10-Q
Table of Contents


 
 
 
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549

FORM 10-Q
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2016
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 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 25, 2016 was 24,969,676 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,
2016
 
December 31,
2015
ASSETS
 
 
 
 
Cash and due from banks
 
$
52,324

 
$
54,288

Interest earning deposits
 
16,130

 
26,687

Total cash and cash equivalents
 
68,454

 
80,975

Securities available for sale, at estimated fair value
 
1,332,381

 
1,460,492

Securities held to maturity, at carrying value (estimated fair value of $818,108 and $799,763, respectively)
 
784,579

 
784,296

FHLB stock, at cost
 
47,550

 
51,047

Other investments
 
5,501

 
5,462

Loans held for sale
 
4,971

 
3,811

Loans:
 
 

 
 

Loans
 
2,443,231

 
2,431,753

Less:  Allowance for loan losses
 
(21,799
)
 
(19,736
)
Net Loans
 
2,421,432

 
2,412,017

Premises and equipment, net
 
107,556

 
107,929

Goodwill
 
91,520

 
91,520

Other intangible assets, net
 
6,029

 
6,548

Interest receivable
 
16,548

 
22,700

Deferred tax asset
 
12,512

 
19,903

Unsettled trades to sell securities
 
15,039

 
9,343

Bank owned life insurance
 
95,718

 
95,080

Other assets
 
9,222

 
10,953

TOTAL ASSETS
 
$
5,019,012

 
$
5,162,076

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 

 
 

Deposits:
 
 

 
 

Noninterest bearing
 
$
698,695

 
$
672,470

Interest bearing
 
2,920,673

 
2,782,937

Total deposits
 
3,619,368

 
3,455,407

Short-term obligations:
 
 

 
 

Federal funds purchased and repurchase agreements
 
2,501

 
2,429

FHLB advances
 
257,145

 
645,407

Total short-term obligations
 
259,646

 
647,836

Long-term obligations:
 
 

 
 

FHLB advances
 
561,990

 
502,281

Long-term debt
 
60,311

 
60,311

Total long-term obligations
 
622,301

 
562,592

Unsettled trades to purchase securities
 
23,920

 
19,350

Other liabilities
 
36,201

 
32,829

TOTAL LIABILITIES
 
4,561,436

 
4,718,014

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


 


 
 
 
 
 
Shareholders’ equity:
 
 

 
 

Common stock ($1.25 par value, 40,000,000 shares authorized, 27,882,740 shares issued at March 31, 2016 and 27,865,798 shares issued at December 31, 2015)
 
34,853

 
34,832

Paid-in capital
 
424,753

 
424,078

Retained earnings
 
49,254

 
41,527

Treasury stock, at cost (2,913,064 at March 31, 2016 and 2,469,638 at December 31, 2015)
 
(47,891
)
 
(37,692
)
Accumulated other comprehensive loss
 
(3,393
)
 
(18,683
)
TOTAL SHAREHOLDERS’ EQUITY
 
457,576

 
444,062

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
 
$
5,019,012

 
$
5,162,076


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,
 
2016
 
2015
Interest income
 
 
 
Loans
$
27,765

 
$
23,916

Investment securities – taxable
214

 
237

Investment securities – tax-exempt
5,355

 
5,865

Mortgage-backed securities
9,391

 
8,462

FHLB stock and other investments
217

 
93

Other interest earning assets
70

 
34

Total interest income
43,012

 
38,607

Interest expense
 

 
 

Deposits
3,256

 
2,529

Short-term obligations
696

 
142

Long-term obligations
2,443

 
2,145

Total interest expense
6,395

 
4,816

Net interest income
36,617

 
33,791

Provision for loan losses
2,316

 
3,848

Net interest income after provision for loan losses
34,301

 
29,943

Noninterest income
 

 
 

Deposit services
5,085

 
4,989

Net gain on sale of securities available for sale
2,441

 
2,476

Gain on sale of loans
643

 
377

Trust income
855

 
893

Bank owned life insurance income
674

 
669

Brokerage services
575

 
639

Other
1,323

 
745

Total noninterest income
11,596

 
10,788

Noninterest expense
 

 
 

Salaries and employee benefits
17,732

 
18,199

Occupancy expense
3,335

 
3,199

Advertising, travel & entertainment
685

 
657

ATM and debit card expense
712

 
679

Professional fees
1,338

 
742

Software and data processing expense
749

 
1,031

Telephone and communications
484

 
469

FDIC insurance
638

 
638

Other
3,735

 
3,835

Total noninterest expense
29,408

 
29,449

 
 
 
 
Income before income tax expense
16,489

 
11,282

Income tax expense
2,973

 
1,903

Net income
$
13,516

 
$
9,379

Earnings per common share – basic
$
0.54

 
$
0.37

Earnings per common share – diluted
$
0.54

 
$
0.37

Dividends paid per common share
$
0.23

 
$
0.23


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,
 
2016
 
2015
Net income
$
13,516

 
$
9,379

Other comprehensive income:
 

 
 

Securities available for sale and transferred securities:
 
 
 
Net unrealized holding gains on available for sale securities during the period
27,744

 
9,520

Change in net unrealized loss on securities transferred to held to maturity

 

Reclassification adjustment for amortization of unrealized losses on securities transferred to held to maturity
57

 
282

Reclassification adjustment for net gain on sale of available for sale securities, included in net income
(2,441
)
 
(2,476
)
Derivatives:
 
 
 
Change in net unrealized loss on effective cash flow hedge interest rate swap derivatives
(2,244
)
 

Pension plans:
 
 
 
Amortization of net actuarial loss, included in net periodic benefit cost
411

 
531

Amortization of prior service credit, included in net periodic benefit cost
(4
)
 
(4
)
Other comprehensive income, before tax
23,523

 
7,853

Income tax expense related to other items of comprehensive income
(8,233
)
 
(2,749
)
Other comprehensive income, net of tax
15,290

 
5,104

Comprehensive income
$
28,806

 
$
14,483


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

3

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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, 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

 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2015
$
34,832

 
$
424,078

 
$
41,527

 
$
(37,692
)
 
$
(18,683
)
 
$
444,062

Net income

 

 
13,516

 

 

 
13,516

Other comprehensive income

 

 

 

 
15,290

 
15,290

Issuance of common stock (12,030 shares)
15

 
299

 

 

 

 
314

Purchase of common stock (443,426 shares)

 

 

 
(10,199
)
 

 
(10,199
)
Stock compensation expense

 
355

 

 

 

 
355

Tax expense related to stock awards

 
(12
)
 

 

 

 
(12
)
Net issuance of common stock under employee stock plans
6

 
33

 
(15
)
 

 

 
24

Cash dividends paid on common stock ($0.23 per share)

 

 
(5,774
)
 

 

 
(5,774
)
Balance at March 31, 2016
$
34,853

 
$
424,753

 
$
49,254

 
$
(47,891
)
 
$
(3,393
)
 
$
457,576


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,
 
2016
 
2015
OPERATING ACTIVITIES:
 
 
 
Net income
$
13,516

 
$
9,379

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

 
 

Depreciation and net amortization
2,169

 
2,123

Securities premium amortization (discount accretion), net
4,510

 
5,264

Loan (discount accretion) premium amortization, net
(799
)
 
(565
)
Provision for loan losses
2,316

 
3,848

Stock compensation expense
355

 
273

Deferred tax benefit
(812
)
 
(1,535
)
Tax expense (benefit) related to stock awards
12

 
(4
)
Net gain on sale of securities available for sale
(2,441
)
 
(2,476
)
Net (gain) loss on premises and equipment
(19
)
 
138

Gross proceeds from sales of loans held for sale
17,944

 
15,176

Gross originations of loans held for sale
(19,104
)
 
(16,373
)
Net loss on other real estate owned
152

 
272

Net change in:
 

 
 

Interest receivable
6,152

 
5,792

Other assets
590

 
3,564

Interest payable
291

 
(66
)
Other liabilities
1,243

 
(3,142
)
Net cash provided by operating activities
26,075

 
21,668

 
 
 
 
INVESTING ACTIVITIES:
 

 
 

Securities available for sale:
 
 
 
Purchases
(135,648
)
 
(279,911
)
Sales
251,976

 
285,326

Maturities, calls and principal repayments
47,407

 
77,202

Securities held to maturity:
 

 
 

Purchases
(18,922
)
 

Maturities, calls and principal repayments
5,168

 
4,061

Proceeds from redemption of FHLB stock
3,644

 

Purchases of FHLB stock and other investments
(171
)
 
(20
)
Net loans originated
(11,420
)
 
6,266

Purchases of premises and equipment
(1,648
)
 
(1,223
)
Proceeds from sales of premises and equipment
50

 
3

Proceeds from sales of other real estate owned
483

 
548

Proceeds from sales of repossessed assets
311

 
1,088

Net cash provided by investing activities
141,230

 
93,340

 
 
 
 
(continued)
 
 
 

5

Table of Contents


SOUTHSIDE BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
(UNAUDITED) (continued)
(in thousands)
 
Three Months Ended
 
March 31,
 
2016
 
2015
FINANCING ACTIVITIES:
 
 
 
Net change in deposits
$
164,249

 
$
121,246

Net increase (decrease) in federal funds purchased and repurchase agreements
72

 
(2,110
)
Proceeds from FHLB advances
2,916,882

 
5,227,768

Repayment of FHLB advances
(3,245,382
)
 
(5,434,204
)
Tax (expense) benefit related to stock awards
(12
)
 
4

Net issuance of common stock under employee stock plan
24

 
53

Purchase of common stock
(10,199
)
 

Proceeds from the issuance of common stock
314

 
304

Cash dividends paid
(5,774
)
 
(5,546
)
Net cash used in financing activities
(179,826
)
 
(92,485
)
 
 
 
 
Net (decrease) increase in cash and cash equivalents
(12,521
)
 
22,523

Cash and cash equivalents at beginning of period
80,975

 
84,655

Cash and cash equivalents at end of period
$
68,454

 
$
107,178

 
 
 
 
SUPPLEMENTAL DISCLOSURES FOR CASH FLOW INFORMATION:
 

 
 


 
 
 
Interest paid
$
6,104

 
$
4,881

Income taxes paid
$

 
$

 
 
 
 
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES:
 

 
 


 
 
 
Loans transferred to other repossessed assets and real estate through foreclosure
$
465

 
$
674

Adjustment to pension liability
$
(407
)
 
$
(527
)
Unsettled trades to purchase securities
$
(23,920
)
 
$
(13,096
)
Unsettled trades to sell securities
$
15,039

 
$
1,792


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


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Table of Contents


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


1.    Summary of Significant Accounting and Reporting Policies

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. “Omni” refers to OmniAmerican Bancorp, Inc., a bank holding company acquired by Southside on December 17, 2014. “SFG” refers to SFG Finance, LLC (formerly Southside Financial Group, LLC), which was a wholly-owned subsidiary of the Bank that was dissolved in April 2015.
The consolidated balance sheet as of March 31, 2016, and the related consolidated statements of income, comprehensive income, changes in shareholders’ equity, cash flows and notes to the financial statements for the three-month periods ended March 31, 2016 and 2015 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.
Certain prior period amounts have been reclassified to conform to current year presentation and had no impact on net income, equity or cash flows.
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, 2015.  
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, 2015. The accounting and reporting policies we follow with respect to our derivative instruments and hedging activities are presented below.

Derivative Financial Instruments and Hedging Activities

Derivative financial instruments are carried on the consolidated balance sheets as other assets or other liabilities, as applicable, at estimated fair value. The accounting for changes in the fair value (i.e., gains or losses) of a derivative financial instrument is determined by whether it has been designated and qualifies as part of a hedging relationship and, further, by the type of hedging relationship. We present derivative financial instruments at fair value in the consolidated balance sheets on a net basis when a right of offset exists, based on transactions with a single counterparty and any cash collateral paid to and/or received from that counterparty for derivative contracts that are subject to legally enforceable master netting arrangements.

For derivative instruments that are designated and qualify as cash flow hedges (i.e., hedging the exposure to variability in expected future cash flows that is attributable to a particular risk), the effective portion of the gain or loss on the derivative instrument is reported as a component of other comprehensive income and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. The remaining gain or loss on the derivative instrument in excess of the cumulative change in the present value of future cash flows of the hedged item (i.e., the ineffective portion), if any, is recognized in current earnings during the period of change. For derivative instruments not designated as hedging instruments, the gain or loss is recognized in current earnings during the period of change.

For derivatives designated as hedging instruments at inception, statistical regression analysis is used at inception and for each reporting period thereafter to assess whether the derivative used has been and is expected to be highly effective in offsetting changes in the fair value or cash flows of the hedged item. All components of each derivative instrument’s gain or loss are included in the assessment of hedge effectiveness. Net hedge ineffectiveness is recorded in “other noninterest income” on the consolidated statements of income.

Further information on our derivative instruments and hedging activities is included in “Note 9 - Derivative Financial Instruments and Hedging Activities.”


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Table of Contents


Accounting Pronouncements
In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842).” ASU 2016-02 requires a lessee to recognize assets and liabilities for leases with lease terms of more than 12 months. Consistent with current GAAP, the recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee primarily will depend on its classification as a finance or operating lease. However, unlike current GAAP which requires only capital leases to be recognized on the balance sheet, the new ASU will require both types of leases to be recognized on the balance sheet. ASU 2016-02 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted. We have not yet selected a transition method nor have we determined the impact of adoption on our consolidated financial statements.
In March 2016, the FASB issued ASU 2016-09, “Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting.” ASU 2016-09 simplifies several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification in the statement of cash flows. The ASU requires that all excess tax benefits and tax deficiencies be recognized as income tax expense or benefit in the income statement and should be classified along with other income tax cash flows as an operating activity instead of a financing activity as currently required under GAAP. The ASU also simplifies accounting for forfeitures by allowing an entity to make an entity-wide accounting policy election either to estimate the number of forfeitures expected to occur or to recognize the effects of forfeitures when they occur in compensation cost. Additionally, cash paid by an employer when directly withholding shares for tax-withholding purposes should be classified as a financing activity, and to qualify for equity classification, an employer can now withhold up to the maximum statutory tax rate instead of the minimum statutory tax rate as currently required by GAAP. ASU 2016-09 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. Early adoption is permitted. We have not yet selected a transition method nor have we determined the impact of adoption on our consolidated financial statements.

2.    Acquisition
On December 17, 2014, we acquired 100% of the outstanding stock of OmniAmerican Bancorp, Inc. and its wholly-owned subsidiary OmniAmerican Bank (collectively, “Omni”) headquartered in Fort Worth, Texas. Omni operated 14 banking offices in Fort Worth, Texas and surrounding areas. We acquired Omni to further expand our presence in the growing Fort Worth market. The total merger consideration for the Omni merger was $298.3 million. The operations of Omni were merged into ours as of the date of the acquisition.
The fair value of assets acquired, adjusted for subsequent measurement period adjustments, excluding goodwill, totaled $1.36 billion, including total loans of $763.5 million and total investment securities of $428.4 million.  Total fair value of the liabilities assumed, adjusted for subsequent measurement period adjustments, totaled $1.13 billion, including deposits of $801.3 million.  We recognized $69.5 million in goodwill associated with the Omni acquisition.  The goodwill resulting from the acquisition represents consideration paid in excess of the net assets acquired and the value expected from the opportunities to strategically grow our franchise in the greater Fort Worth market area and to enhance our operations through customer synergies and efficiencies, thereby providing enhanced customer service.  Goodwill is not expected to be deductible for tax purposes.
We recognized a core deposit intangible of $8.6 million in connection with the Omni acquisition, which will be amortized using an accelerated method over a 10 year period consistent with expected future cash flows.
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.  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, 2015.
The following table reflects our goodwill for the periods presented (in thousands).
 
 
March 31,
2016
 
December 31, 2015
 
 
 
 
 
Goodwill
 
$
91,520

 
$
91,520




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3.     Earnings Per Share
Earnings per share on a basic and diluted basis have been calculated as follows (in thousands, except per share amounts):
 
Three Months Ended
March 31,
 
2016
 
2015
Basic and Diluted Earnings:
 
 
 
Net income
$
13,516

 
$
9,379

Basic weighted-average shares outstanding
25,186

 
25,322

Add:   Stock awards
66

 
81

Diluted weighted-average shares outstanding
25,252

 
25,403

 
 

 
 

Basic Earnings Per Share:
$
0.54

 
$
0.37

 
 

 
 

Diluted Earnings Per Share:
$
0.54

 
$
0.37

For the three-month periods ended March 31, 2016 and 2015, there were approximately 95,000 and 10,000 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, 2016
 

 
 
Pension Plans
 
 
 
Unrealized Gains (Losses) on Securities
 
Unrealized Gains (Losses) on Derivatives
 
Net Prior
Service
(Cost)
Credit
 
Net Gain (Loss)
 
Total
Beginning balance, net of tax
$
(239
)
 
$

 
$
(44
)
 
$
(18,400
)
 
$
(18,683
)
Other comprehensive (loss) income:
 
 
 
 
 
 
 
 
 
Other comprehensive income (loss) before reclassifications
27,744

 
(2,244
)
 

 

 
25,500

Reclassified from accumulated other comprehensive income
(2,384
)
 

 
(4
)
 
411

 
(1,977
)
Income tax (expense) benefit
(8,876
)
 
785

 
1

 
(143
)
 
(8,233
)
Net current-period other comprehensive income (loss), net of tax
16,484

 
(1,459
)
 
(3
)
 
268

 
15,290

Ending balance, net of tax
$
16,245

 
$
(1,459
)
 
$
(47
)
 
$
(18,132
)
 
$
(3,393
)

 
Three Months Ended March 31, 2015
 

 
 
Pension Plans
 
 
 
Unrealized Gains (Losses) on Securities
 
Unrealized Gains (Losses) on Derivatives
 
Net Prior
 Service
 (Cost)
 Credit
 
Net Gain (Loss)
 
Total
Beginning balance, net of tax
$
6,238

 
$

 
$
7

 
$
(21,815
)
 
$
(15,570
)
Other comprehensive (loss) income:
 
 
 
 
 
 
 
 
 
Other comprehensive income before reclassifications
9,520

 

 

 

 
9,520

Reclassified from accumulated other comprehensive income
(2,194
)
 

 
(4
)
 
531

 
(1,667
)
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
)

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The reclassifications out of accumulated other comprehensive loss into net income are presented below (in thousands):
 
Three Months Ended
March 31,
 
2016
 
2015
 
 
 
 
Unrealized losses on securities transferred to held to maturity:
 
 
 
Amortization of unrealized losses (1)
$
(57
)
 
$
(282
)
Tax benefit
20

 
99

Net of tax
(37
)
 
(183
)
 
 
 
 
Unrealized gains and losses on available for sale securities:
 
 
 
Realized net gain on sale of securities (2)
$
2,441

 
$
2,476

Tax expense
(854
)
 
(867
)
Net of tax
1,587

 
1,609

 
 
 
 
Amortization of pension plan:
 
 
 
Net actuarial loss (3)
$
(411
)
 
$
(531
)
Prior service credit (3)
4

 
4

Total before tax
(407
)
 
(527
)
Tax benefit
142

 
185

Net of tax
(265
)
 
(342
)
Total reclassifications for the period, net of tax
$
1,285

 
$
1,084

(1) Included in interest income on the consolidated statements of income.
(2) Listed as net gain on sale of securities available for sale on the consolidated statements of income.
(3) These accumulated other comprehensive income components are included in the computation of net periodic pension cost (income) presented in “Note 8 - Employee Benefit Plans.”

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5.     Securities

The amortized cost, gross unrealized gains and losses, carrying value, and estimated fair value of investment and mortgage-backed securities as of March 31, 2016 and December 31, 2015 are reflected in the tables below (in thousands):
 
 
March 31, 2016
 
 
 
 
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:
 
 
 
 
 
 
 
 
 
 
 
 
 

State and Political Subdivisions
 
$
270,091

 
$
10,172

 
$
471

 
$
279,792

 
$

 
$

 
$
279,792

Other Stocks and Bonds
 
12,774

 
80

 
45

 
12,809

 

 

 
12,809

Other Equity Securities
 
6,048

 
52

 

 
6,100

 

 

 
6,100

Mortgage-backed Securities: (1)
 
 

 
 

 
 

 
 
 
 
 
 
 
 
Residential
 
553,121

 
12,042

 
153

 
565,010

 

 

 
565,010

Commercial

456,552

 
12,118

 

 
468,670

 

 

 
468,670

Total
 
$
1,298,586

 
$
34,464

 
$
669

 
$
1,332,381

 
$

 
$

 
$
1,332,381

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
HELD TO MATURITY
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Investment Securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
State and Political Subdivisions
 
$
387,936

 
$
4,480

 
$
9,094

 
$
383,322

 
$
17,387

 
$
1,179

 
$
399,530

Mortgage-backed Securities: (1)
 
 

 
 

 
 

 
 
 
 
 
 
 
 
Residential
 
34,187

 

 
44

 
34,143

 
2,380

 
1

 
36,522

Commercial
 
371,258

 
1,192

 
5,336

 
367,114

 
14,942

 

 
382,056

Total
 
$
793,381

 
$
5,672

 
$
14,474

 
$
784,579

 
$
34,709

 
$
1,180

 
$
818,108


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December 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. Treasury
 
$
103,906

 
$
61

 
$
380

 
$
103,587

 
$

 
$

 
$
103,587

State and Political Subdivisions
 
236,534

 
8,323

 
611

 
244,246



 

 
244,246

Other Stocks and Bonds
 
12,772

 
63

 
45


12,790



 

 
12,790

Other Equity Securities
 
6,052

 

 
36

 
6,016

 

 

 
6,016

Mortgage-backed Securities: (1)
 
 
 
 
 
 

 
 

 
 
 
 
 
Residential
 
580,621

 
9,120

 
1,239


588,502



 

 
588,502

Commercial

512,116


466


7,231


505,351



 

 
505,351

Total
 
$
1,452,001

 
$
18,033

 
$
9,542

 
$
1,460,492

 
$

 
$

 
$
1,460,492

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
HELD TO MATURITY
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Investment Securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
State and Political Subdivisions
 
$
389,997

 
$
4,772

 
$
9,273

 
$
385,496

 
$
13,061

 
$
1,363

 
$
397,194

Mortgage-backed Securities: (1)
 
 

 
 

 
 

 
 
 
 
 
 
 
 

Residential
 
31,430

 

 
51

 
31,379

 
2,018

 
1

 
33,396

Commercial
 
371,727

 
1,233

 
5,539

 
367,421

 
4,232

 
2,480

 
369,173

Total
 
$
793,154

 
$
6,005

 
$
14,863

 
$
784,296

 
$
19,311

 
$
3,844

 
$
799,763


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

From time to time, we 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. AFS securities transferred with losses included in accumulated other comprehensive income continue to be included in management’s assessment for other-than-temporary impairment for each individual security. There were no securities transferred from AFS to HTM during the three months ended March 31, 2016.



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The following tables represent the fair value and unrealized loss on securities as of March 31, 2016 and December 31, 2015 (in thousands):
 
As of March 31, 2016
 
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
$
6,134

 
$
16

 
$
17,650

 
$
455

 
$
23,784

 
$
471

Other Stocks and Bonds
2,955

 
45

 

 

 
2,955

 
45

Mortgage-backed Securities:
 
 
 
 
 
 
 
 
 
 
 
Residential
57,543

 
147

 
2,699

 
6

 
60,242

 
153

Total
$
66,632

 
$
208

 
$
20,349

 
$
461

 
$
86,981

 
$
669

HELD TO MATURITY
 

 
 

 
 

 
 

 
 

 
 

Investment Securities:
 
 
 
 
 
 
 
 
 
 
 
State and Political Subdivisions
$
4,197

 
$
40

 
$
47,304

 
$
1,139

 
$
51,501

 
$
1,179

Mortgage-backed Securities:
 
 
 
 
 
 
 
 
 
 
 
Residential
540

 
1

 

 

 
540

 
1

Total
$
4,737

 
$
41

 
$
47,304

 
$
1,139

 
$
52,041

 
$
1,180

 
 
 
 
 
 
 
 
 
 
 
 
 
As of December 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:
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury
$
64,172

 
$
380

 
$

 
$

 
$
64,172

 
$
380

State and Political Subdivisions
15,550

 
116

 
19,270

 
495

 
34,820

 
611

Other Stocks and Bonds
2,954

 
45

 

 

 
2,954

 
45

   Other Equity Securities
6,016

 
36

 

 

 
6,016

 
36

Mortgage-backed Securities:
 
 
 
 
 
 
 
 
 
 
 
Residential
229,514

 
1,215

 
3,817

 
24

 
233,331

 
1,239

Commercial
422,316

 
7,039

 
5,110

 
192

 
427,426

 
7,231

Total
$
740,522

 
$
8,831

 
$
28,197

 
$
711

 
$
768,719

 
$
9,542

HELD TO MATURITY
 

 
 

 
 

 
 

 
 

 
 

Investment Securities:
 
 
 
 
 
 
 
 
 
 
 
State and Political Subdivisions
$
24,340

 
$
214

 
$
62,240

 
$
1,149

 
$
86,580

 
$
1,363

Mortgage-backed Securities:
 
 
 
 
 
 
 
 
 
 
 
Residential
1,717

 
1

 

 

 
1,717

 
1

Commercial
193,710

 
2,439

 
2,481

 
41

 
196,191

 
2,480

Total
$
219,767

 
$
2,654

 
$
64,721

 
$
1,190

 
$
284,488

 
$
3,844


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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.  We consider an other-than-temporary impairment to have occurred when there is an adverse change in expected cash flows.  When it is determined that a decline in fair value of HTM or AFS securities is other-than-temporary, the carrying value of the security is reduced to its estimated fair value, with a corresponding charge to earnings for the credit portion and the noncredit portion to other comprehensive income. Based upon the length of time and the extent to which fair value is less than cost, we believe that none of the securities with an unrealized loss have other-than-temporary impairment at March 31, 2016.
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 securities before the anticipated recovery of their amortized cost basis. To the best of management’s knowledge and based on our consideration of the qualitative factors associated with each security, there were no securities in our investment and MBS portfolio with an other-than-temporary impairment at March 31, 2016.

Interest income recognized on securities for the periods presented (in thousands):
 
 
 
 
 
Three Months Ended
March 31,
 
2016
 
2015
U.S. Treasury
$
127

 
$
116

U.S. Government Agency Debentures

 
32

State and Political Subdivisions
5,355

 
5,870

Other Stocks and Bonds
58

 
52

Other Equity Securities
29

 
32

Mortgage-backed Securities
9,391

 
8,462

Total interest income on securities
$
14,960

 
$
14,564


Of the approximately $2.4 million in net securities gains from the AFS portfolio for the three months ended March 31, 2016, there were $2.6 million in realized gains and $202,000 in realized losses.  Of the $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. There were no sales from the HTM portfolio during the three months ended March 31, 2016 or 2015. We calculate realized gains and losses on sales of securities under the specific identification method.  

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The amortized cost, carrying value and fair value of securities at March 31, 2016, 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, 2016
 
Amortized Cost
 
Fair Value
AVAILABLE FOR SALE
(in thousands)
Investment Securities:
 
 
 
Due in one year or less
$
18,483

 
$
18,576

Due after one year through five years
21,036

 
22,078

Due after five years through ten years
30,220

 
31,318

Due after ten years
213,126

 
220,629

 
282,865

 
292,601

Mortgage-backed Securities and Other Equity Securities:
1,015,721

 
1,039,780

Total
$
1,298,586

 
$
1,332,381


 
March 31, 2016
 
Carrying Value
 
Fair Value
HELD TO MATURITY
(in thousands)
Investment Securities:
 
 
 
Due in one year or less
$
5,233

 
$
5,144

Due after one year through five years
22,189

 
22,649

Due after five years through ten years
77,787

 
80,387

Due after ten years
278,113

 
291,350

 
383,322

 
399,530

Mortgage-backed Securities:
401,257

 
418,578

Total
$
784,579

 
$
818,108


Investment and MBS with carrying values of $1.13 billion and $1.33 billion were pledged as of March 31, 2016 and December 31, 2015, respectively, to collateralize Federal Home Loan Bank of Dallas, (“FHLB”) advances, repurchase agreements, and public funds or for other purposes as required by law.
Securities with limited marketability, such as FHLB stock and other investments, are carried at cost, which approximates fair value and are assessed for other-than-temporary impairment.  These securities have no maturity date.

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Table of Contents




6.     Loans and Allowance for Probable Loan Losses

Loans in the accompanying consolidated balance sheets are classified as follows (in thousands):
 
March 31, 2016
 
December 31, 2015
Real Estate Loans:
 
 
 
Construction
$
464,750

 
$
438,247

1-4 Family Residential
644,826

 
655,410

Commercial
657,962

 
635,210

Commercial Loans
233,857

 
242,527

Municipal Loans
286,217

 
288,115

Loans to Individuals
155,619

 
172,244

Total Loans (1)
2,443,231

 
2,431,753

Less: Allowance for Loan Losses
21,799

 
19,736

Net Loans
$
2,421,432

 
$
2,412,017

(1)
Includes approximately $525.4 million and $581.1 million of loans acquired with the Omni acquisition as of March 31, 2016 and December 31, 2015, respectively. The allowance for loan loss recorded on acquired loans totaled $519,000 and $629,000 as of March 31, 2016 and December 31, 2015, respectively.
Real Estate Construction Loans
Our construction loans are collateralized by property located primarily in the market areas we serve. A majority of our construction loans will be owner-occupied upon completion. Construction loans for speculative projects are financed, but these typically have secondary sources of repayment and collateral. Our construction loans have both adjustable and fixed interest rates during the construction period. Construction loans to individuals are typically priced and made with the intention of granting the permanent loan on the property. Speculative and commercial construction loans are subject to underwriting standards similar to that of the commercial portfolio.  Owner occupied 1-4 family residential construction loans are subject to the underwriting standards of the permanent loan.
Real Estate 1-4 Family Residential Loans
Residential loan originations are generated by our loan officers, in-house origination staff, marketing efforts, present customers, walk-in customers and referrals from real estate agents and builders.  We focus our residential lending efforts primarily on the origination of loans secured by first mortgages on owner-occupied, 1-4 family residences.  Substantially all of our 1-4 family residential loan originations are secured by properties located in or near our market areas.  
Our 1-4 family residential loans generally have maturities ranging from five to 30 years.  These loans are typically fully amortizing with monthly payments sufficient to repay the total amount of the loan.  Our 1-4 family residential loans are made at both fixed and adjustable interest rates.
Underwriting for 1-4 family residential loans includes debt-to-income analysis, credit history analysis, appraised value and down payment considerations. Changes in the market value of real estate can affect the potential losses in the portfolio.
Commercial Real Estate Loans
Commercial real estate consists of $582.8 million of commercial real estate loans, $69.9 million of loans secured by multi-family properties and $5.3 million of loans secured by farm land. Commercial real estate loans primarily include loans collateralized by commercial office buildings, retail, medical facilities and offices, warehouse facilities, hotels and churches. In determining whether to originate commercial real estate loans, we generally consider such factors as the financial condition of the borrower and the debt service coverage of the property. Commercial real estate loans are made at both fixed and adjustable interest rates for terms generally up to 20 years.




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Table of Contents


Commercial Loans
Our commercial loans are diversified loan types including short-term working capital loans for inventory and accounts receivable and short- and medium-term loans for equipment or other business capital expansion.  Management does not consider there to be a concentration of risk in any one industry type, other than the medical industry.  Loans to borrowers in the medical industry include all loan types listed above for commercial loans.  Collateral for these loans varies depending on the type of loan and financial strength of the borrower.  The primary source of repayment for loans in the medical community is cash flow from continuing operations.
In our commercial loan underwriting, we assess the creditworthiness, ability to repay, and the value and liquidity of the collateral being offered.  Terms of commercial loans are generally commensurate with the useful life of the collateral offered.
Municipal Loans
We have a specific lending department that makes loans to municipalities and school districts primarily throughout the state of Texas.  Municipal loans outside the state of Texas have been limited to adjoining states. The majority of the loans to municipalities and school districts have tax or revenue pledges and in some cases are additionally supported by collateral.  Municipal loans made without a direct pledge of taxes or revenues are usually made based on some type of collateral that represents an essential service. 
Loans to Individuals
Substantially all originations of our loans to individuals are made to consumers in our market areas.  The majority of loans to individuals are collateralized by titled equipment, which are primarily automobiles. Loan terms vary according to the type and value of collateral, length of contract and creditworthiness of the borrower.  The underwriting standards we employ for consumer loans include an application, a determination of the applicant’s payment history on other debts, with the greatest weight being given to payment history with us, and an assessment of the borrower’s ability to meet existing obligations and payments on the proposed loan.  Although creditworthiness of the applicant is a primary consideration, the underwriting process also includes a comparison of the value of the collateral, if any, in relation to the proposed loan amount. Most of our loans to individuals are collateralized, which management believes should assist in limiting our exposure.
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 aggregate debt of $500,000 or greater.  The loan review officer also reviews specific reserves compared to general reserves to determine trends in comparative reserves as well as losses not reserved for prior to charge-off to determine the effectiveness of the specific reserve process.
At each review, a subjective analysis methodology is used to grade the respective loan.  Categories of grading vary in severity from loans that do not appear to have a significant probability of loss at the time of review to loans that indicate a probability that the entire balance of the loan will be uncollectible.  If full collection of the loan balance appears unlikely at the time of review, estimates of future expected cash flows or appraisals of the collateral securing the debt are used to determine the necessary allowances.  The internal loan review department maintains a list of all loans or loan relationships that are graded as having more than the normal degree of risk associated with them. In addition, a list of specifically reserved loans or loan relationships of $150,000 or more is updated on a quarterly basis in order to properly determine necessary allowances and keep management informed on the status of attempts to correct the deficiencies noted with respect to the loan.
We calculate historical loss ratios for pools of loans with similar characteristics based on the proportion of actual charge-offs experienced to the total population of loans in the pool. The historical gross loss ratios are updated based on actual charge-off experience quarterly and adjusted for qualitative factors. Our pools of similar loans include consumer loans and loans secured by 1-4 residential family loans.
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 occur 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

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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 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.
All accruing loans are reserved for as a group of similar type credits and included in the general portion of the allowance for loan losses. Loans to individuals and 1-4 family residential loans, including loans not accruing, are collectively evaluated and included in the general portion of the allowance for loan losses. All loans considered troubled debt restructurings (“TDR”) are evaluated individually for further impairment.
The general portion of the loan loss allowance is reflective of historical charge-off levels for similar loans adjusted for changes in current conditions and other relevant factors.  These factors are likely to cause estimated losses to differ from historical loss experience and include:
Changes in lending policies or procedures, including underwriting, collection, charge-off, and recovery procedures;
Changes in local, regional and national economic and business conditions, including entry into new markets;
Changes in the volume or type of credit extended;
Changes in the experience, ability, and depth of lending management;
Changes in the volume and severity of past due, nonaccrual, restructured, or classified loans;
Changes in charge-off trends;
Changes in loan review or Board oversight;
Changes in the level of concentrations of credit; and
Changes in external factors, such as competition and legal and regulatory requirements.

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Table of Contents


These factors are also considered for the Omni purchased portfolio specifically in regards to changes in past due, nonaccrual and charge-off trends.
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, 2016
 
Real Estate
 
 
 
 
 
 
 
 
 
Construction
 
1-4 Family
Residential
 
Commercial
 
Commercial
Loans
 
Municipal
Loans
 
Loans to
Individuals
 
Total
Balance at beginning of period 
$
4,350

 
$
2,595

 
$
4,577

 
$
6,596

 
$
725

 
$
893

 
$
19,736

Provision (reversal) for loan losses
(42
)
 
(551
)
 
(116
)
 
2,620

 
(5
)
 
410

 
2,316

Loans charged off

 
(19
)
 

 
(273
)
 

 
(848
)
 
(1,140
)
Recoveries of loans charged off
269

 
130

 
6

 
21

 

 
461

 
887

Balance at end of period
$
4,577

 
$
2,155

 
$
4,467

 
$
8,964

 
$
720

 
$
916

 
$
21,799

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended March 31, 2015
 
Real Estate
 
 
 
 
 
 
 
 
 
Construction
 
1-4 Family
Residential
 
Commercial
 
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.

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, 2016
 
Real Estate
 
 
 
 
 
 
 
 
 
Construction
 
1-4 Family
Residential
 
Commercial
 
Commercial
Loans
 
Municipal
Loans
 
Loans to
Individuals
 
Total
Ending balance – individually evaluated for impairment (1)
$
31

 
$
23

 
$
56

 
$
6,422

 
$
13

 
$
92