Edgar Filing: SOUTHSIDE BANCSHARES INC

SBSI 10-Q 06.30.14

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)



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

For the quarterly period ended June 30, 2014



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 August 4, 2014 was 18,845,618 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	40
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	60
ITEM 4. CONTROLS AND PROCEDURES	61
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS	62
ITEM 1A. RISK FACTORS	62
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	62
ITEM 3. DEFAULTS UPON SENIOR SECURITIES	62
ITEM 4. MINE SAFETY DISCLOSURES	63
ITEM 5. OTHER INFORMATION	63
ITEM 6. EXHIBITS	63
SIGNATURES	64
EXHIBIT INDEX	65
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)

	June 30, 2014			December 31, 2013
ASSETS
Cash and due from banks	$	53,880		$	45,624
Interest earning deposits	100,543			8,807
Total cash and cash equivalents	154,423			54,431
Investment securities:
Available for sale, at estimated fair value	351,908			337,429
Held to maturity, at carrying value (estimated fair value of $394,638 and $377,383, respectively)	390,221			391,552
Mortgage-backed securities:
Available for sale, at estimated fair value	751,740			840,258
Held to maturity, at carrying value (estimated fair value of $266,185 and $271,836, respectively)	260,659			275,569
FHLB stock, at cost	25,512			34,065
Other investments, at cost	2,064			2,065
Loans held for sale	755			151
Loans:
Loans	1,391,285			1,351,273
Less: Allowance for loan losses	(18,408		)	(18,877		)
Net Loans	1,372,877			1,332,396
Premises and equipment, net	53,322			52,060
Goodwill	22,034			22,034
Other intangible assets, net	123			178
Interest receivable	20,512			21,973
Deferred tax asset	12,726			18,415
Unsettled trades to sell securities	19,183			3,933
Other assets	60,603			59,154
TOTAL ASSETS	$	3,498,662		$	3,445,663
LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits:
Noninterest bearing	$	711,391		$	529,897
Interest bearing	1,890,087			1,997,911
Total deposits	2,601,478			2,527,808
Short-term obligations:
Federal funds purchased and repurchase agreements	2,057			859
FHLB advances	8,413			73,445
Total short-term obligations	10,470			74,304
Long-term obligations:
FHLB advances	505,710			499,349
Long-term debt	60,311			60,311
Total long-term obligations	566,021			559,660
Unsettled trades to purchase securities	10,269			973
Other liabilities	26,464			23,400
TOTAL LIABILITIES	3,214,702			3,186,145

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

Shareholders' equity:
Common stock ($1.25 par, 40,000,000 shares authorized, 21,315,256 shares issued at June 30, 2014 and 20,386,221 shares issued at December 31, 2013)	26,644			25,483
Paid-in capital	240,305			214,091
Retained earnings	63,469			78,673
Treasury stock (2,469,638 shares at cost)	(37,692		)	(37,692		)
Accumulated other comprehensive loss	(8,766		)	(21,037		)
TOTAL SHAREHOLDERS' EQUITY	283,960			259,518
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	3,498,662		$	3,445,663

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

Table of Contents

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

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2014		2013		2014		2013
Interest income
Loans	$	18,305	$	18,390	$	36,668	$	36,055
Investment securities – taxable	143		169		266		533
Investment securities – tax-exempt	6,021		5,907		11,979		10,395
Mortgage-backed securities	7,557		4,680		15,239		8,616
FHLB stock and other investments	38		34		108		99
Other interest earning assets	22		35		65		78
Total interest income	32,086		29,215		64,325		55,776
Interest expense
Deposits	1,984		2,001		4,100		4,071
Short-term obligations	56		389		127		1,639
Long-term obligations	2,190		1,954		4,350		3,735
Total interest expense	4,230		4,344		8,577		9,445
Net interest income	27,856		24,871		55,748		46,331
Provision for loan losses	2,650		2,021		6,783		2,513
Net interest income after provision for loan losses	25,206		22,850		48,965		43,818
Noninterest income
Deposit services	3,794		3,904		7,432		7,657
Net gain on sale of securities available for sale	498		5,001		509		9,346
Total other-than-temporary impairment losses	—		—		—		(52		)
Portion of loss recognized in other comprehensive income (before taxes)	—		—		—		10
Net impairment losses recognized in earnings	—		—		—		(42		)

Gain on sale of loans	81		241		161		560
Trust income	762		733		1,542		1,453
Bank owned life insurance income	307		264		621		518
Other	1,073		953		2,056		1,844
Total noninterest income	6,515		11,096		12,321		21,336
Noninterest expense
Salaries and employee benefits	13,092		13,401		26,194		26,610
Occupancy expense	1,786		1,897		3,540		3,768
Advertising, travel & entertainment	605		656		1,148		1,297
ATM and debit card expense	302		303		619		684
Professional fees	1,304		562		2,231		1,202
Software and data processing expense	486		444		987		987
Telephone and communications	320		384		598		835
FDIC insurance	434		409		882		830
FHLB prepayment fees	—		988		—		988
Other	2,097		2,122		4,409		4,284
Total noninterest expense	20,426		21,166		40,608		41,485

Income before income tax expense	11,295		12,780		20,678		23,669
Provision for income tax expense	838		1,712		1,997		3,559
Net income	$	10,457	$	11,068	$	18,681	$	20,110
Earnings per common share – basic	$	0.55	$	0.59	$	0.99	$	1.07
Earnings per common share – diluted	$	0.55	$	0.59	$	0.99	$	1.07
Dividends paid per common share	$	0.21	$	0.20	$	0.42	$	0.40

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

Table of Contents

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

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2014			2013			2014			2013
Net income	$	10,457		$	11,068		$	18,681		$	20,110
Other comprehensive income (loss):
Unrealized holding gains (losses) on available for sale securities during the period	8,308			(38,536		)	18,319			(44,280		)
Change in net unrealized loss on securities transferred to held to maturity	278			28			554			28
Noncredit portion of other-than-temporary impairment losses on the AFS securities	—			—			—			(10		)
Reclassification adjustment for net gain on sale of available for sale securities, included in net income	(498		)	(5,001		)	(509		)	(9,346		)
Reclassification of other-than-temporary impairment charges on available for sale securities, included in net income	—			—			—			42
Amortization of net actuarial loss, included in net periodic benefit cost	289			751			521			1,394
Amortization of prior service credit, included in net periodic benefit cost	(4		)	(11		)	(7		)	(22		)
Other comprehensive income (loss), before tax	8,373			(42,769		)	18,878			(52,194		)
Income tax (expense) benefit related to other items of comprehensive income	(2,930		)	14,969			(6,607		)	18,268
Other comprehensive income (loss), net of tax	5,443			(27,800		)	12,271			(33,926		)
Comprehensive income (loss)	$	15,900		$	(16,732	)	$	30,952		$	(13,816	)

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

Table of Contents

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

	Common Stock		Paid In Capital		Retained Earnings			Treasury Stock			Accumulated Other Comprehensive Income (Loss)			Total Shareholders' Equity
Balance at December 31, 2012	$	24,308	$	195,602	$	70,708		$	(35,793	)	$	2,938		$	257,763
Net Income					20,110									20,110
Other comprehensive loss											(33,926		)	(33,926		)
Issuance of common stock (28,529 shares)	35		593											628
Purchase of common stock (90,300 shares)								(1,899		)				(1,899		)
Stock compensation expense			373											373
Tax benefits related to stock awards			22											22
Net issuance of common stock under employee stock plan	12		63		(62		)							13
Cash dividends paid on common stock ($0.40 per share)					(6,964		)							(6,964		)
Stock dividend declared	1,065		15,995		(17,060		)							—
Balance at June 30, 2013	$	25,420	$	212,648	$	66,732		$	(37,692	)	$	(30,988	)	$	236,120

Balance at December 31, 2013	$	25,483	$	214,091	$	78,673		$	(37,692	)	$	(21,037	)	$	259,518
Net Income					18,681									18,681
Other comprehensive income											12,271			12,271
Issuance of common stock (18,265 shares)	23		500											523
Stock compensation expense			577											577
Tax benefits related to stock awards			38											38
Net issuance of common stock under employee stock plan	14		158		(103		)							69
Cash dividends paid on common stock ($0.42 per share)					(7,717		)							(7,717		)
Stock dividend declared	1,124		24,941		(26,065		)							—
Balance at June 30, 2014	$	26,644	$	240,305	$	63,469		$	(37,692	)	$	(8,766	)	$	283,960

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

Table of Contents

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

	Six Months Ended
	June 30,
	2014			2013
OPERATING ACTIVITIES:
Net income	$	18,681		$	20,110
Adjustments to reconcile net income to net cash provided by operations:
Depreciation	1,615			1,807
Amortization of premium	10,750			16,015
Accretion of discount and loan fees	(1,971		)	(2,852		)
Provision for loan losses	6,783			2,513
Stock compensation expense	577			373
Deferred tax (benefit) expense	(1,361		)	909
Excess tax benefits from stock-based compensation	(42		)	(22		)
Net gain on sale of securities available for sale	(509		)	(9,346		)
Net other-than-temporary impairment losses	—			42
Gain on premises and equipment	(7		)	—
Loss (gain) on other real estate owned	65			(72		)
Net change in:
Interest receivable	1,461			(1,947		)
Other assets	(1,459		)	(6,990		)
Interest payable	(40		)	(481		)
Other liabilities	3,356			69
Loans held for sale	(604		)	2,877
Net cash provided by operating activities	37,295			23,005

INVESTING ACTIVITIES:
Securities held to maturity:
Purchases	—			(115,647		)
Maturities, calls and principal repayments	14,797			118,178
Securities available for sale:
Purchases	(327,668		)	(1,018,900		)
Sales	252,696			612,459
Maturities, calls and principal repayments	153,637			179,203
Proceeds from redemption of FHLB stock	8,938			5,242
Purchases of FHLB stock and other investments	(384		)	(4,506		)
Net increase in loans	(49,047		)	(35,355		)
Purchases of premises and equipment	(2,878		)	(1,918		)
Proceeds from sales of premises and equipment	8			—
Proceeds from sales of other real estate owned	275			461
Proceeds from sales of repossessed assets	3,268			2,304
Net cash provided by (used in) investing activities	53,642			(258,479		)

(continued)

Table of Contents

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

	Six Months Ended
	June 30,
	2014			2013
FINANCING ACTIVITIES:
Net increase in demand and savings accounts	157,322			140,307
Net decrease in certificates of deposit	(83,711		)	(3,947		)
Net increase (decrease) in federal funds purchased and repurchase agreements	1,198			(127		)
Proceeds from FHLB advances	6,267,018			6,792,758
Repayment of FHLB advances	(6,325,689		)	(6,786,150		)
Excess tax benefits from stock-based awards	42			22
Net issuance of common stock under employee stock plan	69			13
Purchase of common stock	—			(1,899		)
Proceeds from the issuance of common stock	523			628
Cash dividends paid	(7,717		)	(6,964		)
Net cash provided by financing activities	9,055			134,641

Net increase (decrease) in cash and cash equivalents	99,992			(100,833		)
Cash and cash equivalents at beginning of period	54,431			150,630
Cash and cash equivalents at end of period	$	154,423		$	49,797

SUPPLEMENTAL DISCLOSURES FOR CASH FLOW INFORMATION:

Interest paid	$	8,617		$	9,925
Income taxes paid	$	3,550		$	1,600

SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES:

Loans transferred to other repossessed assets and real estate through foreclosure	$	2,807		$	2,555
Transfer of available for sale securities to held to maturity securities	$	—		$	290,136
Adjustment to pension liability	$	(514	)	$	(1,372	)
5% stock dividend	$	26,065		$	17,060
Unsettled trades to purchase securities	$	(10,269	)	$	(27,814	)
Unsettled trades to sell securities	$	19,183		$	—
Unsettled issuances of brokered CDs	$	—		$	11,069

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

Table of Contents

SOUTHSIDE BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Basis of Presentation

In this report, the words “the Company,” “we,” “us,” and “our” refer to the combined entities of Southside Bancshares, Inc. and its subsidiaries. The words “Southside” and “Southside Bancshares” refer to Southside Bancshares, Inc. The words “Southside Bank” and “the Bank” refer to Southside Bank. “SFG” refers to SFG Finance, LLC (formerly Southside Financial Group, LLC), which is a wholly-owned subsidiary of the Bank.

In early 2013, we decided to close Southside Securities, Inc., our introducing broker-dealer. We completed the closure of Southside Securities, Inc. during the second quarter of 2013.

The consolidated balance sheet as of June 30, 2014, and the related consolidated statements of income, comprehensive income, changes in shareholders' equity and cash flows and notes to the financial statements for the three- and six-month periods ended June 30, 2014 and 2013 are unaudited; in the opinion of management, all adjustments necessary for a fair statement of such financial statements have been included. Such adjustments consisted only of normal recurring items. All significant intercompany accounts and transactions are eliminated in consolidation. The preparation of these consolidated financial statements in conformity with U.S. generally accepted accounting principles (“GAAP”) requires the use of management’s estimates. These estimates are subjective in nature and involve matters of judgment. Actual amounts could differ from these estimates.

Interim results are not necessarily indicative of results for a full year. These financial statements should be read in conjunction with the financial statements and notes thereto in our Annual Report on Form 10-K for the year ended December 31, 2013. For a description of our significant accounting and reporting policies, refer to Note 1 of the Notes to Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended December 31, 2013.

On March 20, 2014, our board of directors declared a 5% stock dividend to common stock shareholders of record as of April 10, 2014, which was paid on May 1, 2014. All share data has been adjusted to give retroactive recognition to stock dividends.

Accounting Pronouncements

In January 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (ASU) 2014-04 “Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans Upon Foreclosure” to clarify when an entity is considered to have obtained physical possession of a residential real estate property collateralizing a consumer mortgage loan. Upon physical possession (from an in-substance possession or foreclosure) of such real property, an entity is required to reclassify the nonperforming mortgage loan to other real estate owned. The ASU is effective for our interim and annual periods beginning after January 1, 2015. Early adoption is permitted. ASU 2014-04 is not expected to have a material impact on our consolidated financial statements.

Table of Contents

2. Pending Acquisitions

On April 28, 2014, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with OmniAmerican Bancorp, Inc., a Maryland corporation (“OmniAmerican”) and the holding company for OmniAmerican Bank, a federal savings association based in Fort Worth, Texas. As of June 30, 2014, OmniAmerican had $1.4 billion in assets. The Merger Agreement provides that, subject to the terms and conditions thereof, OmniAmerican will merge with and into the Company, with the Company as the surviving corporation. The merger is expected to close during the fourth quarter of 2014, subject to receipt of regulatory approvals and approvals by both our shareholders and OmniAmerican's stockholders.

Pursuant to the Merger Agreement, each outstanding share of common stock of OmniAmerican will be converted into (a) 0.4459 of a share of common stock of the Company, subject to adjustment pursuant to the terms of the Merger Agreement and (b) $13.125 in cash.

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 June 30,				Six Months Ended June 30,
	2014		2013		2014		2013
Basic and Diluted Earnings:
Net income	$	10,457	$	11,068	$	18,681	$	20,110
Basic weighted-average shares outstanding	18,832		18,744		18,825		18,748
Add: Stock options	93		34		89		28
Diluted weighted-average shares outstanding	18,925		18,778		18,914		18,776

Basic Earnings Per Share:	$	0.55	$	0.59	$	0.99	$	1.07

Diluted Earnings Per Share:	$	0.55	$	0.59	$	0.99	$	1.07

For the three- and six-month periods ended June 30, 2014, there were approximately 18,000 and 21,000 anti-dilutive shares, respectively. For the three- and six-month periods ended June 30, 2013, there were approximately 10,000 and 18,000 anti-dilutive shares, respectively.

Table of Contents

4. Accumulated Other Comprehensive (Loss) Income

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



	Six Months Ended June 30, 2014
	Unrealized Gains (Losses) on Securities					Pension Plans
	Other			OTTI		Net Prior Service (Cost) Credit			Net Gain (Loss)			Total
Beginning balance, net of tax	$	(8,656	)	$	—	$	(12	)	$	(12,369	)	$	(21,037	)
Other comprehensive income (loss) before reclassifications	18,873			—		—			—			18,873
Reclassified to income	(509		)	—		(7		)	521			5
Income tax benefit (expense)	(6,427		)	—		2			(182		)	(6,607		)
Net current-period other comprehensive income (loss), net of tax	11,937			—		(5		)	339			12,271
Ending balance, net of tax	$	3,281		$	—	$	(17	)	$	(12,030	)	$	(8,766	)


	Three Months Ended June 30, 2014
	Unrealized Gains (Losses) on Securities					Pension Plans
	Other			OTTI		Net Prior Service (Cost) Credit			Net Gain (Loss)			Total
Beginning balance, net of tax	$	(1,977	)	$	—	$	(14	)	$	(12,218	)	$	(14,209	)
Other comprehensive income (loss) before reclassifications	8,586			—		—			—			8,586
Reclassified to income	(498		)	—		(4		)	289			(213		)
Income tax benefit (expense)	(2,830		)	—		1			(101		)	(2,930		)
Net current-period other comprehensive income (loss), net of tax	5,258			—		(3		)	188			5,443
Ending balance, net of tax	$	3,281		$	—	$	(17	)	$	(12,030	)	$	(8,766	)

Table of Contents



	Six Months Ended June 30, 2013
	Unrealized Gains (Losses) on Securities						Pension Plans
	Other			OTTI			Net Prior Service (Cost) Credit			Net Gain (Loss)			Total
Beginning balance, net of tax	$	30,500		$	(1,140	)	$	248		$	(26,670	)	$	2,938
Other comprehensive income (loss) before reclassifications	(44,416		)	154			—			—			(44,262		)
Reclassified to income	(9,346		)	42			(22		)	1,394			(7,932		)
Income tax benefit (expense)	18,816			(68		)	8			(488		)	18,268
Net current-period other comprehensive (loss) income, net of tax	(34,946		)	128			(14		)	906			(33,926		)
Ending balance, net of tax	$	(4,446	)	$	(1,012	)	$	234		$	(25,764	)	$	(30,988	)

	Three Months Ended June 30, 2013
	Unrealized Gains (Losses) on Securities						Pension Plans
	Other			OTTI			Net Prior Service (Cost) Credit			Net Gain (Loss)			Total
Beginning balance, net of tax	$	24,194		$	(1,371	)	$	241		$	(26,252	)	$	(3,188	)
Other comprehensive income (loss) before reclassifications	(39,060		)	552			—			—			(38,508		)
Reclassified to income	(5,001		)	—			(11		)	751			(4,261		)
Income tax benefit (expense)	15,421			(193		)	4			(263		)	14,969
Net current-period other comprehensive (loss) income, net of tax	(28,640		)	359			(7		)	488			(27,800		)
Ending balance, net of tax	$	(4,446	)	$	(1,012	)	$	234		$	(25,764	)	$	(30,988	)

Table of Contents

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



	Three Months Ended June 30,						Six Months Ended June 30,
	2014			2013			2014			2013
Unrealized gains and losses on available for sale securities:
Realized net (loss) gain on sale of securities ⁽¹⁾	$	498		$	5,001		$	509		$	9,346
Impairment losses⁽²⁾	—			—			—			(42		)
Total before tax	498			5,001			509			9,304
Tax expense	(174		)	(1,750		)	(178		)	(3,256		)
Net of tax	$	324		$	3,251		$	331		$	6,048

Amortization of pension plan items:
Net actuarial loss ⁽³⁾	$	(289	)	$	(751	)	$	(521	)	$	(1,394	)
Prior service credit ⁽³⁾	4			11			7			22
Total before tax	(285		)	(740		)	(514		)	(1,372		)
Tax benefit	100			259			180			480
Net of tax	$	(185	)	$	(481	)	$	(334	)	$	(892	)
Total reclassifications for the period, net of tax	$	139		$	2,770		$	(3	)	$	5,156

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

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

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

Table of Contents

5. Securities

The amortized cost, carrying value, and estimated fair value of investment and mortgage-backed securities as of June 30, 2014 and December 31, 2013 are reflected in the tables below (in thousands):



	June 30, 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	$	29,388	$	74	$	56	$	29,406					$	29,406
State and Political Subdivisions	306,164		6,505		3,438		309,231						309,231
Other Stocks and Bonds	13,080		191		—		13,271						13,271
Mortgage-backed Securities: ⁽¹⁾
Residential	639,149		14,396		1,484		652,061						652,061
Commercial	99,137		1,018		476		99,679						99,679
Total	$	1,086,918	$	22,184	$	5,454	$	1,103,648					$	1,103,648

HELD TO MATURITY
Investment Securities:
State and Political Subdivisions	$	395,077	$	5,554	$	10,410	$	390,221	$	6,895	$	2,478	$	394,638
Mortgage-backed Securities: ⁽¹⁾
Residential	59,335		—		84		59,251		3,515		—		62,766
Commercial	208,149		—		6,741		201,408		3,935		1,924		203,419
Total	$	662,561	$	5,554	$	17,235	$	650,880	$	14,345	$	4,402	$	660,823

Table of Contents



	December 31, 2013
			Recognized in OCI						Not recognized in OCI
	Amortized		Gross Unrealized		Gross Unrealized		Carrying		Gross Unrealized		Gross Unrealized		Estimated
AVAILABLE FOR SALE	Cost		Gains		Losses		Value		Gains		Losses		Fair Value
Investment Securities:
U.S. Government Agency Debentures	$	11,612	$	—	$	1,483	$	10,129					$	10,129
State and Political Subdivisions	322,412		4,537		12,875		314,074						314,074
Other Stocks and Bonds	13,074		159		7		13,226						13,226
Mortgage-backed Securities:⁽¹⁾
Residential	760,418		14,940		3,273		772,085						772,085
Commercial	71,262		220		3,309		68,173						68,173
Total	$	1,178,778	$	19,856	$	20,947	$	1,177,687					$	1,177,687

HELD TO MATURITY
Investment Securities:
State and Political Subdivisions	$	396,549	$	5,925	$	10,922	$	391,552	$	1,207	$	15,376	$	377,383
Mortgage-backed Securities:⁽¹⁾
Residential	74,129		—		99		74,030		3,923		—		77,953
Commercial	208,667		—		7,128		201,539		—		7,656		193,883
Total	$	679,345	$	5,925	$	18,149	$	667,121	$	5,130	$	23,032	$	649,219

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

During 2013, the Company transferred certain commercial mortgage-backed securities and state and political subdivision securities from available for sale (“AFS”) to held to maturity (“HTM”). We transferred these securities due to overall balance sheet strategies, and our management has the current intent and ability to hold these securities until maturity. The net unrealized loss on the transferred securities included in accumulated other comprehensive income at the time of transfer will be amortized over the remaining life of the underlying security as an adjustment of the yield on those securities. There were no securities transferred from AFS to HTM during the six months ended June 30, 2014.

Table of Contents

The following table represents the unrealized loss on securities as of June 30, 2014 and December 31, 2013 (in thousands):



	As of June 30, 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	$	14,622	$	56	$	—	$	—	$	14,622	$	56
State and Political Subdivisions	52,132		424		118,123		3,014		170,255		3,438
Mortgage-backed Securities:
Residential	55,955		224		47,083		1,260		103,038		1,484
Commercial	5,442		13		26,967		463		32,409		476
Total	$	128,151	$	717	$	192,173	$	4,737	$	320,324	$	5,454
HELD TO MATURITY
Investment Securities:
State and Political Subdivisions	$	61,771	$	320	$	130,419	$	2,158	$	192,190	$	2,478
Mortgage-backed Securities:
Commercial	—		—		100,580		1,924		100,580		1,924
Total	$	61,771	$	320	$	230,999	$	4,082	$	292,770	$	4,402

	As of December 31, 2013
	Less Than 12 Months				More Than 12 Months				Total
	Fair Value		Unrealized Loss		Fair Value		Unrealized Loss		Fair Value		Unrealized Loss
AVAILABLE FOR SALE
Investment Securities:
U.S. Government Agency Debentures	$	—	$	—	$	10,129	$	1,483	$	10,129	$	1,483
State and Political Subdivisions	191,117		11,757		18,408		1,118		209,525		12,875
Other Stocks and Bonds	2,992		7		—		—		2,992		7
Mortgage-backed Securities:
Residential	126,965		3,266		1,351		7		128,316		3,273
Commercial	65,406		3,309		—		—		65,406		3,309
Total	$	386,480	$	18,339	$	29,888	$	2,608	$	416,368	$	20,947
HELD TO MATURITY
Investment Securities:
State and Political Subdivisions	$	283,667	$	15,311	$	1,705	$	65	$	285,372	$	15,376
Mortgage-backed Securities:
Commercial	193,883		7,656		—		—		193,883		7,656
Total	$	477,550	$	22,967	$	1,705	$	65	$	479,255	$	23,032

We review securities in an unrealized loss position to evaluate if a classification of other-than-temporarily impaired is warranted. In estimating other-than-temporary impairment losses, management considers, among other things, the length of time and the extent to which the fair value has been less than cost and the financial condition and near-term prospects of the issuer. The Company considers an other-than-temporary impairment to have occurred when there is an adverse change in expected cash flows. When it is determined that a decline in fair value of HTM and AFS securities is other-than-temporary, the carrying value of the security is reduced to its estimated fair value, with a corresponding charge to earnings for the credit portion and to other comprehensive income for the noncredit portion.

Table of Contents

The majority of the unrealized loss positions are comprised of highly rated municipal securities and U.S. Agency mortgage- backed securities (“MBS”) where the unrealized loss is a direct result of the change in interest rates and spreads. Based upon the length of time and the extent to which fair value is less than cost, we believe the securities with an unrealized loss are not other-than-temporarily impaired at June 30, 2014.

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

The following table presents a roll forward of the credit losses recognized in earnings on the TRUPs (in thousands):



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

On December 13, 2013, management decided to sell all TRUPs as a result of new guidance effective in 2014 as listed in Section 419 of the Dodd-Frank Act (the “Volcker Rule”). The sale of the TRUPs, with a $2.7 million amortized-cost basis, resulted in a loss of approximately $959,000. Until the final rules under the Volcker Rule were issued by the agencies on December 10, 2013, management did not intend to sell the securities and it was not more likely than not that we would be required to sell the security before the anticipated recovery of its amortized cost basis.

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



	Six Months Ended June 30,
	2014			2013
U.S. Treasury	$	41		$	17
U.S. Government Agency Debentures	100			305
State and Political Subdivisions	12,001		</