Edgar Filing: SOUTHSIDE BANCSHARES INC

SBSI 10-Q Doc_03.31.15

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, 2015



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 Avenue, 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, 2015 was 25,331,116 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	37
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	56
ITEM 4. CONTROLS AND PROCEDURES	57
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS	58
ITEM 1A. RISK FACTORS	58
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	58
ITEM 3. DEFAULTS UPON SENIOR SECURITIES	58
ITEM 4. MINE SAFETY DISCLOSURES	58
ITEM 5. OTHER INFORMATION	58
ITEM 6. EXHIBITS	58
SIGNATURES	59
EXHIBIT INDEX	60
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)

	March 31, 2015			December 31, 2014
ASSETS
Cash and due from banks	$	55,055		$	64,001
Interest earning deposits	52,123			20,654
Total cash and cash equivalents	107,178			84,655
Investment securities:
Available for sale, at estimated fair value	293,735			306,706
Held to maturity, at carrying value (estimated fair value of $399,503 and $400,248, respectively)	388,106			388,823
Mortgage-backed securities:
Available for sale, at estimated fair value	1,140,140			1,142,002
Held to maturity, at carrying value (estimated fair value of $260,818 and $261,339, respectively)	249,430			253,496
FHLB stock, at cost	39,978			39,942
Other investments	5,259			3,929
Loans held for sale	4,096			2,899
Loans:
Loans	2,174,614			2,181,133
Less: Allowance for loan losses	(16,926		)	(13,292		)
Net Loans	2,157,688			2,167,841
Premises and equipment, net	111,903			112,860
Goodwill	90,394			91,372
Other intangible assets, net	8,242			8,844
Interest receivable	16,644			22,436
Deferred tax asset	10,966			12,707
Unsettled trades to sell securities	1,792			57,202
Bank owned life insurance	93,021			92,384
Other assets	13,821			19,163
TOTAL ASSETS	$	4,732,393		$	4,807,261
LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits:
Noninterest bearing	$	680,122		$	661,014
Interest bearing	2,815,218			2,713,403
Total deposits	3,495,340			3,374,417
Short-term obligations:
Federal funds purchased and repurchase agreements	2,127			4,237
FHLB advances	141,244			297,368
Total short-term obligations	143,371			301,605
Long-term obligations:
FHLB advances	549,545			600,052
Long-term debt	60,311			60,311
Total long-term obligations	609,856			660,363
Unsettled trades to purchase securities	13,096			5,982
Other liabilities	35,916			39,651
TOTAL LIABILITIES	4,297,579			4,382,018

Off-Balance-Sheet Arrangements, Commitments and Contingencies (Note 12)

Shareholders' equity:
Common stock ($1.25 par, 40,000,000 shares authorized, 27,800,279 shares issued at March 31, 2015 (including 1,209,337 shares declared on April 13, 2015 as a stock dividend) and 26,578,127 shares issued at December 31, 2014)	33,239			33,223
Paid-in capital	390,515			389,886
Retained earnings	59,218			55,396
Treasury stock (2,469,638 shares at cost)	(37,692		)	(37,692		)
Accumulated other comprehensive loss	(10,466		)	(15,570		)
TOTAL SHAREHOLDERS' EQUITY	434,814			425,243
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	4,732,393		$	4,807,261

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
	March 31,
	2015		2014
Interest income
Loans	$	23,916	$	18,363
Investment securities – taxable	237		123
Investment securities – tax-exempt	5,865		5,958
Mortgage-backed securities	8,462		7,682
FHLB stock and other investments	93		70
Other interest earning assets	34		43
Total interest income	38,607		32,239
Interest expense
Deposits	2,529		2,116
Short-term obligations	142		71
Long-term obligations	2,145		2,160
Total interest expense	4,816		4,347
Net interest income	33,791		27,892
Provision for loan losses	3,848		4,133
Net interest income after provision for loan losses	29,943		23,759
Noninterest income
Deposit services	4,989		3,638
Net gain on sale of securities available for sale	2,476		11
Gain on sale of loans	377		80
Trust income	893		780
Bank owned life insurance income	669		314
Other	1,644		983
Total noninterest income	11,048		5,806
Noninterest expense
Salaries and employee benefits	18,199		13,102
Occupancy expense	3,459		1,754
Advertising, travel & entertainment	657		543
ATM and debit card expense	679		317
Professional fees	742		927
Software and data processing expense	1,031		501
Telephone and communications	469		278
FDIC insurance	638		448
Other	3,835		2,312
Total noninterest expense	29,709		20,182

Income before income tax expense	11,282		9,383
Income tax expense	1,903		1,159
Net income	$	9,379	$	8,224
Earnings per common share – basic	$	0.37	$	0.41
Earnings per common share – diluted	$	0.37	$	0.41
Dividends paid per common share	$	0.23	$	0.21

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
	March 31,
	2015			2014
Net income	$	9,379		$	8,224
Other comprehensive income:
Net unrealized holding gains on available for sale securities during the period	9,520			10,011
Change in net unrealized loss on securities transferred to held to maturity	282			276
Reclassification adjustment for net gain on sale of available for sale securities, included in net income	(2,476		)	(11		)
Amortization of net actuarial loss, included in net periodic benefit cost	531			232
Amortization of prior service credit, included in net periodic benefit cost	(4		)	(3		)
Other comprehensive income, before tax	7,853			10,505
Income tax expense related to other items of comprehensive income	(2,749		)	(3,677		)
Other comprehensive income, net of tax	5,104			6,828
Comprehensive income	$	14,483		$	15,052

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 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, 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 plans	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

Balance at December 31, 2014	$	33,223	$	389,886	$	55,396		$	(37,692	)	$	(15,570	)	$	425,243
Net income	—		—		9,379			—			—			9,379
Other comprehensive income	—		—		—			—			5,104			5,104
Issuance of common stock (9,983 shares)	12		292		—			—			—			304
Stock compensation expense	—		273		—			—			—			273
Tax benefits related to stock awards	—		4		—			—			—			4
Net issuance of common stock under employee stock plans	4		60		(11		)	—			—			53
Cash dividends paid on common stock ($0.23 per share)	—		—		(5,546		)	—			—			(5,546		)
Balance at March 31, 2015	$	33,239	$	390,515	$	59,218		$	(37,692	)	$	(10,466	)	$	434,814

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)

	Three Months Ended
	March 31,
	2015			2014
OPERATING ACTIVITIES:
Net income	$	9,379		$	8,224
Adjustments to reconcile net income to net cash provided by operations:
Depreciation	2,039			790
Amortization of premium	6,974			5,482
Accretion of discount and loan fees	(2,191		)	(887		)
Provision for loan losses	3,848			4,133
Stock compensation expense	273			286
Deferred tax benefit	(1,535		)	(989		)
Tax benefit related to stock awards	(4		)	(5		)
Net gain on sale of securities available for sale	(2,476		)	(11		)
Loss (gain) on premises and equipment	138			(7		)
Loss on other real estate owned	272			55
Net change in:
Interest receivable	5,792			6,520
Other assets	3,564			(3		)
Interest payable	(66		)	(35		)
Other liabilities	(3,142		)	3,332
Loans originated for sale	(1,197		)	(56		)
Net cash provided by operating activities	21,668			26,829

INVESTING ACTIVITIES:
Securities held to maturity:
Maturities, calls and principal repayments	4,061			9,863
Securities available for sale:
Purchases	(279,911		)	(165,673		)
Sales	285,326			101,830
Maturities, calls and principal repayments	77,202			76,840
Proceeds from redemption of FHLB stock	—			6,766
Purchases of FHLB stock and other investments	(20		)	(32		)
Net loans originated	6,266			(24,173		)
Purchases of premises and equipment	(1,223		)	(1,285		)
Proceeds from sales of premises and equipment	3			8
Proceeds from sales of other real estate owned	548			194
Proceeds from sales of repossessed assets	1,088			1,730
Net cash provided by investing activities	93,340			6,068

(continued)

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

	Three Months Ended
	March 31,
	2015			2014
FINANCING ACTIVITIES:
Net increase in demand and savings accounts	108,731			59,468
Net increase (decrease) in certificates of deposit	12,515			(40,463		)
Net (decrease) increase in federal funds purchased and repurchase agreements	(2,110		)	1,055
Proceeds from FHLB advances	5,227,768			5,064,879
Repayment of FHLB advances	(5,434,204		)	(5,111,416		)
Tax benefit related to stock awards	4			5
Net issuance of common stock under employee stock plan	53			42
Proceeds from the issuance of common stock	304			257
Cash dividends paid	(5,546		)	(3,763		)
Net cash used in financing activities	(92,485		)	(29,936		)

Net increase in cash and cash equivalents	22,523			2,961
Cash and cash equivalents at beginning of period	84,655			54,431
Cash and cash equivalents at end of period	$	107,178		$	57,392

SUPPLEMENTAL DISCLOSURES FOR CASH FLOW INFORMATION:

Interest paid	$	4,881		$	4,382
Income taxes paid	$	—		$	500

SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES:

Loans transferred to other repossessed assets and real estate through foreclosure	$	674		$	1,263
Adjustment to pension liability	$	(527	)	$	(229	)
Declaration of 5% stock dividend	$	—		$	26,046
Unsettled trades to purchase securities	$	(13,096	)	$	(1,032	)
Unsettled trades to sell securities	$	1,792		$	—

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

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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. “OABC” and “Omni” refer to OmniAmerican Bancorp, Inc. “SFG” refers to SFG Finance, LLC (formerly Southside Financial Group, LLC), which is a wholly-owned subsidiary of the Bank.

The consolidated balance sheet as of March 31, 2015, 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-month periods ended March 31, 2015 and 2014 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, 2014. For a description of our significant accounting and reporting policies, refer to "Note 1- Summary of Significant Accounting and Reporting Policies" in our consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2014.

On April 13, 2015, our board of directors declared a 5% stock dividend to common stock shareholders of record as of April 27, 2015, which will be paid on May 14, 2015. All share data has been adjusted to give retroactive recognition to stock dividends.

Accounting Pronouncements

In January 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-04, “Receivables-Troubled Debt Restructurings by Creditors (Subtopic 310-40): Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure.” This update clarifies that an in-substance repossession or foreclosure occurs, and a creditor is considered to have received physical possession of the residential real estate property collateralizing a consumer mortgage loan, upon either: (i) the creditor obtaining legal title to the property upon completion of the foreclosure; or (ii) the borrower conveying all interest in the property to the creditor to satisfy the loan through completion of a deed-in-lieu of foreclosure or through a similar legal agreement. ASU 2014-04 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2014. The adoption of this guidance did not have a material impact on our consolidated financial statements.

In April 2014, the FASB issued ASU No. 2014-08, “Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity.” Under the new guidance, a disposal of a component of an entity or a group of components of an entity is required to be reported in discontinued operations if the disposal represents a strategic shift that has (or will have) a major effect on the entity's operations and financial results when any of the following occurs: (i) the component of an entity or group of components of an entity meets the criteria in paragraph 205-20-45-1E to be classified as held for sale; (ii) the component of an entity or group of components of an entity is disposed of by sale; or (iii) the component of an entity or group of components of an entity is disposed of other than by sale (for example, by abandonment or in a distribution to owners in a spin-off). ASU 2014-08 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2014 with early adoption permitted. We early adopted ASU 2014-08 in the third quarter of 2014. The adoption of this guidance did not have a material impact on our consolidated financial statements.

In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers (Topic 606).” This update states that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an

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amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This update affects entities that enter into contracts with customers to transfer goods or services or enter into contracts for the transfer of nonfinancial assets, unless those contracts are within the scope of other standards. ASU 2014-09 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. Early adoption is not permitted. We are in the process of reviewing the potential impact the adoption of this guidance will have on our consolidated financial statements.

In June 2014, the FASB issued ASU 2014-11, “Transfers and Servicing (Topic 860): Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures.” This update aligns the accounting for repurchase-to-maturity transactions and repurchase agreements executed as a repurchase financing with the accounting for other typical repurchase agreements by accounting for these transactions as secured borrowings. This update also requires a new disclosure for transactions economically similar to repurchase agreements in which the transferor retains substantially all of the exposure to the economic return of the transferred financial assets throughout the term of the transaction. ASU 2014-11 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2014. The adoption of this guidance did not have a significant impact on our consolidated financial statements.

In August 2014, the FASB issued ASU 2014-14, “Receivables - Troubled Debt Restructurings by Creditors (Subtopic 310-40): Classification of Certain Government-Guaranteed Mortgage Loans upon Foreclosure.” This update affects creditors that hold government-guaranteed mortgage loans, including those guaranteed by the Federal Housing Administration (FHA) of the U.S. Department of Housing and Urban Development (HUD), and the U.S. Department of Veterans Affairs (VA). The update requires that, upon foreclosure, a guaranteed mortgage loan be derecognized and a separate other receivable be recognized when specific criteria are met. ASU 2014-14 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2014. The adoption of this guidance did not have a significant impact on our consolidated financial statements.

In April 2015, the FASB issued ASU 2015-05, “Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40) – Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement.” ASU 2015-05 affects the accounting for fees paid by a customer in cloud computing arrangements such as (i) software as a service, (ii) platform as a service (iii) infrastructure as a service and (iv) other similar hosting arrangements. If a cloud computing arrangement includes a software license, then the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. ASU 2015-05 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is permitted. The adoption of this guidance is not expected to have a significant impact on our consolidated financial statements.

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2. Acquisition

On December 17, 2014, we acquired 100% of the outstanding stock of OmniAmerican Bancorp, Inc. and its wholly-owned subsidiary OmniAmerican Bank (collectively, "Omni") headquartered in Fort Worth, Texas. Omni operated 14 banking offices in Fort Worth, Texas and surrounding areas. We acquired Omni to further expand our presence in the growing Fort Worth market. The operations of Omni were merged into ours as of the date of the acquisition.

The Omni acquisition was accounted for using the purchase method of accounting and accordingly, purchased assets, including identifiable intangible assets, and assumed liabilities were recorded at their respective acquisition date fair values. The purchase price allocation remains preliminary and is subject to final determination and valuation of the fair value of assets acquired and liabilities assumed. Subsequent to filing our Annual Report on Form 10-K for the year ended December 31, 2014, we continued to evaluate the assets and liabilities assumed. This evaluation resulted in a $1.4 million adjustment to the fair value of Visa Class B stock included in other investments on the consolidated balance sheets, not previously recorded. The impact of this adjustment on goodwill, net of deferred tax, is reflected below. For more information concerning the fair value of the assets acquired and liabilities assumed in relation to the acquisition of Omni, see "Note 2 - Acquisition" in our Annual Report on Form 10-K for the year ended December 31, 2014.

The following table reflects the changes in the carrying amount of our goodwill for the three months ended March 31, 2015 (in thousands):



	Goodwill

Balance as of December 31, 2014	$	91,372
Less: measurement period adjustments	(978		)
Balance as of March 31, 2015	$	90,394

3. 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,
	2015		2014
Basic and Diluted Earnings:
Net income	$	9,379	$	8,224
Basic weighted-average shares outstanding	25,322		19,761
Add: Stock awards	81		89
Diluted weighted-average shares outstanding	25,403		19,850

Basic Earnings Per Share:	$	0.37	$	0.41

Diluted Earnings Per Share:	$	0.37	$	0.41

For the three-month periods ended March 31, 2015 and 2014, there were approximately 10,000 and 26,000 anti-dilutive shares, respectively.

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4. Accumulated Other Comprehensive (Loss) Income

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



	Three Months Ended March 31, 2015
	Unrealized Gains (Losses) on Securities			Pension Plans
	Other			Net Prior Service (Cost) Credit			Net Gain (Loss)			Total
Beginning balance, net of tax	$	6,238		$	7		$	(21,815	)	$	(15,570	)
Other comprehensive income before reclassifications	9,802			—			—			9,802
Reclassified to income	(2,476		)	(4		)	531			(1,949		)
Income tax (expense) benefit	(2,564		)	1			(186		)	(2,749		)
Net current-period other comprehensive income (loss), net of tax	4,762			(3		)	345			5,104
Ending balance, net of tax	$	11,000		$	4		$	(21,470	)	$	(10,466	)



	Three Months Ended March 31, 2014
	Unrealized Gains (Losses) on Securities			Pension Plans
	Other			Net Prior Service (Cost) Credit			Net Gain (Loss)			Total
Beginning balance, net of tax	$	(8,656	)	$	(12	)	$	(12,369	)	$	(21,037	)
Other comprehensive income before reclassifications	10,287			—			—			10,287
Reclassified to income	(11		)	(3		)	232			218
Income tax (expense) benefit	(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	)

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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,
	2015			2014
Unrealized gains and losses on available for sale securities:
Realized net gain on sale of securities ⁽¹⁾	$	2,476		$	11
Tax expense	(867		)	(4		)
Net of tax	$	1,609		$	7

Amortization of pension plan:
Net actuarial loss ⁽²⁾	$	(531	)	$	(232	)
Prior service credit ⁽²⁾	4			3
Total before tax	(527		)	(229		)
Tax benefit	185			80
Net of tax	$	(342	)	$	(149	)
Total reclassifications for the period, net of tax	$	1,267		$	(142	)

(1) Listed as net gain on sale of securities available for sale on the consolidated statements of income.

(2) These accumulated other comprehensive income components are included in the computation of net periodic benefit cost presented in “Note 8 - Employee Benefit Plans.”

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5. Securities

The amortized cost, carrying value, and estimated fair value of investment and mortgage-backed securities as of March 31, 2015 and December 31, 2014 are reflected in the tables below (in thousands):



	March 31, 2015
			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. Treasuries	$	24,646	$	507	$	—	$	25,153	$	—	$	—	$	25,153
U.S. Government Agency Debentures	4,840		78		—		4,918		—		—		4,918
State and Political Subdivisions	237,460		7,823		954		244,329		—		—		244,329
Other Stocks and Bonds	13,089		140		—		13,229		—		—		13,229
Other Equity Securities	6,061		45		—		6,106		—		—		6,106
Mortgage-backed Securities: ⁽¹⁾
Residential	791,207		15,459		197		806,469		—		—		806,469
Commercial	328,813		5,240		382		333,671		—		—		333,671
Total	$	1,406,116	$	29,292	$	1,533	$	1,433,875	$	—	$	—	$	1,433,875

HELD TO MATURITY
Investment Securities:
State and Political Subdivisions	$	392,731	$	5,095	$	9,720	$	388,106	$	12,286	$	889	$	399,503
Mortgage-backed Securities: ⁽¹⁾
Residential	48,305		—		65		48,240		2,851		—		51,091
Commercial	207,335		—		6,145		201,190		8,569		32		209,727
Total	$	648,371	$	5,095	$	15,930	$	637,536	$	23,706	$	921	$	660,321

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	December 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. Treasuries	$	14,883	$	30	$	7	$	14,906	$	—	$	—	$	14,906
U.S. Government Agency Debentures	4,835		—		7		4,828		—		—		4,828
State and Political Subdivisions	260,535		8,055		906		267,684		—		—		267,684
Other Stocks and Bonds	13,086		153		—		13,239		—		—		13,239
Other Equity Securities	6,061		—		12		6,049		—		—		6,049
Mortgage-backed Securities:⁽¹⁾
Residential	952,481		12,624		807		964,298		—		—		964,298
Commercial	176,112		1,743		151		177,704		—		—		177,704
Total	$	1,427,993	$	22,605	$	1,890	$	1,448,708	$	—	$	—	$	1,448,708

HELD TO MATURITY
Investment Securities:
State and Political Subdivisions	$	393,525	$	5,168	$	9,870	$	388,823	$	12,181	$	756	$	400,248
Mortgage-backed Securities:⁽¹⁾
Residential	52,287		—		70		52,217		2,871		—		55,088
Commercial	207,624		—		6,345		201,279		5,461		489		206,251
Total	$	653,436	$	5,168	$	16,285	$	642,319	$	20,513	$	1,245	$	661,587

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

From time to time, the Company may transfer securities from available for sale (“AFS”) to held to maturity (“HTM”) due to overall balance sheet strategies. Our management has the current intent and ability to hold the transferred securities until maturity. Any net unrealized gain or 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, 2015.

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The following table represents the unrealized loss on securities as of March 31, 2015 and December 31, 2014 (in thousands):



	As of March 31, 2015
	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:
State and Political Subdivisions	$	38,943	$	325	$	23,758	$	629	$	62,701	$	954
Mortgage-backed Securities:
Residential	53,148		119		18,656		78		71,804		197
Commercial	77,243		382		—		—		77,243		382
Total	$	169,334	$	826	$	42,414	$	707	$	211,748	$	1,533
HELD TO MATURITY
Investment Securities:
State and Political Subdivisions	$	10,955	$	98	$	57,230	$	791	$	68,185	$	889
Mortgage-backed Securities:
Commercial	—		—		6,638		32		6,638		32
Total	$	10,955	$	98	$	63,868	$	823	$	74,823	$	921

	As of December 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. Treasuries	$	4,968	$	7	$	—	$	—	$	4,968	$	7
U.S. Government Agency Debentures	4,828		7		—		—		4,828		7
State and Political Subdivisions	28,155		90		44,269		816		72,424		906
Other Equity Securities	6,049		12		—		—		6,049		12
Mortgage-backed Securities:
Residential	347,777		573		27,632		234		375,409		807
Commercial	21,103		54		10,116		97		31,219		151
Total	$	412,880	$	743	$	82,017	$	1,147	$	494,897	$	1,890
HELD TO MATURITY
Investment Securities:
State and Political Subdivisions	$	7,843	$	31	$	64,946	$	725	$	72,789	$	756
Mortgage-backed Securities:
Commercial	—		—		44,144		489		44,144		489
Total	$	7,843	$	31	$	109,090	$	1,214	$	116,933	$	1,245

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We review those securities in an unrealized loss position for significant differences between fair value and the cost basis to evaluate if a classification of other-than-temporary impairment is warranted. In estimating other-than-temporary impairment losses, management considers, among other things, the length of time and the extent to which the fair value has been less than cost and the financial condition and near-term prospects of the issuer. The Company considers an other-than-temporary impairment to have occurred when there is an adverse change in expected cash flows. When it is determined that a decline in fair value of HTM and AFS securities is other-than-temporary, the carrying value of the security is reduced to its estimated fair value, with a corresponding charge to earnings for the credit portion and the noncredit portion to other comprehensive income. Based upon the length of time and the extent to which fair value is less than cost, we believe the securities with an unrealized loss do not have other-than-temporary impairment at March 31, 2015. To the best of management’s knowledge and based on our consideration of the qualitative factors associated with each security, there were no securities in our investment and MBS portfolio with an other-than-temporary impairment at March 31, 2015.

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. For those securities in an unrealized loss position, we do not currently intend to sell the securities and it is not more likely than not that we will be required to sell the 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,
	2015		2014
U.S. Treasury	$	116	$	—
U.S. Government Agency Debentures	32		59
State and Political Subdivisions	5,870		5,970
Other Stocks and Bonds	84		52
Mortgage-backed Securities	8,462		7,682
Total interest income on securities	$	14,564	$	13,763

Of the approximately $2.5 million in net securities gains from the AFS portfolio for the three months ended March 31, 2015, there were $2.5 million in realized gains and $54,000 in realized losses. Of the $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. There were no sales from the HTM portfolio during the three months ended March 31, 2015 or 2014. We calculate realized gains and losses on sales of securities under the specific identification method.

The amortized cost, carrying value and fair value of securities at March 31, 2015, are presented below by contractual maturity. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations. MBS are presented in total by category due to the fact that MBS typically are issued with stated principal amounts, and the securities are backed by pools of mortgages that have loans with varying maturities. The characteristics of the underlying pool of mortgages, such as fixed-rate or adjustable-rate, as well as prepayment risk, are passed on to the 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.

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	March 31, 2015
	Amortized Cost		Fair Value
AVAILABLE FOR SALE	(in thousands)
Investment Securities:
Due in one year or less	$	5,546	$	5,588
Due after one year through five years	17,737		18,151
Due after five years through ten years	73,069		74,408
Due after ten years	183,683		189,482
	280,035		287,629
Mortgage-backed Securities and Other Equity Securities:	1,126,081		1,146,246
Total	$	1,406,116	$	1,433,875



	March 31, 2015
	Carrying Value		Fair Value
HELD TO MATURITY	(in thousands)
Investment Securities:
Due in one year or less	$	1,078	$	1,081
Due after one year through five years	2,927		3,047
Due after five years through ten years	44,464		45,368
Due after ten years	339,637		350,007
	388,106		399,503
Mortgage-backed Securities:	249,430		260,818
Total	$	637,536	$	660,321

Investment securities and MBS with carrying values of $1.09 billion and $1.12 billion were pledged as of March 31, 2015 and December 31, 2014, 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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6. Loans and Allowance for Probable Loan Losses

Loans in the accompanying consolidated balance sheets are classified as follows (in thousands):



	March 31, 2015		December 31, 2014
Real Estate Loans:
Construction	$	237,236	$	243,486
1-4 Family Residential	691,955		689,288
Other	502,476		485,226
Commercial Loans	249,407		235,356
Municipal Loans	252,756		257,492
Loans to Individuals	240,784		270,285
Total Loans⁽¹⁾	2,174,614		2,181,133
Less: Allowance for Loan Losses	16,926		13,292
Net Loans	$	2,157,688	$	2,167,841

(1) Includes approximately $727.7 million and $763.3 million of loans acquired with the Omni acquisition as of March 31, 2015 and December 31, 2014, respectively. These loans were measured at fair value at the acquisition date with no carryover of allowance for loan loss. The allowance for loan loss recorded on acquired loans for the three months ended March 31, 2015 was not significant.

Real Estate Construction Loans

Our construction loans are collateralized by property located primarily in the market areas we serve. A majority of our construction loans will be owner-occupied upon completion. Construction loans for speculative projects are financed, but these typically have secondary sources of repayment and collateral. Our construction loans have both adjustable and fixed interest rates during the construction period. Construction loans to individuals are typically priced and made with the intention of granting the permanent loan on the property. Speculative and commercial construction loans are subject to underwriting standards similar to that of the commercial portfolio. Owner occupied 1-4 family residential construction loans are subject to the underwriting standards of the permanent loan.

Real Estate 1-4 Family Residential Loans

Residential loan originations are generated by our loan officers, in-house origination staff, marketing efforts, present customers, walk-in customers and referrals from real estate agents and builders. We focus our 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.

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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 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.

On October 3, 2014, we announced that we intended to sell all of our subprime automobile loans purchased through SFG, as well as the repossessed assets held by SFG. During the fourth quarter of 2014, the sale of the subprime automobile loans and repossessed assets held by SFG was completed. As a result, the carrying amount of SFG loans totaling $70.3 million were sold and were therefore not included in our loan portfolio as of December 31, 2014. There have been no subsequent loan pool purchases through SFG since December 2014 and there will be no additional loan pool purchases through SFG. For the three months ended March 31, 2014, SFG purchased loan pools of approximately $20.8 million, net of discount.

Allowance for Loan Losses

The allowance for loan losses is based on the most current review of the loan portfolio and is a result of multiple processes. First, the bank utilizes historical data to establish general reserve amounts for each class of loans. The historical charge off figure is further adjusted through qualitative factors that include general trends in past dues, nonaccruals and classified loans to more effectively and promptly react to both positive and negative movements. Second, our lenders have the primary responsibility for identifying problem loans based on customer financial stress and underlying collateral. These recommendations are reviewed by senior loan administration, the special assets department, and the loan review department. Third, the loan review department independently reviews the portfolio on an annual basis. The loan review department follows a board-approved annual loan review scope. The loan review scope encompasses a number of considerations including the size of the loan, the type of credit extended, the seasoning of the loan and the performance of the loan. The loan review scope, as it relates to size, focuses more on larger dollar loan relationships, typically, for example, aggregate debt of $500,000 or greater. The loan review officer also reviews specific reserves compared to general reserves to determine trends in comparative reserves as well as losses not reserved for prior to charge-off to determine the effectiveness of the specific reserve process.

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At each review, a subjective analysis methodology is used to grade the respective loan. Categories of grading vary in severity from loans that do not appear to have a significant probability of loss at the time of review to loans that indicate a probability that the entire balance of the loan will be uncollectible. If full collection of the loan balance appears unlikely at the time of review, estimates of future expected cash flows or appraisals of the collateral securing the debt are used to determine the necessary allowances. The internal loan review department maintains a list of all loans or loan relationships that are graded as having more than the normal degree of risk associated with them. In addition, a list of specifically reserved loans or loan relationships of $150,000 or more is updated on a quarterly basis in order to properly determine necessary allowances and keep management informed on the status of attempts to correct the deficiencies noted with respect to the loan.

We calculate historical loss ratios for pools of similar loans with similar characteristics based on the proportion of actual charge-offs experienced to the total population of loans in the pool. The historical gross loss ratios are updated based on actual charge-off experience quarterly and adjusted for qualitative factors. Our pools of similar loans include consumer loans and loans secured by 1-4 family loans.

Prior to September 30, 2014, SFG loans included in loans to individuals that experienced past due status or extension of maturity characteristics were reserved for at higher levels based on the circumstances associated with each specific loan. In general, the reserves for SFG were calculated based on the past due status of the loan. For reserve purposes, the portfolio was segregated by past due status and by the remaining term variance from the original contract. During repayment, loans that paid late took longer to repay than the original contract. Additionally, some loans may have been granted extensions for extenuating payment circumstances and evaluated for troubled debt classification. The remaining term extensions increased the risk of collateral deterioration and, accordingly, reserves were increased to recognize this risk.

Industry and our own experience indicates that a portion of our loans will become delinquent and a portion of the loans will require partial or full charge-off. Regardless of the underwriting criteria utilized, losses may be experienced as a result of various factors beyond our control, including, among other things, changes in market conditions affecting the value of properties used as collateral for loans and problems affecting the credit of the borrower and the ability of the borrower to make payments on the loan. Our determination of the appropriateness of the allowance for loan losses is based on various considerations, including an analysis of the risk characteristics of various classifications of loans, previous loan loss experience, specific loans which would have loan loss potential, delinquency trends, estimated fair value of the underlying collateral, current economic conditions, and geographic and industry loan concentration.

Credit Quality Indicators

We categorize loans into risk categories on an ongoing basis based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. We use the following definitions for risk ratings:


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


•	Pass Watch (Rating 5) – These loans require some degree of special treatment, but not due to credit quality. This category does not include loans specially mentioned or adversely classified; however, particular attention must be accorded such credits due to characteristics such as:


◦	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

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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, with the exception of loans to individuals and 1-4 family residential loans, that are accruing are reserved for as a group of similar type credits and included in the general portion of the allowance for loan losses. Loans to individuals and 1-4 family residential loans are collectively evaluated and included in the general portion of the allowance for loan losses. Loans considered troubled debt restructurings ("TDR") are evaluated individually for further impairment.

The general portion of the loan loss allowance is reflective of historical charge-off levels for similar loans adjusted for changes in current conditions and other relevant factors. These factors are likely to cause estimated losses to differ from historical loss experience and include:


•	Changes in lending policies or procedures, including underwriting, collection, charge-off, and recovery procedures;


•	Changes in local, regional and national economic and business conditions, including entry into new markets;


•	Changes in the volume or type of credit extended;


•	Changes in the experience, ability, and depth of lending management;


•	Changes in the volume and severity of past due, nonaccrual, restructured, or classified loans;


•	Changes in charge-off trends;


•	Changes in loan review or Board oversight;


•	Changes in the level of concentrations of credit; and


•	Changes in external factors, such as competition and legal and regulatory requirements.

The following table details activity in the allowance for loan losses by portfolio segment for the periods presented (in thousands):



	Three Months Ended March 31, 2015
	Real Estate
	Construction		1-4 Family Residential			Other		Commercial Loans			Municipal Loans		Loans to Individuals			Total
Balance at beginning of period⁽¹⁾	$	2,456	$	2,822		$	3,025	$	3,279		$	716	$	994		$	13,292
Provision (reversal) for loan losses	275		573			269		2,065			108		558			3,848
Loans charged off	—		(6		)	—		(57		)	—		(1,023		)	(1,086		)
Recoveries of loans charged off	43		11			66		29			—		723			872
Balance at end of period	$	2,774	$	3,400		$	3,360	$	5,316		$	824	$	1,252		$	16,926

(1) Loans acquired with the Omni acquisition were measured at fair value on December 17, 2014 with no carryover of allowance for loan loss.

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	Three Months Ended March 31, 2014
	Real Estate
	Construction			1-4 Family Residential			Other			Commercial Loans		Municipal Loans		Loans to Individuals			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

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, 2015

Real Estate

Construction ⁽¹⁾

1-4 Family

Residential

Other

Commercial

Loans

Municipal

Loans

Loans to

Individuals

Total

Ending balance – individually evaluated for impairment