SBSI 10-Q 03.31.14
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 March 31, 2014
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.

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 April 30, 2014 was 18,825,948 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)
 
 
March 31,
2014
 
December 31,
2013
ASSETS
 
 
 
 
Cash and due from banks
 
$
52,195

 
$
45,624

Interest earning deposits
 
5,197

 
8,807

Total cash and cash equivalents
 
57,392

 
54,431

Investment securities:
 
 

 
 

Available for sale, at estimated fair value
 
259,662

 
337,429

Held to maturity, at carrying value (estimated fair value of $387,903 and $377,383, respectively)
 
390,889

 
391,552

Mortgage-backed securities:
 
 

 
 

Available for sale, at estimated fair value
 
915,061

 
840,258

Held to maturity, at carrying value (estimated fair value of $266,006 and $271,836, respectively)
 
265,627

 
275,569

FHLB stock, at cost
 
27,331

 
34,065

Other investments, at cost
 
2,065

 
2,065

Loans held for sale
 
207

 
151

Loans:
 
 

 
 

Loans
 
1,370,393

 
1,351,273

Less:  Allowance for loan losses
 
(18,787
)
 
(18,877
)
Net Loans
 
1,351,606

 
1,332,396

Premises and equipment, net
 
52,554

 
52,060

Goodwill
 
22,034

 
22,034

Other intangible assets, net
 
149

 
178

Interest receivable
 
15,453

 
21,973

Deferred tax asset
 
15,727

 
18,415

Unsettled trades to sell securities
 
—

 
3,933

Other assets
 
58,587

 
59,154

TOTAL ASSETS
 
$
3,434,344

 
$
3,445,663

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 

 
 

Deposits:
 
 

 
 

Noninterest bearing
 
$
554,497

 
$
529,897

Interest bearing
 
1,992,346

 
1,997,911

Total deposits
 
2,546,843

 
2,527,808

Short-term obligations:
 
 

 
 

Federal funds purchased and repurchase agreements
 
1,914

 
859

FHLB advances
 
19,697

 
73,445

Total short-term obligations
 
21,611

 
74,304

Long-term obligations:
 
 

 
 

FHLB advances
 
506,560

 
499,349

Long-term debt
 
60,311

 
60,311

Total long-term obligations
 
566,871

 
559,660

Unsettled trades to purchase securities
 
1,032

 
973

Other liabilities
 
26,594

 
23,400

TOTAL LIABILITIES
 
3,162,951

 
3,186,145

 
 
 
 
 
Off-Balance-Sheet Arrangements, Commitments and Contingencies (Note 11)
 


 


 
 
 
 
 
Shareholders' equity:
 
 

 
 

Common stock ($1.25 par, 40,000,000 shares authorized, 21,295,292 shares issued at March 31, 2014 and 20,386,221 shares issued at December 31, 2013)
 
26,619

 
25,483

Paid-in capital
 
239,678

 
214,091

Retained earnings
 
56,997

 
78,673

Treasury stock (2,469,638 shares at cost)
 
(37,692
)
 
(37,692
)
Accumulated other comprehensive loss
 
(14,209
)
 
(21,037
)
TOTAL SHAREHOLDERS' EQUITY
 
271,393

 
259,518

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
 
$
3,434,344

 
$
3,445,663

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
 
 
March 31,
 
 
2014
 
2013
Interest income
 
 
 
 
Loans
 
$
18,363

 
$
17,665

Investment securities – taxable
 
123

 
364

Investment securities – tax-exempt
 
5,958

 
4,488

Mortgage-backed securities
 
7,682

 
3,936

FHLB stock and other investments
 
70

 
65

Other interest earning assets
 
43

 
43

Total interest income
 
32,239

 
26,561

Interest expense
 
 

 
 

Deposits
 
2,116

 
2,070

Short-term obligations
 
71

 
1,250

Long-term obligations
 
2,160

 
1,781

Total interest expense
 
4,347

 
5,101

Net interest income
 
27,892

 
21,460

Provision for loan losses
 
4,133

 
492

Net interest income after provision for loan losses
 
23,759

 
20,968

Noninterest income
 
 

 
 

Deposit services
 
3,638

 
3,753

Net gain on sale of securities available for sale
 
11

 
4,345

Total other-than-temporary impairment losses
 
—

 
(52
)
Portion of loss recognized in other comprehensive income (before taxes)
 
—

 
10

Net impairment losses recognized in earnings
 
—

 
(42
)

 


 


Gain on sale of loans
 
80

 
319

Trust income
 
780

 
720

Bank owned life insurance income
 
314

 
254

Other
 
983

 
891

Total noninterest income
 
5,806

 
10,240

Noninterest expense
 
 

 
 

Salaries and employee benefits
 
13,102

 
13,209

Occupancy expense
 
1,754

 
1,871

Advertising, travel & entertainment
 
543

 
641

ATM and debit card expense
 
317

 
381

Professional fees
 
927

 
640

Software and data processing expense
 
501

 
543

Telephone and communications
 
278

 
451

FDIC insurance
 
448

 
421

Other
 
2,312

 
2,162

Total noninterest expense
 
20,182

 
20,319

 
 
 
 
 
Income before income tax expense
 
9,383

 
10,889

Provision for income tax expense
 
1,159

 
1,847

Net income
 
$
8,224

 
$
9,042

Earnings per common share – basic
 
$
0.44

 
$
0.48

Earnings per common share – diluted
 
$
0.44

 
$
0.48

Dividends paid per common share
 
$
0.21

 
$
0.20

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

 
March 31,
 
 
2014
 
2013
Net income
 
$
8,224

 
$
9,042

Other comprehensive income (loss):
 
 

 
 

Unrealized holding gains (losses) on available for sale securities during the period
 
10,011

 
(5,744
)
Change in net unrealized loss on securities transferred to held to maturity
 
276

 
—

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

 
(10
)
Reclassification adjustment for net gain on sale of available for sale securities, included in net income
 
(11
)
 
(4,345
)
Reclassification of other-than-temporary impairment charges on available for sale securities, included in net income
 
—

 
42

Amortization of net actuarial loss, included in net periodic benefit cost
 
232

 
643

Amortization of prior service credit, included in net periodic benefit cost
 
(3
)
 
(11
)
Other comprehensive income (loss), before tax
 
10,505

 
(9,425
)
Income tax (expense) benefit related to other items of comprehensive income
 
(3,677
)
 
3,299

Other comprehensive income (loss), net of tax
 
6,828

 
(6,126
)
Comprehensive income
 
$
15,052

 
$
2,916


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 SHAREHOLDERS' EQUITY
(UNAUDITED)
(in thousands, except share and per share data)
 
Common
Stock
 
Paid In
Capital
 
Retained
Earnings
 
Treasury
Stock
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Total
Shareholders'
Equity
Balance at December 31, 2012
$
24,308

 
$
195,602

 
$
70,708

 
$
(35,793
)
 
$
2,938

 
$
257,763

Net Income
 

 
 

 
9,042

 
 

 
 

 
9,042

Other comprehensive loss
 

 
 

 
 

 
 

 
(6,126
)
 
(6,126
)
Issuance of common stock (14,361 shares)
18

 
288

 
 

 
 

 
 

 
306

Purchase of common stock (90,300 shares)
 
 
 
 
 
 
(1,899
)
 
 
 
(1,899
)
Stock compensation expense
 

 
207

 
 

 
 

 
 

 
207

Net issuance of common stock under employee stock plan


 
62

 
(62
)
 
 
 
 
 
—

Cash dividends paid on common stock ($0.20 per share)
 

 
 

 
(3,395
)
 
 

 
 

 
(3,395
)
Stock dividend declared
1,064

 
15,992

 
(17,056
)
 
 

 
 

 
—

Balance at March 31, 2013
$
25,390

 
$
212,151

 
$
59,237

 
$
(37,692
)
 
$
(3,188
)
 
$
255,898

 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2013
$
25,483

 
$
214,091

 
$
78,673

 
$
(37,692
)
 
$
(21,037
)
 
$
259,518

Net Income
 

 
 

 
8,224

 
 

 
 

 
8,224

Other comprehensive income
 

 
 

 
 

 
 

 
6,828

 
6,828

Issuance of common stock (8,325 shares)
10

 
247

 
 

 
 

 
 

 
257

Stock compensation expense
 

 
286

 
 

 
 

 
 

 
286

Tax benefits related to stock awards
 

 
1

 
 

 
 

 
 

 
1

Net issuance of common stock under employee stock plan
3

 
130

 
(91
)
 
 

 
 

 
42

Cash dividends paid on common stock ($0.21 per share)
 

 
 

 
(3,763
)
 
 

 
 

 
(3,763
)
Stock dividend declared
1,123

 
24,923

 
(26,046
)
 
 

 
 

 
—

Balance at March 31, 2014
$
26,619

 
$
239,678

 
$
56,997

 
$
(37,692
)
 
$
(14,209
)
 
$
271,393


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)
 
Three Months Ended
 
March 31,
 
2014
 
2013
OPERATING ACTIVITIES:
 
 
 
Net income
$
8,224

 
$
9,042

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

 
 

Depreciation
790

 
895

Amortization of premium
5,482

 
8,543

Accretion of discount and loan fees
(887
)
 
(1,363
)
Provision for loan losses
4,133

 
492

Stock compensation expense
286

 
207

Deferred tax (benefit) expense
(989
)
 
1,031

Excess tax benefits from stock-based compensation
(5
)
 
—

Net gain on sale of securities available for sale
(11
)
 
(4,345
)
Net other-than-temporary impairment losses
—

 
42

Gain on premises and equipment
(7
)
 
—

Loss (gain) on other real estate owned
55

 
(21
)
Net change in:
 

 
 

Interest receivable
6,520

 
5,326

Other assets
(3
)
 
895

Interest payable
(35
)
 
(244
)
Other liabilities
3,332

 
(2,183
)
Loans held for sale
(56
)
 
463

Net cash provided by operating activities
26,829

 
18,780

 
 
 
 
INVESTING ACTIVITIES:
 

 
 

Securities held to maturity:
 

 
 

Purchases
—

 
(42,898
)
Maturities, calls and principal repayments
9,863

 
57,275

Securities available for sale:
 

 
 

Purchases
(165,673
)
 
(448,973
)
Sales
101,830

 
237,318

Maturities, calls and principal repayments
76,840

 
87,694

Proceeds from redemption of FHLB stock
6,766

 
5,242

Purchases of FHLB stock and other investments
(32
)
 
(2,768
)
Net increase in loans
(24,173
)
 
(21,524
)
Purchases of premises and equipment
(1,285
)
 
(805
)
Proceeds from sales of premises and equipment
8

 
—

Proceeds from sales of other real estate owned
194

 
266

Proceeds from sales of repossessed assets
1,730

 
1,778

Net cash provided by (used in) investing activities
6,068

 
(127,395
)
 
 
 
 
(continued)
 
 
 

5
Table of Contents


SOUTHSIDE BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
(UNAUDITED) (continued)
(in thousands)
 
Three Months Ended
 
March 31,
 
2014
 
2013
FINANCING ACTIVITIES:
 
 
 
Net increase in demand and savings accounts
59,468

 
30,071

Net decrease in certificates of deposit
(40,463
)
 
(44,734
)
Net increase (decrease) in federal funds purchased and repurchase agreements
1,055

 
(127
)
Proceeds from FHLB advances
5,064,879

 
942,466

Repayment of FHLB advances
(5,111,416
)
 
(909,585
)
Excess tax benefits from stock-based awards
5

 
—

Net issuance of common stock under employee stock plan
42

 
—

Purchase of common stock
—

 
(1,899
)
Proceeds from the issuance of common stock
257

 
306

Cash dividends paid
(3,763
)
 
(3,395
)
Net cash (used in) provided by financing activities
(29,936
)
 
13,103

 
 
 
 
Net increase (decrease) in cash and cash equivalents
2,961

 
(95,512
)
Cash and cash equivalents at beginning of period
54,431

 
150,630

Cash and cash equivalents at end of period
$
57,392

 
$
55,118

 
 
 
 
SUPPLEMENTAL DISCLOSURES FOR CASH FLOW INFORMATION:
 

 
 


 
 
 
Interest paid
$
4,382

 
$
5,345

Income taxes paid
$
500

 
$
—

 
 
 
 
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES:
 

 
 


 
 
 
Loans transferred to other repossessed assets and real estate through foreclosure
$
1,263

 
$
1,410

Adjustment to pension liability
$
(229
)
 
$
(632
)
Declaration of 5% stock dividend
$
26,046

 
$
17,056

Unsettled trades to purchase securities
$
(1,032
)
 
$
(71,757
)
Unsettled trades to sell securities
$
—

 
$
1,857


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


6
Table of Contents


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


1.    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. “SFG” refers to SFG Finance, LLC (formerly Southside Financial Group, LLC), which is a wholly-owned subsidiary of the Bank.
In early 2013, we decided to close Southside Securities, Inc., our introducing broker-dealer. We completed the closure of Southside Securities, Inc. during the second quarter of 2013.
The consolidated balance sheet as of March 31, 2014, and the related consolidated statements of income, comprehensive income, changes in shareholders' equity and cash flows and notes to the financial statements for the three months period ended March 31, 2014 and 2013 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, 2013.  For a description of our significant accounting and reporting policies, refer to Note 1 of the Notes to Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended December 31, 2013.
On March 20, 2014, our board of directors declared a 5% stock dividend to common stock shareholders of record as of April 10, 2014, which was paid on May 1, 2014. All share data has been adjusted to give retroactive recognition to stock dividends.  
Subsequent Event
On April 28, 2014, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with OmniAmerican Bancorp, Inc., a Maryland corporation (“OmniAmerican”) and the holding company for OmniAmerican Bank, a federal savings association based in Fort Worth, Texas. As of March 31, 2014, OmniAmerican had $1.4 billion in assets. The Merger Agreement provides that, subject to the terms and conditions thereof, OmniAmerican will merge with and into the Company, with the Company as the surviving corporation. The Merger is expected to close during the fourth quarter of 2014, subject to receipt of regulatory approvals and approvals by both our and OmniAmerican's shareholders.
Pursuant to the Merger Agreement, each outstanding share of common stock of OmniAmerican will be converted into (a) 0.4459 of a share of common stock of the Company, subject to adjustment pursuant to the terms of the Merger Agreement and (b) $13.125 in cash.
Accounting Pronouncements
In January 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (ASU) 2014-04 “Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans Upon Foreclosure” to clarify when an entity is considered to have obtained physical possession of a residential real estate property collateralizing a consumer mortgage loan. Upon physical possession (from an in-substance possession or foreclosure) of such real property, an entity is required to reclassify the nonperforming mortgage loan to other real estate owned. The ASU is effective for our interim and annual periods beginning after December 15, 2014. Early adoption is permitted. ASU 2014-04 is not expected to have a material impact on our consolidated financial statements.


7
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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
March 31,
 
 
2014
 
2013
Basic and Diluted Earnings:
 
 
 
 
Net income
 
$
8,224

 
$
9,042

Basic weighted-average shares outstanding
 
18,818

 
18,752

Add:   Stock options
 
84

 
21

Diluted weighted-average shares outstanding
 
18,902

 
18,773

 
 
 

 
 

Basic Earnings Per Share:
 
$
0.44

 
$
0.48

 
 
 

 
 

Diluted Earnings Per Share:
 
$
0.44

 
$
0.48


For the three month periods ended March 31, 2014 and 2013, there were approximately 24,000 and 27,000 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):

 
Three Months Ended March 31, 2014
 
Unrealized Gains (Losses) on Securities
 
Pension Plans
 
 
 
Other
 
OTTI
 
Net Prior
 Service
 (Cost)
 Credit
 
Net Gain (Loss)
 
Total
Beginning balance, net of tax
$
(8,656
)
 
$
—

 
$
(12
)
 
$
(12,369
)
 
$
(21,037
)
Other comprehensive income (loss) before reclassifications
10,287

 
—

 
—

 
—

 
10,287

Reclassified to income
(11
)
 
—

 
(3
)
 
232

 
218

Income tax benefit (expense)
(3,597
)
 
—

 
1

 
(81
)
 
(3,677
)
Net current-period other comprehensive income (loss), net of tax
6,679

 
—

 
(2
)
 
151

 
6,828

Ending balance, net of tax
$
(1,977
)
 
$
—

 
$
(14
)
 
$
(12,218
)
 
$
(14,209
)

 
Three Months Ended March 31, 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 income (loss) before reclassifications
(5,356
)
 
(398
)
 
—

 
—

 
(5,754
)
Reclassified to income
(4,345
)
 
42

 
(11
)
 
643

 
(3,671
)
Income tax benefit (expense)
3,395

 
125

 
4

 
(225
)
 
3,299

Net current-period other comprehensive (loss) income, net of tax
(6,306
)
 
(231
)
 
(7
)
 
418

 
(6,126
)
Ending balance, net of tax
$
24,194

 
$
(1,371
)
 
$
241

 
$
(26,252
)
 
$
(3,188
)

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The reclassifications out of accumulated other comprehensive income into net income are presented below (in thousands):
 
 
Three Months Ended
March 31,
 
 
2014
 
2013
Unrealized gains and losses on available for sale securities:
 
 
 
 
Realized net (loss) gain on sale of securities (1)
 
$
11

 
$
4,345

Impairment losses (2)
 
—

 
(42
)
Total before tax
 
11

 
4,303

Tax expense
 
(4
)
 
(1,506
)
Net of tax
 
$
7

 
$
2,797

 
 
 
 
 
Amortization of pension plan items:
 
 
 
 
Net actuarial loss (3)
 
$
(232
)
 
$
(643
)
Prior service credit (3)
 
3

 
11

Total before tax
 
(229
)
 
(632
)
Tax benefit
 
80

 
221

Net of tax
 
$
(149
)
 
$
(411
)
Total reclassifications for the period, net of tax
 
$
(142
)
 
$
2,386


(1) Listed as Net gain on sale of securities available for sale on the Statements of Income.
(2) Listed as Net impairment losses recognized in earnings on the Statements of Income.
(3) These accumulated other comprehensive income components are included in the computation of net periodic benefit cost presented in “Note 7 - Employee Benefit Plans.”

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4.     Securities

The amortized cost, carrying value, and estimated fair value of investment and mortgage-backed securities as of March 31, 2014 and December 31, 2013 are reflected in the tables below (in thousands):
 
 
 
March 31, 2014
 
 
 
 
Recognized in OCI
 
 
 
Not recognized in OCI
 
 

 
Amortized
 
Gross
Unrealized
 
Gross Unrealized
 
Carrying
 
Gross
Unrealized
 
Gross Unrealized
 
Estimated
AVAILABLE FOR SALE
 
Cost
 
Gains
 
Losses
 
Value
 
Gains
 
Losses
 
Fair Value
Investment Securities:
 
 
 
 
 
 
 
 
 
 
 
 
 

U.S. Government Agency Debentures
 
$
11,609

 
$
—

 
$
1,080

 
$
10,529

 
 
 
 
 
$
10,529

State and Political Subdivisions
 
236,428

 
4,755

 
5,282

 
235,901

 
 
 
 
 
235,901

Other Stocks and Bonds
 
13,077

 
163

 
8

 
13,232

 
 
 
 
 
13,232

Mortgage-backed Securities: (1)
 
 

 
 

 
 

 
 
 
 
 
 
 
 
Residential
 
785,270

 
14,788

 
2,449

 
797,609

 
 
 
 
 
797,609

Commercial

119,419

 
384

 
2,351

 
117,452

 
 
 
 
 
117,452

Total
 
$
1,165,803

 
$
20,090

 
$
11,170

 
$
1,174,723

 
 
 
 
 
$
1,174,723

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
HELD TO MATURITY
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Investment Securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
State and Political Subdivisions
 
$
395,822

 
$
5,850

 
$
10,783

 
$
390,889

 
$
4,386

 
$
7,372

 
$
387,903

Mortgage-backed Securities: (1)
 
 

 
 

 
 

 
 
 
 
 
 
 
 
Residential
 
64,249

 
—

 
91

 
64,158

 
3,598

 
—

 
67,756

Commercial
 
208,405

 
—

 
6,936

 
201,469

 
1,591

 
4,810

 
198,250

Total
 
$
668,476

 
$
5,850

 
$
17,810

 
$
656,516

 
$
9,575

 
$
12,182

 
$
653,909



 
 
December 31, 2013
 
 
 
 
Recognized in OCI
 
 
 
Not recognized in OCI
 
 
 
 
Amortized
 
Gross
Unrealized
 
Gross Unrealized
 
Carrying
 
Gross
Unrealized
 
Gross Unrealized
 
Estimated
AVAILABLE FOR SALE
 
Cost
 
Gains
 
Losses
 
Value
 
Gains
 
Losses
 
Fair Value
Investment Securities:
 
 
 
 
 
 
 
 

 
 
 
 
 
U.S. Government Agency Debentures
 
$
11,612

 
$
—

 
$
1,483

 
$
10,129


 
 
 
 
$
10,129

State and Political Subdivisions
 
322,412

 
4,537

 
12,875

 
314,074


 
 
 
 
314,074

Other Stocks and Bonds
 
13,074

 
159

 
7


13,226


 
 
 
 
13,226

Mortgage-backed Securities:(1)
 
 
 
 
 
 

 
 

 
 
 
 
 
Residential
 
760,418

 
14,940

 
3,273


772,085


 
 
 
 
772,085

Commercial

71,262


220


3,309


68,173


 
 
 
 
68,173

Total
 
$
1,178,778

 
$
19,856

 
$
20,947

 
$
1,177,687

 
 
 
 
 
$
1,177,687

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
HELD TO MATURITY
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Investment Securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
State and Political Subdivisions
 
$
396,549

 
$
5,925

 
$
10,922

 
$
391,552

 
$
1,207

 
$
15,376

 
$
377,383

Mortgage-backed Securities:(1)
 
 

 
 

 
 

 
 
 
 
 
 
 
 

Residential
 
74,129

 
—

 
99

 
74,030

 
3,923

 
—

 
77,953

Commercial
 
208,667

 
—

 
7,128

 
201,539

 
—

 
7,656

 
193,883

Total
 
$
679,345

 
$
5,925

 
$
18,149

 
$
667,121

 
$
5,130

 
$
23,032

 
$
649,219


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

During 2013, the Company transferred certain commercial mortgage-backed securities and state and political subdivision securities from available for sale (“AFS”) to held to maturity (“HTM”). 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 net unrealized loss on the transferred securities included in accumulated other comprehensive income at the time of transfer will be amortized over the remaining life of the underlying security as an adjustment of the yield on those securities. There were no securities transferred from AFS to HTM during the three months ended March 31, 2014.
  

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The following table represents the unrealized loss on securities for the three months ended March 31, 2014 and year ended December 31, 2013 (in thousands):
 
As of March 31, 2014
 
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
$
—

 
$
—

 
$
10,529

 
$
1,080

 
$
10,529

 
$
1,080

State and Political Subdivisions
119,705

 
4,635

 
13,275

 
647

 
132,980

 
5,282

Other Stocks and Bonds
2,992

 
8

 
—

 
—

 
2,992

 
8

Mortgage-backed Securities:
 
 
 
 
 
 
 
 
 
 
 
Residential
175,901

 
2,444

 
1,051

 
5

 
176,952

 
2,449

Commercial
82,527

 
2,351

 
—

 
—

 
82,527

 
2,351

Total
$
381,125

 
$
9,438

 
$
24,855

 
$
1,732

 
$
405,980

 
$
11,170

HELD TO MATURITY
 

 
 

 
 

 
 

 
 

 
 

Investment Securities:
 
 
 
 
 
 
 
 
 
 
 
State and Political Subdivisions
$
275,802

 
$
7,119

 
$
11,046

 
$
253

 
$
286,848

 
$
7,372

Mortgage-backed Securities:
 
 
 
 
 
 
 
 
 
 
 
Commercial
110,240

 
4,810

 
—

 
—

 
110,240

 
4,810

Total
$
386,042

 
$
11,929

 
$
11,046

 
$
253

 
$
397,088

 
$
12,182

 
 
 
 
 
 
 
 
 
 
 
 
 
As of December 31, 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
$
—

 
$
—

 
$
10,129

 
$
1,483

 
$
10,129

 
$
1,483

State and Political Subdivisions
191,117

 
11,757

 
18,408

 
1,118

 
209,525

 
12,875

Other Stocks and Bonds
2,992

 
7

 
—

 
—

 
2,992

 
7

Mortgage-backed Securities:
 
 
 
 
 
 
 
 
 
 
 
Residential
126,965

 
3,266

 
1,351

 
7

 
128,316

 
3,273

Commercial
65,406

 
3,309

 
—

 
—

 
65,406

 
3,309

Total
$
386,480

 
$
18,339

 
$
29,888

 
$
2,608

 
$
416,368

 
$
20,947

HELD TO MATURITY
 

 
 

 
 

 
 

 
 

 
 

Investment Securities:
 
 
 
 
 
 
 
 
 
 
 
State and Political Subdivisions
$
283,667

 
$
15,311

 
$
1,705

 
$
65

 
$
285,372

 
$
15,376

Mortgage-backed Securities:
 
 
 
 
 
 
 
 
 
 
 
Commercial
193,883

 
7,656

 
—

 
—

 
193,883

 
7,656

Total
$
477,550

 
$
22,967

 
$
1,705

 
$
65

 
$
479,255

 
$
23,032


We review securities in an unrealized loss position to evaluate if a classification of other-than-temporarily impaired 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 and AFS securities is other-

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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. 

The majority of the unrealized loss positions are comprised of highly rated municipal securities and U.S. Agency mortgage- backed securities (“MBS”) where the unrealized loss is a direct result of the change in interest rates and spreads. Based upon the length of time and the extent to which fair value is less than cost, we believe the securities with an unrealized loss in accumulated other comprehensive income (“AOCI”) are not other-than-temporarily impaired at March 31, 2014.

Prior to December 31, 2013, we held pooled trust preferred securities ("TRUPs"). The turmoil in the capital markets had a significant impact on our estimate of fair value of our TRUPs. These TRUPs were structured products with cash flows dependent upon securities issued by U.S. financial institutions, including banks and insurance companies.   Given the facts and circumstances associated with the TRUPs, we reviewed the financial condition of each of the underlying issuing banks within the TRUP collateral pool that had not deferred and defaulted and we performed detailed cash flow modeling for each TRUP using an industry-accepted cash flow model. The cash flow model assumptions represented management’s best estimate and considered 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 security. For the three months ended March 31, 2013, the additional write-down recognized in earnings was approximately $42,000.

The following table presents a roll forward of the credit losses recognized in earnings on the TRUPs (in thousands):
 
 
Three Months Ended
March 31,
 
 
2013
Balance, beginning of period
 
$
3,256

Additions for credit losses recognized on debt securities that had previously incurred impairment losses
 
42

Balance, end of period
 
$
3,298


On December 13, 2013, management decided to sell all TRUPs as a result of new guidance effective in 2014 as listed in Section 419 of the Dodd-Frank Act (the “Volcker Rule”). The sale of the TRUPs, with a $2.7 million amortized-cost basis, resulted in a loss of approximately $959,000. Until the final rules under 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.

Interest income recognized on securities for the periods presented (in thousands):
 
Three Months Ended
March 31,
 
2014
 
2013
U.S. Treasury
$
—

 
$
17

U.S. Government Agency Debentures
59

 
212

State and Political Subdivisions
5,970

 
4,578

Other Stocks and Bonds
52

 
45

Mortgage-backed Securities
7,682

 
3,936

Total interest income on securities
$
13,763

 
$
8,788

 
 
 
 

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Of the approximately $11,000 in net securities gains from the AFS portfolio for the three months ended March 31, 2014, there were $2.9 million in realized gains and $2.9 million in realized losses.  Of the $4.3 million in net securities gains from the AFS portfolio for the three months ended March 31, 2013, there were $5.5 million in realized gains and approximately $1.2 million in realized losses. There were no sales from the HTM portfolio during the three months ended March 31, 2014 or 2013.  
The amortized cost, carrying value and fair value of securities at March 31, 2014, 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 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.
 
March 31, 2014
 
Amortized Cost
 
Fair Value
AVAILABLE FOR SALE
(in thousands)
Investment Securities:
 
 
 
Due in one year or less
$
3,292

 
$
3,356

Due after one year through five years
18,421

 
18,915

Due after five years through ten years
25,743

 
25,228

Due after ten years
213,658

 
212,163

 
261,114

 
259,662

Mortgage-backed Securities:
904,689

 
915,061

Total
$
1,165,803

 
$
1,174,723


 
March 31, 2014
 
Carrying Value
 
Fair Value
HELD TO MATURITY
(in thousands)
Investment Securities:
 
 
 
Due in one year or less
$
—

 
$
—

Due after one year through five years
329

 
329

Due after five years through ten years
17,591

 
17,307

Due after ten years
372,969

 
370,267

 
390,889

 
387,903

Mortgage-backed Securities:
265,627

 
266,006

Total
$
656,516

 
$
653,909


Investment and MBS with book values of $1.10 billion and $1.14 billion were pledged as of March 31, 2014 and December 31, 2013, 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 their fair value and are 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):
 
March 31, 2014
 
December 31, 2013
Real Estate Loans:
 
 
 
Construction
$
135,237

 
$
125,219

1-4 Family Residential
395,809

 
390,499

Other
272,868

 
262,536

Commercial Loans
154,524

 
157,655

Municipal Loans
240,114

 
245,550

Loans to Individuals
171,841

 
169,814

Total Loans
1,370,393

 
1,351,273

Less: Allowance for Loan Losses
18,787

 
18,877

Net Loans
$
1,351,606

 
$
1,332,396


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.  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 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.
Other Real Estate
Other 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.  Other real estate loans are made at both fixed and adjustable interest rates for terms generally up to 20 years.



15
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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 throughout the state of Texas.  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 pools purchased through SFG are subjected to a modeling system that takes into consideration credit scores and estimated collateral values to determine expected defaults in each pool. SFG purchased loan pools of approximately $20.8 million and $21.8 million, net of discount, during the three months ended March 31, 2014 and March 31, 2013, respectively.
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.
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 and estimating necessary reserves 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

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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 $50,000 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.

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.

SFG loans, included in loans to individuals, experiencing past due status or extension of maturity characteristics are reserved for at 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 repay than the original contract.  Additionally, some loans may be granted extensions for extenuating payment circumstances and evaluated for troubled debt classification.  The remaining term extensions increase the risk of collateral deterioration and, accordingly, reserves are 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) – Special Treatment Required – 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 Loan Review; 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.

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•
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.
Loans that are accruing and not considered troubled debt restructurings ("TDR") are reserved for as a group of similar type 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:
•
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.

The following tables detail activity in the allowance for loan losses by portfolio segment for the periods presented (in thousands):
 
Three Months Ended March 31, 2014
 
Real Estate
 
 
 
 
 
 
 
 
 
 
 
Construction
 
1-4 Family
Residential
 
Other
 
Commercial
Loans
 
Municipal
Loans
 
Loans to
Individuals
 
Unallocated
 
Total
Balance at beginning of period
$
2,142

 
$
3,277

 
$
2,572

 
$
1,970

 
$
668

 
$
8,248

 
$
—

 
$
18,877

Provision (reversal) for loan losses
(10
)
 
536

 
(164
)
 
3

 
109

 
3,659

 
—

 
4,133

Loans charged off
(14
)
 
(22
)
 
—

 
—

 
—

 
(4,732
)
 
—

 
(4,768
)
Recoveries of loans charged off
12

 
6

 
3

 
58

 
—

 
466

 
—

 
545

Balance at end of period
$
2,130

 
$
3,797

 
$
2,411

 
$
2,031

 
$
777

 
$
7,641

 
$
—

 
$
18,787

 




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Three Months Ended March 31, 2013
 
Real Estate
 
 
 
 
 
 
 
 
 
 
 
Construction
 
1-4 Family
Residential
 
Other
 
Commercial
Loans
 
Municipal
Loans
 
Loans to
Individuals
 
Unallocated
 
Total
Balance at beginning of period
$
2,355

 
$
3,545

 
$
2,290

 
$
3,158

 
$
633

 
$
7,373

 
$
1,231

 
$
20,585

Provision (reversal) for loan losses
(125
)
 
167

 
(247
)
 
(290
)
 
(12
)
 
1,344

 
(345
)
 
492

Loans charged off
—

 
(228
)
 
(46
)
 
(71
)
 
—

 
(2,807
)
 
—

 
(3,152
)
Recoveries of loans charged off
17

 
4

 
5

 
50

 
—

 
541

 
—

 
617

Balance at end of period
$
2,247

 
$
3,488

 
$
2,002

 
$
2,847

 
$
621

 
$
6,451

 
$
886

 
$
18,542


 
The following tables present the balance in the allowance for loan losses by portfolio segment based on impairment method (in thousands):

 
As of March 31, 2014
 
Real Estate
 
 
 
 
 
 
 
 
 
 
 
Construction
 
1-4 Family
Residential
 
Other
 
Commercial
Loans
 
Municipal
Loans
 
Loans to
Indi