Edgar Filing: SOUTHSIDE BANCSHARES INC

Document

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, 2019



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 every Interactive Data File required to be submitted 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 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, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.



Large accelerated filer x	Accelerated filer o
Non-accelerated filer o	Smaller reporting company o
	Emerging growth company o

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

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 24, 2019 was 33,718,079 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	45
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	64
ITEM 4. CONTROLS AND PROCEDURES	65
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS	65
ITEM 1A. RISK FACTORS	65
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	65
ITEM 3. DEFAULTS UPON SENIOR SECURITIES	65
ITEM 4. MINE SAFETY DISCLOSURES	65
ITEM 5. OTHER INFORMATION	65
ITEM 6. EXHIBITS	66
EXHIBIT INDEX	66
SIGNATURES	67

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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, 2019			December 31, 2018
	March 31, 2019			December 31, 2018
ASSETS
Cash and due from banks	$	81,981		$	87,375
Interest earning deposits	184,612			23,884
Federal funds sold	3,350			9,460
Total cash and cash equivalents	269,943			120,719
Securities:
Securities available for sale, at estimated fair value	1,876,255			1,989,436
Securities held to maturity, at carrying value (estimated fair value of $147,666 and $159,781, respectively)	147,431			162,931
FHLB stock, at cost	35,269			32,583
Equity investments	12,182			12,093
Loans held for sale	384			601
Loans:
Loans	3,305,110			3,312,799
Less: Allowance for loan losses	(24,155		)	(27,019		)
Net loans	3,280,955			3,285,780
Premises and equipment, net	138,290			135,972
Operating lease right-of-use assets	9,455			—
Goodwill	201,116			201,116
Other intangible assets, net	16,600			17,779
Interest receivable	20,017			27,287
Deferred tax asset, net	491			9,776
Unsettled trades to sell securities	95,482			—
Unsettled issuances of brokered certificates of deposit	—			15,236
Bank owned life insurance	98,704			98,160
Other assets	14,622			14,025
Total assets	$	6,217,196		$	6,123,494

LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits:
Noninterest bearing	$	1,038,116		$	994,680
Interest bearing	3,529,777			3,430,350
Total deposits	4,567,893			4,425,030
Federal funds purchased and repurchase agreements	8,637			36,810
FHLB borrowings	619,861			719,065
Subordinated notes, net of unamortized debt issuance costs	98,448			98,407
Trust preferred subordinated debentures, net of unamortized debt issuance costs	60,247			60,246
Unsettled trades to purchase securities	55,826			6,378
Operating lease liabilities	9,811			—
Other liabilities	38,440			46,267
Total liabilities	5,459,163			5,392,203

Off-balance-sheet arrangements, commitments and contingencies (Note 14)

Shareholders’ equity:
Common stock: ($1.25 par value, 80,000,000 shares authorized, 37,855,789 shares issued at March 31, 2019 and 37,845,224 shares issued at December 31, 2018)	47,320			47,307
Paid-in capital	763,582			762,470
Retained earnings	57,023			64,797
Treasury stock: (shares at cost, 4,137,710 at March 31, 2019 and 4,120,475 at December 31, 2018)	(94,119		)	(93,055		)
Accumulated other comprehensive loss	(15,773		)	(50,228		)
Total shareholders’ equity	758,033			731,291
Total liabilities and shareholders’ equity	$	6,217,196		$	6,123,494

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,
	2019			2018
Interest income:
Loans	$	41,619		$	38,830
Investment securities – taxable	28			227
Investment securities – tax-exempt	4,118			6,381
Mortgage-backed securities	12,474			10,894
FHLB stock and equity investments	355			414
Other interest earning assets	433			448
Total interest income	59,027			57,194
Interest expense:
Deposits	11,241			7,451
FHLB borrowings	4,457			3,632
Subordinated notes	1,400			1,398
Trust preferred subordinated debentures	729			569
Other borrowings	75			11
Total interest expense	17,902			13,061
Net interest income	41,125			44,133
Provision for loan losses	(918		)	3,735
Net interest income after provision for loan losses	42,043			40,398
Noninterest income:
Deposit services	5,986			6,179
Net gain (loss) on sale of securities available for sale	256			(827		)
Gain on sale of loans	93			115
Trust income	1,541			1,760
Bank owned life insurance income	544			632
Brokerage services	517			450
Other	601			1,301
Total noninterest income	9,538			9,610
Noninterest expense:
Salaries and employee benefits	18,046			18,559
Net occupancy expense	3,175			3,583
Acquisition expense	—			832
Advertising, travel & entertainment	847			685
ATM expense	180			346
Professional fees	1,314			1,070
Software and data processing expense	1,076			1,023
Telephone and communications	487			538
FDIC insurance	422			497
Amortization expense on intangibles	1,179			1,378
Other	2,901			3,156
Total noninterest expense	29,627			31,667
Income before income tax expense	21,954			18,341
Income tax expense	3,137			2,090
Net income	$	18,817		$	16,251

Earnings per common share – basic	$	0.56		$	0.46
Earnings per common share – diluted	$	0.56		$	0.46
Cash dividends paid per common share	$	0.30		$	0.28

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,
	2019			2018
Net income	$	18,817		$	16,251
Other comprehensive income (loss):
Securities available for sale and transferred securities:
Change in unrealized holding gain (loss) on available for sale securities during the period	46,626			(37,783		)
Unrealized net gain on securities transferred from held to maturity to available for sale under the transition guidance enumerated in ASU 2017-12	—			11,881
Change in net unrealized loss on securities transferred from held to maturity to available for sale	—			401
Reclassification adjustment for amortization related to available for sale and held to maturity debt securities	491			138
Reclassification adjustment for net (gain) loss on sale of available for sale securities, included in net income	(256		)	827
Derivatives:
Change in net unrealized (loss) gain on effective cash flow hedge interest rate swap derivatives	(3,120		)	4,245
Reclassification adjustment of net gain related to derivatives designated as cash flow hedge	(668		)	(127		)
Pension plans:
Amortization of net actuarial loss and prior service credit, included in net periodic benefit cost	541			473
Other comprehensive income (loss), before tax	43,614			(19,945		)
Income tax (expense) benefit related to items of other comprehensive income (loss)	(9,159		)	4,188
Other comprehensive income (loss), net of tax	34,455			(15,757		)
Comprehensive income	$	53,272		$	494

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, 2017	$	47,253	$	757,439	$	32,851		$	(47,105	)	$	(36,298	)	$	754,140
Cumulative effect of accounting change	—		—		(85		)	—			85			—
Adjusted beginning balance	47,253		757,439		32,766			(47,105		)	(36,213		)	754,140
Net income	—		—		16,251			—			—			16,251
Other comprehensive loss	—		—		—			—			(15,757		)	(15,757		)
Issuance of common stock for dividend reinvestment plan (10,035 shares)	12		341		—			—			—			353
Stock compensation expense	—		456		—			—			—			456
Net issuance of common stock under employee stock plans (42,179 shares)	—		417		(25		)	369			—			761
Cash dividends paid on common stock ($0.28 per share)	—		—		(9,808		)	—			—			(9,808		)
Balance at March 31, 2018	$	47,265	$	758,653	$	39,184		$	(46,736	)	$	(51,970	)	$	746,396

Balance at December 31, 2018	$	47,307	$	762,470	$	64,797		$	(93,055	)	$	(50,228	)	$	731,291
Cumulative effect of accounting change	—		—		(16,452		)	—			—			(16,452		)
Adjusted beginning balance	47,307		762,470		48,345			(93,055		)	(50,228		)	714,839
Net income	—		—		18,817			—			—			18,817
Other comprehensive income	—		—		—			—			34,455			34,455
Issuance of common stock for dividend reinvestment plan (10,565 shares)	13		342		—			—			—			355
Purchase of common stock (40,852 shares)	—		—		—			(1,325		)	—			(1,325		)
Stock compensation expense	—		661		—			—			—			661
Net issuance of common stock under employee stock plans (23,617 shares)	—		109		(32		)	261			—			338
Cash dividends paid on common stock ($0.30 per share)	—		—		(10,107		)	—			—			(10,107		)
Balance at March 31, 2019	$	47,320	$	763,582	$	57,023		$	(94,119	)	$	(15,773	)	$	758,033

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 FLOWS (UNAUDITED) (in thousands)

	Three Months Ended
	March 31,
	2019			2018
OPERATING ACTIVITIES:
Net income	$	18,817		$	16,251
Adjustments to reconcile net income to net cash provided by operations:
Depreciation and net amortization	3,023			3,566
Securities premium amortization (discount accretion), net	3,448			4,058
Loan (discount accretion) premium amortization, net	(438		)	(1,057		)
Provision for loan losses	(918		)	3,735
Stock compensation expense	661			456
Deferred tax expense (benefit)	126			(255		)
Net (gain) loss on sale of securities available for sale	(256		)	827
Net loss on premises and equipment	5			35
Gross proceeds from sales of loans held for sale	4,244			5,600
Gross originations of loans held for sale	(4,027		)	(5,602		)
Net (gain) loss on other real estate owned	(92		)	67
Net change in:
Interest receivable	7,270			7,827
Other assets	3,305			1,875
Interest payable	(321		)	(1,219		)
Other liabilities	(14,373		)	5,501
Net cash provided by operating activities	20,474			41,665

INVESTING ACTIVITIES:
Securities available for sale:
Purchases	(372,465		)	(138,581		)
Sales	436,182			237,526
Maturities, calls and principal repayments	30,077			53,717
Securities held to maturity:
Maturities, calls and principal repayments	15,405			1,222
Proceeds from redemption of FHLB stock and other investments	8,788			13,377
Purchases of FHLB stock and other investments	(11,551		)	(638		)
Net loan paydowns (originations)	5,868			(15,154		)
Purchases of premises and equipment	(4,040		)	(2,018		)
Proceeds from sales of premises and equipment	2			1,903
Proceeds from sales of other real estate owned	470			91
Proceeds from sales of repossessed assets	137			198
Net cash provided by investing activities	108,873			151,643

(continued)

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

	Three Months Ended
	March 31,
	2019			2018
FINANCING ACTIVITIES:
Net change in deposits	$	157,991		$	126,372
Net decrease in federal funds purchased and repurchase agreements	(28,173		)	(1,673		)
Proceeds from FHLB borrowings	1,556,293			1,110,000
Repayment of FHLB borrowings	(1,655,495		)	(1,355,194		)
Proceeds from stock option exercises	412			801
Cash paid to tax authority related to tax withholding on share-based awards	(74		)	(40		)
Purchase of common stock	(1,325		)	—
Proceeds from the issuance of common stock for dividend reinvestment plan	355			353
Cash dividends paid	(10,107		)	(9,808		)
Net cash provided by (used in) financing activities	19,877			(129,189		)

Net increase in cash and cash equivalents	149,224			64,119
Cash and cash equivalents at beginning of period	120,719			198,692
Cash and cash equivalents at end of period	$	269,943		$	262,811

SUPPLEMENTAL DISCLOSURES FOR CASH FLOW INFORMATION:

Interest paid	$	18,224		$	14,280
Income taxes paid	$	—		$	—

SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES:

Loans transferred to other repossessed assets and real estate through foreclosure	$	336		$	649
Transfer of held to maturity securities to available for sale securities	$	—		$	743,421
Adjustment to pension liability	$	(541	)	$	(473	)
Unsettled trades to purchase securities	$	(55,826	)	$	(3,646	)
Unsettled trades to sell securities	$	95,482		$	35,307

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. 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, including Southside Bank. 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, and its wholly-owned subsidiary, OmniAmerican Bank, acquired by Southside on December 17, 2014. “Diboll” refers to Diboll State Bancshares, Inc., a bank holding company and its wholly-owned subsidiary, First Bank & Trust East Texas, acquired by Southside on November 30, 2017.

The accompanying unaudited consolidated financial statements have been prepared in accordance with United States (“U.S.”) generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, not all information required by GAAP for complete financial statements is included in these interim statements. In the opinion of management, all adjustments necessary for a fair presentation of such financial statements have been included. Such adjustments consisted only of normal recurring items. The preparation of these consolidated financial statements in accordance with 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, 2018.

Accounting Changes and Reclassifications

Certain prior period amounts may be reclassified to conform to current year presentation.

Debt Securities

We adopted Accounting Standards Update (“ASU”) 2017-08, “Receivables - Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities,” on January 1, 2019, the effective date of the guidance. Under previous GAAP, premiums on callable debt securities were generally amortized over the contractual life of the security. ASU 2017-08 requires the premium on callable debt securities to be amortized to the earliest call date. If the debt security is not called at the earliest call date, the holder of the debt security would be required to reset the effective yield on the debt security based on the payment terms required by the debt security. The guidance requires companies to apply the requirements on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. Adoption of this guidance on January 1, 2019, resulted in a cumulative-effect adjustment to reduce retained earnings by $16.5 million, before tax. Subsequent to January 1, 2019, we sold the majority of the securities impacted by ASU 2017-08, and thus, the standard did not materially impact our consolidated net income.

Leases

We evaluate our contracts at inception to determine if an arrangement is or contains a lease. Operating leases are included in operating lease right-of-use (“ROU”) assets and operating lease liabilities in our consolidated balance sheets. The Company has no finance leases.

ROU assets represent our right to use an underlying asset for the lease term, and lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. Our leases do not provide an implicit rate, so we use our incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. The incremental borrowing rate is reevaluated upon lease modification. The operating lease ROU asset also includes any initial direct costs and prepaid lease payments made less any lease incentives. Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option.

We adopted ASU 2016-02, “Leases (Topic 842),” on January 1, 2019, the effective date of the guidance, using the practical expedient transition method whereby we did not revise comparative period information or disclosure. The new standard requires lessees to record assets and liabilities on the balance sheet for all leases with terms longer than 12 months. We elected the package of practical expedients permitted under the transition guidance within the new standard, which among other things, allows us to carryforward the historical lease classification. We also elected certain optional practical expedients including the hindsight practical expedient under which we considered the actual outcomes of lease renewals and terminations when measuring the lease term at adoption, and we made an accounting policy election to keep leases with an initial term of 12 months or less off of the balance sheet. We recognize these lease payments in the consolidated statements of income on a straight-line basis over the lease

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term. We have lease agreements with lease and non-lease components, and we have elected the practical expedient to account for these as a single lease component.

Our operating leases relate primarily to bank branches and office space. In conjunction with the adoption on January 1, 2019, we recognized operating lease liabilities of $10.1 million and related lease assets of $9.8 million on our balance sheet. The difference between the lease assets and lease liabilities primarily consists of deferred rent liabilities reclassified upon adoption to reduce the measurement of the lease assets. The standard did not materially impact our consolidated net income and had no impact on cash flows.

Accounting Pronouncements

In June 2016, the FASB issued ASU 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” ASU 2016-13 introduces an approach based on expected losses to estimate credit losses on certain types of financial instruments. ASU 2016-13 also modifies the impairment model for AFS debt securities and provides for a simplified accounting model for purchased financial assets with credit deterioration since their origination. ASU 2016-13 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. The guidance requires companies to apply the requirements in the year of adoption through a cumulative-effect adjustment with some aspects of the update requiring a prospective transition approach. We are currently evaluating the potential impact of the pending adoption of ASU 2016-13 on our consolidated financial statements. We plan to adopt on January 1, 2020, the effective date. We have developed a project plan and have assigned a project team to complete the analysis needed to implement the guidance. We are also currently working with a third party vendor solution to assist with the application of ASU 2016-13. The team is currently completing the data collection and anticipates running parallel models during 2019.

In January 2017, the FASB issued ASU 2017-04, “Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment.” ASU 2017-04 is intended to simplify goodwill impairment testing by eliminating the second step of the analysis which requires the calculation of the implied fair value of goodwill to measure a goodwill impairment charge. The update requires entities to compare the fair value of a reporting unit with its carrying amount and recognize an impairment charge for any amount by which the carrying amount exceeds the reporting unit’s fair value, to the extent that the loss recognized does not exceed the amount of goodwill allocated to that reporting unit. ASU 2017-04 is effective for annual and interim goodwill impairment tests performed in periods beginning after December 15, 2019. Early adoption is permitted for annual and interim goodwill impairment testing dates after January 1, 2017. The guidance requires companies to apply the requirements prospectively in the year of adoption. ASU 2017-04 is not expected to have a material impact on our consolidated financial statements.

2. Acquisition

On November 30, 2017, we acquired 100% of the outstanding stock of Diboll State Bancshares, Inc. and its wholly-owned subsidiary First Bank & Trust East Texas (collectively, “Diboll”) headquartered in Diboll, Texas. Diboll operated 17 banking offices in Diboll and surrounding areas. We acquired Diboll to further expand our presence in the East Texas market. The total merger consideration for the Diboll merger was $224.3 million. The operations of Diboll were merged into the Company as of the date of the acquisition.

The fair value of assets acquired, adjusted for subsequent measurement period adjustments, excluding goodwill, totaled $1.03 billion, including total loans of $621.3 million and total investment securities of $234.4 million. Total fair value of the liabilities assumed totaled $910.7 million, including deposits of $899.3 million. We recognized goodwill of $109.6 million associated with Diboll acquisition. The goodwill resulting from the acquisition represents the value expected from the expansion of our markets into the Southeast Texas region and the enhancement of our operations through customer synergies and efficiencies, thereby providing enhanced customer service. Goodwill was $201.1 million as of March 31, 2019 and December 31, 2018 and is not expected to be deductible for tax purposes.

We recognized a core deposit intangible of $14.7 million and a trust relationship intangible of $5.4 million which we are amortizing using an accelerated method over a 9- and 13-year weighted average amortization period, respectively, consistent with expected future cash flows.

The Diboll acquisition was accounted for using the acquisition 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 Diboll, see “Note 2 - Acquisition” in our Annual Report on Form 10-K for the year ended December 31, 2018.

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3. Earnings Per Share

Earnings per share on a basic and diluted basis are calculated as follows (in thousands, except per share amounts):



	Three Months Ended March 31,
	2019		2018
Basic and Diluted Earnings:
Net income	$	18,817	$	16,251
Basic weighted-average shares outstanding	33,697		35,022
Add: Stock awards	149		178
Diluted weighted-average shares outstanding	33,846		35,200
Basic earnings per share:
Net Income	$	0.56	$	0.46
Diluted earnings per share:
Net Income	$	0.56	$	0.46

For the three months ended March 31, 2019 and 2018, there were approximately 490,000 and 186,000 anti-dilutive shares, respectively.

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4. Accumulated Other Comprehensive Income (Loss)

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



	Three Months Ended March 31, 2019
							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	$	(31,120	)	$	7,146		$	(139	)	$	(26,115	)	$	(50,228	)
Other comprehensive income (loss):
Other comprehensive income (loss) before reclassifications	46,626			(3,120		)	—			—			43,506
Reclassified from accumulated other comprehensive income (loss)	235			(668		)	(1		)	542			108
Income tax (expense) benefit	(9,840		)	795			—			(114		)	(9,159		)
Net current-period other comprehensive income (loss), net of tax	37,021			(2,993		)	(1		)	428			34,455
Ending balance, net of tax	$	5,901		$	4,153		$	(140	)	$	(25,687	)	$	(15,773	)



	Three Months Ended March 31, 2018
							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	$	(16,295	)	$	6,399		$	(133	)	$	(26,269	)	$	(36,298	)
Cumulative effect of ASU 2016-01 ⁽¹⁾	85			—			—			—			85
Adjusted beginning balance, net of tax	(16,210		)	6,399			(133		)	(26,269		)	(36,213		)
Other comprehensive income (loss):
Other comprehensive income (loss) before reclassifications	(25,501		)	4,245			—			—			(21,256		)
Reclassified from accumulated other comprehensive income (loss)	965			(127		)	(2		)	475			1,311
Income tax benefit (expense)	5,152			(865		)	1			(100		)	4,188
Net current-period other comprehensive (loss) income, net of tax	(19,384		)	3,253			(1		)	375			(15,757		)
Ending balance, net of tax	$	(35,594	)	$	9,652		$	(134	)	$	(25,894	)	$	(51,970	)


(1)	The Company adopted ASU 2016-01 on January 1, 2018. This amount includes a reclassification for the cumulative adjustment to retained earnings of $107,000 ($85,000, net of tax).

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



	Three Months Ended March 31,
	2019			2018

Unrealized losses on securities transferred:
Amortization of unrealized losses ⁽¹⁾	$	(491	)	$	(138	)
Tax benefit	103			29
Net of tax	$	(388	)	$	(109	)

Unrealized gains and losses on available for sale securities:
Realized net gain (loss) on sale of securities ⁽²⁾	$	256		$	(827	)
Tax (expense) benefit	(54		)	174
Net of tax	$	202		$	(653	)

Derivatives:
Realized net gain on interest rate swap derivatives ⁽³⁾	$	646		$	106
Tax expense	(136		)	(22		)
Net of tax	$	510		$	84

Amortization of unrealized gains on terminated interest rate swap derivatives ⁽³⁾	$	22		$	21
Tax expense	(5		)	(4		)
Net of tax	$	17		$	17

Amortization of pension plan:
Net actuarial loss ⁽⁴⁾	$	(542	)	$	(475	)
Prior service credit ⁽⁴⁾	1			2
Total before tax	(541		)	(473		)
Tax benefit	114			99
Net of tax	(427		)	(374		)
Total reclassifications for the period, net of tax	$	(86	)	$	(1,035	)

(1) Included in interest income on the consolidated statements of income.

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

(3) Included in interest expense for FHLB borrowings on the consolidated statements of income.


(4)	These accumulated other comprehensive income components are included in the computation of net periodic pension cost (income) presented in “Note 9 - Employee Benefit Plans.”

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5. Securities

Debt securities

The amortized cost, gross unrealized gains and losses and estimated fair value of investment and mortgage-backed securities available for sale and held to maturity as of March 31, 2019 and December 31, 2018 are reflected in the tables below (in thousands):



	March 31, 2019
	Amortized		Gross Unrealized		Gross Unrealized		Estimated
AVAILABLE FOR SALE	Cost		Gains		Losses		Fair Value
Investment securities:
State and political subdivisions	$	446,006	$	9,130	$	1,865	$	453,271
Other stocks and bonds	3,000		—		79		2,921
Mortgage-backed securities: ⁽¹⁾
Residential	999,201		8,669		4,168		1,003,702
Commercial	416,618		910		1,167		416,361
Total	$	1,864,825	$	18,709	$	7,279	$	1,876,255

HELD TO MATURITY
Investment securities:
State and political subdivisions	$	3,025	$	29	$	—	$	3,054
Mortgage-backed securities: ⁽¹⁾
Residential	59,720		962		413		60,269
Commercial	84,686		514		857		84,343
Total	$	147,431	$	1,505	$	1,270	$	147,666

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	December 31, 2018
	Amortized		Gross Unrealized		Gross Unrealized		Estimated
AVAILABLE FOR SALE	Cost		Gains		Losses		Fair Value
Investment securities:
State and political subdivisions	$	728,142	$	6,115	$	17,656	$	716,601
Other stocks and bonds	3,000		—		291		2,709
Mortgage-backed securities: ⁽¹⁾
Residential	738,585		3,498		9,111		732,972
Commercial	543,758		941		7,545		537,154
Total	$	2,013,485	$	10,554	$	34,603	$	1,989,436

HELD TO MATURITY
Investment securities:
State and political subdivisions	$	3,083	$	5	$	42	$	3,046
Mortgage-backed securities: ⁽¹⁾
Residential	59,655		154		1,140		58,669
Commercial	100,193		201		2,328		98,066
Total	$	162,931	$	360	$	3,510	$	159,781


(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 have transferred securities from AFS to HTM due to overall balance sheet strategies. The remaining net unamortized, unrealized loss on the transferred securities included in AOCI in the accompanying balance sheets totaled $4.0 million ($3.1 million, net of tax) at March 31, 2019 and $15.3 million ($12.1 million, net of tax) at December 31, 2018. Any net unrealized gain or loss on the transferred securities included in AOCI at the time of transfer will be amortized over the remaining life of the underlying security as an adjustment to the yield on those securities. Securities transferred with losses included in AOCI 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, 2019 or the year ended December 31, 2018.

On January 1, 2019, we adopted ASU 2017-08, “Receivables - Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities,” and in conjunction with the adoption recognized a cumulative effect adjustment to reduce retained earnings by $16.5 million, before tax, related to premiums on callable debt securities. Prior to January 1, 2019, premiums were amortized over the contractual life of the security. With the adoption of ASU 2017-08, premiums on debt securities will be amortized to the earliest call date.

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The following tables represent the estimated fair value and unrealized loss on investment and mortgage-backed securities AFS and HTM as of March 31, 2019 and December 31, 2018 (in thousands):



	March 31, 2019
	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	$	241	$	—	$	91,310	$	1,865	$	91,551	$	1,865
Other stocks and bonds	2,921		79		—		—		2,921		79
Mortgage-backed securities:
Residential	14,666		83		314,543		4,085		329,209		4,168
Commercial	—		—		186,267		1,167		186,267		1,167
Total	$	17,828	$	162	$	592,120	$	7,117	$	609,948	$	7,279
HELD TO MATURITY
Mortgage-backed securities:
Residential	$	1,213	$	18	$	4,759	$	395	$	5,972	$	413
Commercial	—		—		44,916		857		44,916		857
Total	$	1,213	$	18	$	49,675	$	1,252	$	50,888	$	1,270

	December 31, 2018
	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	$	98,112	$	899	$	399,205	$	16,757	$	497,317	$	17,656
Other stocks and bonds	2,709		291		—		—		2,709		291
Mortgage-backed securities:
Residential	5,552		27		488,334		9,084		493,886		9,111
Commercial	9,529		30		457,704		7,515		467,233		7,545
Total	$	115,902	$	1,247	$	1,345,243	$	33,356	$	1,461,145	$	34,603
HELD TO MATURITY
Investment securities:
State and political subdivisions	$	235	$	1	$	2,022	$	41	$	2,257	$	42
Mortgage-backed securities:
Residential	4,826		60		51,046		1,080		55,872		1,140
Commercial	399		2		89,168		2,326		89,567		2,328
Total	$	5,460	$	63	$	142,236	$	3,447	$	147,696	$	3,510

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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 AFS and HTM 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 a charge to other comprehensive income for the noncredit portion. 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, 2019.

The majority of the securities in an unrealized loss position are highly rated Texas municipal securities and U.S. Agency 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, 2019.

The following table reflects interest income recognized on securities for the periods presented (in thousands):



	Three Months Ended March 31,
	2019		2018
U.S. Treasury	$	—	$	108
U.S. government agency debentures	—		89
State and political subdivisions	4,118		6,381
Other stocks and bonds	28		30
Mortgage-backed securities	12,474		10,894
Total interest income on securities	$	16,620	$	17,502

There was a $256,000 net realized gain from the AFS securities portfolio for the three months ended March 31, 2019, which consisted of $5.0 million in realized gains and $4.8 million in realized losses. There was an $827,000 net realized loss from the AFS securities portfolio for the three months ended March 31, 2018, which consisted of $1.8 million in realized losses and $941,000 in realized gains. There were no sales from the HTM portfolio during the three months ended March 31, 2019 or 2018. We calculate realized gains and losses on sales of securities under the specific identification method.

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The amortized cost and estimated fair value of AFS and HTM securities at March 31, 2019, are presented below by contractual maturity (in thousands). 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, 2019
	Amortized Cost		Fair Value
AVAILABLE FOR SALE
Investment securities:
Due in one year or less	$	3,827	$	3,866
Due after one year through five years	7,743		7,741
Due after five years through ten years	29,416		30,332
Due after ten years	408,020		414,253
	449,006		456,192
Mortgage-backed securities	1,415,819		1,420,063
Total	$	1,864,825	$	1,876,255



	March 31, 2019
	Amortized Cost		Fair Value
HELD TO MATURITY
Investment securities:
Due in one year or less	$	115	$	115
Due after one year through five years	1,663		1,676
Due after five years through ten years	1,247		1,263
Due after ten years	—		—
	3,025		3,054
Mortgage-backed securities:	144,406		144,612
Total	$	147,431	$	147,666

Investment securities and MBS with carrying values of $1.03 billion and $1.08 billion were pledged as of March 31, 2019 and December 31, 2018, respectively, to collateralize Federal Home Loan Bank of Dallas (“FHLB”) borrowings, repurchase agreements and public funds or for other purposes as required by law.

Equity Investments

Equity investments on our consolidated balance sheets include Community Reinvestment Act funds with a readily determinable fair value as well as equity investments without readily determinable fair values. At March 31, 2019 and December 31, 2018, we had equity investments recorded in our consolidated balance sheets of $12.2 million and $12.1 million, respectively.

Any realized and unrealized gains and losses on equity investments are reported in income. Equity investments without readily determinable fair values are recorded at cost less any impairment, if any.

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The following is a summary of unrealized and realized gains and losses on equity investments recognized in other noninterest income in the consolidated statements of income during the three months ended March 31, 2019 (in thousands):



	Three Months Ended March 31,
	2019		2018
Net gains (losses) recognized during the period on equity investments	$	76	$	(92	)
Less: Net gains (losses) recognized during the period on equity investments sold during the period	—		—
Unrealized gains (losses) recognized during the reporting period on equity investments still held at the reporting date	$	76	$	(92	)

Equity investments are assessed quarterly for other-than-temporary impairment. Based upon that evaluation, management does not consider any of our equity investments to be other-than-temporarily impaired at March 31, 2019.

Federal Home Loan Bank Stock

Our FHLB stock, which has limited marketability, is carried at cost.

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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, 2019		December 31, 2018
Real estate loans:
Construction	$	603,411	$	507,732
1-4 family residential	786,198		794,499
Commercial	1,104,378		1,194,118
Commercial loans	367,995		356,649
Municipal loans	343,026		353,370
Loans to individuals	100,102		106,431
Total loans	3,305,110		3,312,799
Less: Allowance for loan losses ⁽¹⁾	24,155		27,019
Net loans	$	3,280,955	$	3,285,780


(1)	The allowance for loan loss recorded on purchased credit impaired (“PCI”) loans totaled $250,000 and $302,000 as of March 31, 2019 and December 31, 2018, respectively.

Construction Real Estate Loans

Our construction loans are collateralized by property located primarily in or near the market areas we serve. A number of our construction loans will be owner occupied upon completion. Construction loans for non-owner occupied projects are financed, but these typically have cash flows from leases with tenants, secondary sources of repayment, and in some cases, additional 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.

1-4 Family Residential Real Estate 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 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 loans as of March 31, 2019 consisted of $1.05 billion of owner and non-owner occupied real estate, $34.9 million of loans secured by multi-family properties and $17.3 million of loans secured by farmland. Commercial real estate loans primarily include loans collateralized by retail, commercial office buildings, multi-family residential buildings, medical facilities and offices, senior living, assisted living and skilled nursing facilities, warehouse facilities, hotels and churches. Management does not consider there to be a risk in any one industry type. 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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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. 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, with a small percentage originating outside of the state. 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. Lending money directly to these municipalities allows us to earn a higher yield than we could if we purchased municipal securities for similar durations.

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 assists 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, we utilize historical net charge-off 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 not reflected in the historical data. 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 on a monthly basis. 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 at the time of the review we determine it is probable we will not collect the principal and interest cash flows contractually due on the loan, estimates of future expected cash flows or appraisals of the collateral securing the debt are used to determine the necessary allowance. The internal loan review department maintains a list (“Watch 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 loans.

We calculate historical loss ratios for pools of loans with similar characteristics based on the proportion of actual charge-offs experienced, consistent with the characteristics of remaining loans, to the total population of loans in the pool. The historical gross loss ratios are updated quarterly based on actual charge-off experience and adjusted for qualitative factors. All loans are subject to individual analysis if determined to be impaired with the exception of consumer loans and loans secured by 1-4 family residential loans.

Industry and our own experience indicates that a portion of our loans will become delinquent and a portion of our loans will require partial or full charge-off. Regardless of the underwriting criteria utilized, losses may occur as a result of various factors beyond

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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 worthiness 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 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 the 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 is warranted 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 loan 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 loan or in our credit position at some future date. Special Mention loans are not adversely classified and do not expose us 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 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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These factors are also considered for the non-PCI purchased loan portfolio specifically in regards to changes in credit quality, 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, 2019
	Real Estate
	Construction		1-4 Family Residential			Commercial			Commercial Loans			Municipal Loans			Loans to Individuals			Total
Balance at beginning of period	$	3,597	$	3,844		$	13,968		$	3,974		$	525		$	1,111		$	27,019
Provision (reversal) for loan losses ⁽²⁾	662		(447		)	(2,112		)	734			(17		)	262			(918		)
Loans charged off	—		(18		)	(1,215		)	(451		)	—			(601		)	(2,285		)
Recoveries of loans charged off	—		3			19			30			—			287			339
Balance at end of period	$	4,259	$	3,382		$	10,660		$	4,287		$	508		$	1,059		$	24,155



	Three Months Ended March 31, 2018
	Real Estate
	Construction			1-4 Family Residential			Commercial		Commercial Loans			Municipal Loans			Loans to Individuals			Total
Balance at beginning of period ⁽¹⁾	$	3,676		$	2,445		$	10,821	$	2,094		$	860		$	885		$	20,781
Provision (reversal) for loan losses ⁽²⁾	(65		)	(82		)	3,266		333			(9		)	292			3,735
Loans charged off	(14		)	—			—		(85		)	—			(668		)	(767		)
Recoveries of loans charged off	—			14			2		43			—			412			471
Balance at end of period	$	3,597		$	2,377		$	14,089	$	2,385		$	851		$	921		$	24,220

(1) Loans acquired with the Diboll acquisition were measured at fair value on November 30, 2017 with no carryover of allowance for loan loss.


(2)	Of the $918,000 reversal of provision for loan losses for the three months ended March 31, 2019, $52,000 related to provision expense reversed on PCI loans. Of the $3.7 million recorded in provision for loan losses for the three months ended March 31, 2018, none related to provision expense on PCI loans.

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



	March 31, 2019
	Real Estate
	Construction		1-4 Family Residential		Commercial		Commercial Loans		Municipal Loans		Loans to Individuals		Total
Ending balance – individually evaluated for impairment ⁽¹⁾	$	13	$	83	$	3,100	$	403	$	1	$	150	$	3,750
Ending balance – collectively evaluated for impairment	4,246		3,299		7,560		3,884		507		909		20,405
Balance at end of period	$	4,259	$	3,382	$	10,660	$	4,287	$	508	$	1,059	$	24,155

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	December 31, 2018
	Real Estate
	Construction		1-4 Family Residential		Commercial		Commercial Loans		Municipal Loans		Loans to Individuals		Total
Ending balance – individually evaluated for impairment ⁽¹⁾	$	13	$	40	$	5,337	$	368	$	1	$	149	$	5,908
Ending balance – collectively evaluated for impairment	3,584		3,804		8,631		3,606		524		962		21,111
Balance at end of period	$	3,597	$	3,844	$	13,968	$	3,974	$	525	$	1,111	$	27,019


(1)	The allowance for loan loss on PCI loans totaled $250,000 and $302,000 as of March 31, 2019 and December 31, 2018, respectively.

The following tables present the recorded investment in loans by portfolio segment based on impairment method (in thousands):

March 31, 2019

Real Estate