(4,044		)
Change in net unrealized gain on securities transferred to held to maturity	(30		)	—			(30		)	—
Noncredit portion of other-than-temporary impairment losses on the AFS securities	—			40			(10		)	181
Reclassification adjustment for gain on sale of available for sale securities, included in net income	(5,052		)	(3,297		)	(9,417		)	(9,269		)
Reclassification of other-than-temporary impairment charges on available for sale securities, included in net income	—			40			42			181
Amortization of net actuarial loss, included in net periodic benefit cost	751			512			1,394			1,011
Amortization of prior service credit, included in net periodic benefit cost	(11		)	(12		)	(22		)	(22		)
Other comprehensive loss, before tax	(42,008		)	(1,875		)	(50,924		)	(11,962		)
Income tax benefit related to other items of comprehensive income	14,703			656			17,824			4,187
Other comprehensive loss, net of tax	(27,305		)	(1,219		)	(33,100		)	(7,775		)
Comprehensive (loss) income	$	(17,233	)	$	6,510		$	(14,503	)	$	10,093

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

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SOUTHSIDE BANCSHARES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (UNAUDITED) (in thousands, except share and per share data)

	Common Stock		Paid In Capital		Retained Earnings			Treasury Stock			Accumulated Other Comprehensive Income (Loss)			Total Equity
Balance at December 31, 2011	$	23,146	$	176,791	$	72,646		$	(28,377	)	$	14,721		$	258,927
Net Income					17,868									17,868
Other comprehensive loss											(7,775		)	(7,775		)
Issuance of common stock (30,436 shares)	38		595											633
Stock compensation expense			133											133
Tax benefits of incentive stock options			11											11
Net issuance of common stock under employee stock plans	10		39		(54		)							(5		)
Cash dividends paid on common stock ($0.38 per share)					(6,436		)							(6,436		)
Stock dividend declared	1,034		16,425		(17,459		)							—
Balance at June 30, 2012	$	24,228	$	193,994	$	66,565		$	(28,377	)	$	6,946		$	263,356

Balance at December 31, 2012	$	24,308	$	195,602	$	70,708		$	(35,793	)	$	2,938		$	257,763
Net Income					18,597									18,597
Other comprehensive loss											(33,100		)	(33,100		)
Issuance of common stock (28,529 shares)	35		593											628
Purchase of common stock (90,300 shares)								(1,899		)				(1,899		)
Stock compensation expense			373											373
Tax benefits related to stock awards			22											22
Net issuance of common stock under employee stock plans	12		63		(62		)							13
Cash dividends paid on common stock ($0.40 per share)					(6,964		)							(6,964		)
Stock dividend declared	1,065		15,995		(17,060		)							—
Balance at June 30, 2013	$	25,420	$	212,648	$	65,219		$	(37,692	)	$	(30,162	)	$	235,433

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

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SOUTHSIDE BANCSHARES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOW (UNAUDITED) (in thousands)

	Six Months Ended
	June 30,
	2013			2012
OPERATING ACTIVITIES:
Net income	$	18,597		$	17,868
Adjustments to reconcile net income to net cash provided by operations:
Depreciation	1,807			1,778
Amortization of premium	17,636			22,864
Accretion of discount and loan fees	(2,913		)	(2,399		)
Provision for loan losses	2,513			5,226
Stock compensation expense	373			133
Deferred tax expense (benefit)	1,060			(2,743		)
Excess tax benefits from stock-based compensation	(22		)	(11		)
Loss on sale of securities carried at fair value through income	—			498
Gain on sale of securities available for sale	(9,417		)	(9,269		)
Net other-than-temporary impairment losses	42			181
FHLB advance option impairment charges	—			1,836
Gain on sale of other real estate owned	(72		)	(3		)
Net change in:
Interest receivable	(1,947		)	1,497
Other assets	(7,117		)	27
Interest payable	(481		)	(458		)
Other liabilities	69			(2,393		)
Loans held for sale	2,877			2,105
Net cash provided by operating activities	23,005			36,737

INVESTING ACTIVITIES:
Securities held to maturity:
Purchases	(115,647		)	—
Maturities, calls and principal repayments	118,178			32,331
Securities available for sale:
Purchases	(1,018,900		)	(1,213,923		)
Sales	612,459			448,725
Maturities, calls and principal repayments	179,203			163,809
Securities carried at fair value through income:
Purchases	—			(57,606		)
Sales	—			675,255
Maturities, calls and principal repayments	—			25,279
Proceeds from redemption of FHLB stock	5,242			10,292
Purchases of FHLB stock and other investments	(4,506		)	(10,757		)
Net increase in loans	(35,355		)	(100,529		)
Purchases of premises and equipment	(1,918		)	(1,433		)
Proceeds from sales of premises and equipment	—			—
Proceeds from sales of other real estate owned	461			112
Proceeds from sales of repossessed assets	2,304			2,070
Net cash used in investing activities	(258,479		)	(26,375		)

(continued)

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SOUTHSIDE BANCSHARES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOW (UNAUDITED) (continued) (in thousands)

	Six Months Ended
	June 30,
	2013			2012
FINANCING ACTIVITIES:
Net increase in demand and savings accounts	140,307			198,420
Net decrease in certificates of deposit	(3,947		)	(124,695		)
Net decrease in federal funds purchased and repurchase agreements	(127		)	(997		)
Proceeds from FHLB advances	6,792,758			9,133,164
Repayment of FHLB advances	(6,786,150		)	(9,147,464		)
Excess tax benefits from stock-based awards	22			11
Net issuance of common stock under employee stock plan	13			—
Purchase of common stock	(1,899		)	—
Proceeds from the issuance of common stock	628			633
Cash dividends paid	(6,964		)	(6,436		)
Net cash provided by financing activities	134,641			52,636

Net (decrease) increase in cash and cash equivalents	(100,833		)	62,998
Cash and cash equivalents at beginning of period	150,630			43,238
Cash and cash equivalents at end of period	$	49,797		$	106,236


SUPPLEMENTAL DISCLOSURES FOR CASH FLOW INFORMATION:

Interest paid	$	9,925		$	15,075
Income taxes paid	$	1,600		$	9,200

SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES:

Loans transferred to other repossessed assets and real estate through foreclosure	$	2,555		$	2,621
Transfer of available for sale securities to held to maturity securities	$	290,136		$	—
Adjustment to pension liability	$	(1,372	)	$	(989	)
5% stock dividend	$	17,060		$	17,459
Unsettled trades to purchase securities	$	(27,814	)	$	(42,300	)
Unsettled trades to sell securities	$	—		$	1,071
Unsettled issuances of brokered CDs	$	11,069		$	—

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

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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. “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 is a wholly-owned subsidiary of the Bank as of July 15, 2011.

As mentioned in our 10-K for the year ended December 31, 2012, we made a decision to close Southside Securities, Inc. The closure was completed during the second quarter of 2013.

The consolidated balance sheet as of June 30, 2013, 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 six-month periods ended June 30, 2013 and 2012 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, 2012. 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, 2012.

On March 28, 2013 our board of directors declared a 5% stock dividend to common stock shareholders of record as of April 18, 2013, which was paid on May 9, 2013. All share data has been adjusted to give retroactive recognition to stock dividends.

Accounting Pronouncements

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. We adopted ASU 2011-11 on January 1, 2013, and it did not have a significant impact on our consolidated financial statements.

ASU 2013-02, “Comprehensive Income (Topic 220) – Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income.” ASU 2013-02 requires entities to provide information about the significant amounts reclassified out of accumulated other comprehensive income by component. This update also requires companies to disclose the income statement line items impacted by any significant reclassifications. We adopted ASU 2013-02 on January 1, 2013, and it did not have a significant impact on our consolidated financial statements.

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2. Earnings Per Share

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



	Three Months Ended June 30,				Six Months Ended June 30,
	2013		2012		2013		2012
Basic and Diluted Earnings:
Net income	$	10,072	$	7,729	$	18,597	$	17,868
Basic weighted-average shares outstanding	17,849		18,210		17,853		18,203
Add: Stock options	32		13		26		13
Diluted weighted-average shares outstanding	17,881		18,223		17,879		18,216

Basic Earnings Per Share:	$	0.56	$	0.42	$	1.04	$	0.98

Diluted Earnings Per Share:	$	0.56	$	0.42	$	1.04	$	0.98

For the three- and six-month periods ended June 30, 2013 there were approximately 10,000 and 17,000 anti-dilutive shares, respectively. For the three- and six-month periods ended June 30, 2012 there were approximately 4,000 and 6,000 anti-dilutive shares, respectively.

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3. Accumulated Other Comprehensive (Loss) Income

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



	Six Months Ended June 30, 2013
	Unrealized Gains (Losses) on Securities						Pension Plans
	Other			OTTI			Net Prior Service (Cost) Credit			Net Gain (Loss)			Total
Beginning balance, net of tax	$	30,500		$	(1,140	)	$	248		$	(26,670	)	$	2,938
Other comprehensive (loss) income before reclassifications	(43,045		)	154			—			—			(42,891		)
Reclassified from accumulated other comprehensive income ⁽¹⁾	(9,447		)	42			(22		)	1,394			(8,033		)
Income tax benefit (expense)	18,372			(68		)	8			(488		)	17,824
Net current-period other comprehensive (loss) income, net of tax	(34,120		)	128			(14		)	906			(33,100		)
Ending balance, net of tax	$	(3,620	)	$	(1,012	)	$	234		$	(25,764	)	$	(30,162	)



	Three Months Ended June 30, 2013
	Unrealized Gains (Losses) on Securities						Pension Plans
	Other			OTTI			Net Prior Service (Cost) Credit			Net Gain (Loss)			Total
Beginning balance, net of tax	$	24,525		$	(1,371	)	$	241		$	(26,252	)	$	(2,857	)
Other comprehensive (loss) income before reclassifications	(38,218		)	552			—			—			(37,666		)
Reclassified from accumulated other comprehensive income ⁽¹⁾	(5,082		)	—			(11		)	751			(4,342		)
Income tax benefit (expense)	15,155			(193		)	4			(263		)	14,703
Net current-period other comprehensive (loss) income, net of tax	(28,145		)	359			(7		)	488			(27,305		)
Ending balance, net of tax	$	(3,620	)	$	(1,012	)	$	234		$	(25,764	)	$	(30,162	)

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	Six Months Ended June 30, 2012
	Unrealized Gains (Losses) on Securities						Pension Plans
	Other			OTTI			Net Prior Service (Cost) Credit			Net Gain (Loss)			Total
Beginning balance, net of tax	$	37,271		$	(1,577	)	$	276		$	(21,249	)	$	14,721
Other comprehensive (loss) income before reclassifications	(3,987		)	124			—			—			(3,863		)
Reclassified from accumulated other comprehensive income	(9,269		)	181			(22		)	1,011			(8,099		)
Income tax benefit (expense)	4,640			(107		)	8			(354		)	4,187
Net current-period other comprehensive (loss) income, net of tax	(8,616		)	198			(14		)	657			(7,775		)
Ending balance, net of tax	$	28,655		$	(1,379	)	$	262		$	(20,592	)	$	6,946



	Three Months Ended June 30, 2012
	Unrealized Gains (Losses) on Securities						Pension Plans
	Other			OTTI			Net Prior Service (Cost) Credit			Net Gain (Loss)			Total
Beginning balance, net of tax	$	30,202		$	(1,382	)	$	270		$	(20,925	)	$	8,165
Other comprehensive (loss) income before reclassifications	917			(35		)	—			—			882
Reclassified from accumulated other comprehensive income	(3,297		)	40			(12		)	512			(2,757		)
Income tax benefit (expense)	833			(2		)	4			(179		)	656
Net current-period other comprehensive (loss) income, net of tax	(1,547		)	3			(8		)	333			(1,219		)
Ending balance, net of tax	$	28,655		$	(1,379	)	$	262		$	(20,592	)	$	6,946

(1) Includes realized gains on sale of securities and amortization of unrealized gains on securities transferred from available-for-sale to held-to-maturity.

The reclassifications out of accumulated other comprehensive income into net income are presented below (in thousands):

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	Three Months Ended June 30,						Six Months Ended June 30,
	2013			2012			2013			2012
Unrealized holding gains arising during period:
Realized gain on sale of securities ⁽¹⁾	$	5,052		$	3,297		$	9,417		$	9,269
Change in unrealized gain on securities transferred to held to maturity ⁽²⁾	30			—			30			—
Impairment losses⁽³⁾	—			(40		)	(42		)	(181		)
Total before tax	5,082			3,257			9,405			9,088
Tax benefit (expense)	(1,779		)	(1,140		)	(3,292		)	(3,181		)
Net of tax	$	3,303		$	2,117		$	6,113		$	5,907

Amortization of defined benefit pension items:
Net loss ⁽⁴⁾	$	(751	)	$	(512	)	$	(1,394	)	$	(1,011	)
Prior service credit ⁽⁴⁾	11			12			22			22
Total before tax	(740		)	(500		)	(1,372		)	(989		)
Tax benefit (expense)	259			175			480			346
Net of tax	$	(481	)	$	(325	)	$	(892	)	$	(643	)
Total reclassifications for the period, net of tax	$	2,822		$	1,792		$	5,221		$	5,264

(1) Listed as Gain on sale of securities available for sale on the Statements of Income.

(2) Included in Interest income on the Statements of Income.

(3)Listed as Net impairment losses recognized in earnings on the Statements of Income.

(4) These accumulated other comprehensive income components are included in the computation of net periodic pension cost presented in “Note 7 - Employee Benefit Plans.”

4. Securities

The amortized cost and estimated fair value of investment and mortgage-backed securities as of June 30, 2013 and December 31, 2012, are reflected in the tables below (in thousands):



	June 30, 2013
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses				Estimated Fair Value
AVAILABLE FOR SALE	Amortized Cost		Gross Unrealized Gains		OTTI		Other		Estimated Fair Value
Investment Securities:
U.S. Government Agency Debentures	$	15,551	$	—	$	—	$	1,353	$	14,198
State and Political Subdivisions	472,419		7,148		—		19,740		459,827
Other Stocks and Bonds	15,770		142		1,558		58		14,296
Mortgage-backed Securities: ⁽¹⁾
Residential	670,639		15,402		—		2,420		683,621
Commercial	146,289		274		—		8,424		138,139
Total	$	1,320,668	$	22,966	$	1,558	$	31,995	$	1,310,081

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	June 30, 2013
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses				Estimated Fair Value
HELD TO MATURITY	Amortized Cost		Gross Unrealized Gains		OTTI		Other		Estimated Fair Value
Investment Securities:
State and Political Subdivisions	$	302,775	$	112	$	—	$	12,654	$	290,233
Mortgage-backed Securities: ⁽¹⁾
Residential	125,189		5,134		—		1		130,322
Commercial	115,325		—		—		5,786		109,539
Total	$	543,289	$	5,246	$	—	$	18,441	$	530,094



	December 31, 2012
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses				Estimated Fair Value
AVAILABLE FOR SALE	Amortized Cost		Gross Unrealized Gains		OTTI		Other		Estimated Fair Value
Investment Securities:
U.S. Government Agency Debentures	$	61,461	$	—	$	—	$	598	$	60,863
State and Political Subdivisions	515,116		30,888		—		316		545,688
Other Stocks and Bonds	12,807		104		1,754		1		11,156
Mortgage-backed Securities: ⁽¹⁾
Residential	789,356		18,003		—		999		806,360
Total	$	1,378,740	$	48,995	$	1,754	$	1,914	$	1,424,067



	December 31, 2012
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses				Estimated Fair Value
HELD TO MATURITY	Amortized Cost		Gross Unrealized Gains		OTTI		Other		Estimated Fair Value
Investment Securities:
State and Political Subdivisions	$	1,009	$	128	$	—	$	—	$	1,137
Mortgage-backed Securities: ⁽¹⁾
Residential	245,538		8,770		—		47		254,261
Total	$	246,547	$	8,898	$	—	$	47	$	255,398

(1) All mortgage-backed securities issued and/or guaranteed by U.S. government agencies or U.S. government-sponsored enterprises.

Securities carried at fair value through income were as follows (in thousands):



	At June 30,		At December 31,		At December 31,
	2013		2012		2011
Mortgage-backed Securities:
U.S. Government Agencies	$	—	$	—	$	30,413
Government-Sponsored Enterprises	—		—		617,346
Total	$	—	$	—	$	647,759

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



	Three Months Ended June 30,					Six Months Ended June 30,
	2013		2012			2013		2012
Net (loss) gain on sales transactions	$	—	$	(13	)	$	—	$	(498	)
Net mark-to-market gains	—		—			—		—
Net (loss) gain on securities carried at fair value through income	$	—	$	(13	)	$	—	$	(498	)

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The following table represents the unrealized loss on securities for the six months ended June 30, 2013 and year ended December 31, 2012 (in thousands):



	As of June 30, 2013
	Less Than 12 Months				More Than 12 Months				Total
	Fair Value		Unrealized Loss		Fair Value		Unrealized Loss		Fair Value		Unrealized Loss
AVAILABLE FOR SALE
Investment Securities:
U.S. Government Agency Debentures	$	14,198	$	1,353	$	—	$	—	$	14,198	$	1,353
State and Political Subdivisions	339,697		19,740		—		—		339,697		19,740
Other Stocks and Bonds	5,272		58		1,144		1,558		6,416		1,616
Mortgage-backed Securities:
Residential	115,495		1,967		28,072		453		143,567		2,420
Commercial	135,287		8,424		—		—		135,287		8,424
Total	$	609,949	$	31,542	$	29,216	$	2,011	$	639,165	$	33,553
HELD TO MATURITY
Investment Securities:
State and Political Subdivisions	$	287,541	$	12,654	$	—	$	—	$	287,541	$	12,654
Mortgage-backed Securities:
Residential	3,074		1		—		—		3,074		1
Commercial	109,539		5,786		—		—		109,539		5,786
Total	$	400,154	$	18,441	$	—	$	—	$	400,154	$	18,441

	As of December 31, 2012
	Less Than 12 Months				More Than 12 Months				Total
	Fair Value		Unrealized Loss		Fair Value		Unrealized Loss		Fair Value		Unrealized Loss
AVAILABLE FOR SALE
Investment Securities:
U.S. Government Agency Debentures	$	60,863	$	598	$	—	$	—	$	60,863	$	598
State and Political Subdivisions	49,548		316		—		—		49,548		316
Other Stocks and Bonds	4,856		1		990		1,754		5,846		1,755
Mortgage-backed Securities:
Residential	260,909		967		3,122		32		264,031		999
Total	$	376,176	$	1,882	$	4,112	$	1,786	$	380,288	$	3,668
HELD TO MATURITY
Mortgage-backed Securities:
Residential	$	3,251	$	47	$	—	$	—	$	3,251	$	47
Total	$	3,251	$	47	$	—	$	—	$	3,251	$	47

When it is determined that a decline in fair value of Held to Maturity (“HTM”) and Available for Sale (“AFS”) securities are 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. In estimating other-than-temporary impairment losses, management considers, among other things, (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) whether we have a current intent to sell the security

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and whether it is not more likely than not that we will be required to sell the security before the anticipated recovery of their amortized cost basis.

At June 30, 2013, 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 June 30, 2013 for the TRUPs is approximately $1.1 million 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 June 30, 2013 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 June 30, 2013. 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 June 30, 2013 and December 31, 2012. The noncredit charge to other comprehensive income was estimated at $1.6 million and $1.8 million at June 30, 2013 and December 31, 2012, 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 no write-down recognized in earnings during 2011 but there was an additional write-down of the TRUPs recognized in earnings in the amount of approximately $181,000 during 2012. For the six months ended June 30, 2013 and 2012, the additional write-down recognized in earnings was approximately $42,000 and $181,000, respectively. 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. 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 June 30, 2013 (in thousands):



TRUP	Par		Credit Loss		Amortized Cost		Fair Value		Tranche	Credit Rating
1	$	2,000	$	1,298	$	702	$	26	C1	Ca
2	2,000		550		1,450		733		B1	C
3	2,000		1,450		550		385		B2	C
	$	6,000	$	3,298	$	2,702	$	1,144

The following tables present a roll forward of the credit losses recognized in earnings, on AFS debt securities

(in thousands):



	Three Months Ended June 30,				Six Months Ended June 30,
	2013		2012		2013		2012
Balance, beginning of period	$	3,298	$	3,216	$	3,256	$	3,075
Additions for credit losses recognized on debt securities that had previously incurred impairment losses	—		40		42		181
Balance, end of period	$	3,298	$	3,256	$	3,298	$	3,256

Interest income recognized on securities for the periods presented (in thousands):

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	Six Months Ended June 30,
	2013		2012
U.S. Treasury	$	17	$	—
U.S. Government Agency Debentures	305		—
State and Political Subdivisions	8,947		5,642
Other Stocks and Bonds	99		37
Mortgage-backed Securities	8,616		21,035
Total interest income on securities	$	17,984	$	26,714



	Three Months Ended June 30,
	2013		2012
U.S. Treasury	$	—	$	—