body_10q.htm
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, 2007
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
|
(I.R.S.
Employer
|
incorporation
or organization)
|
Identification
No.)
|
|
|
1201
S.
Beckham, Tyler, Texas
|
75701
|
|
|
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 is a large accelerated filer, an accelerated filer,
or a non-accelerated filer. See definition of “accelerated filer and
large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check
one):
Large
accelerated
filer o Accelerated
filer x Non-accelerated
filer o
Indicate
by check
mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the
Act). Yes o . No
x .
The
number of
shares of the issuer's common stock, par value $1.25, outstanding as of July
26,
2007 was 13,081,616 shares.
TABLE
OF
CONTENTS
Certification
Pursuant to Section 302
Certification
Pursuant to Section 302
Certification
Pursuant to Section 906
SOUTHSIDE
BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
(UNAUDITED)
(in
thousands,
except share amounts)
|
|
June
30,
|
|
|
December
31,
|
|
ASSETS
|
|
2007
|
|
|
2006
|
|
Cash
and due
from banks
|
|
$ |
43,762
|
|
|
$ |
52,537
|
|
Interest
earning deposits
|
|
|
544
|
|
|
|
550
|
|
Federal
funds
sold
|
|
|
11,850
|
|
|
|
1,925
|
|
Total
cash
and cash equivalents
|
|
|
56,156
|
|
|
|
55,012
|
|
Investment
securities:
|
|
|
|
|
|
|
|
|
Available
for
sale, at estimated fair value
|
|
|
88,566
|
|
|
|
98,952
|
|
Held
to
maturity, at cost
|
|
|
1,353
|
|
|
|
1,351
|
|
Mortgage-backed
and related securities:
|
|
|
|
|
|
|
|
|
Available
for
sale, at estimated fair value
|
|
|
599,326
|
|
|
|
643,164
|
|
Held
to
maturity, at cost
|
|
|
207,262
|
|
|
|
226,162
|
|
Federal
Home
Loan Bank stock, at cost
|
|
|
15,540
|
|
|
|
25,614
|
|
Other
investments, at cost
|
|
|
881
|
|
|
|
882
|
|
Loans
held
for sale
|
|
|
5,042
|
|
|
|
3,909
|
|
Loans:
|
|
|
|
|
|
|
|
|
Loans
|
|
|
768,739
|
|
|
|
759,147
|
|
Less: allowance
for loan losses
|
|
|
(7,367 |
) |
|
|
(7,193 |
) |
Net
Loans
|
|
|
761,372
|
|
|
|
751,954
|
|
Premises
and
equipment, net
|
|
|
35,268
|
|
|
|
32,641
|
|
Interest
receivable
|
|
|
9,921
|
|
|
|
10,110
|
|
Deferred
tax
asset
|
|
|
10,456
|
|
|
|
8,678
|
|
Other
assets
|
|
|
30,633
|
|
|
|
32,547
|
|
TOTAL
ASSETS
|
|
$ |
1,821,776
|
|
|
$ |
1,890,976
|
|
LIABILITIES
AND SHAREHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
|
|
|
Noninterest
bearing
|
|
$ |
328,361
|
|
|
$ |
325,771
|
|
Interest
bearing
|
|
|
1,007,989
|
|
|
|
956,704
|
|
Total
Deposits
|
|
|
1,336,350
|
|
|
|
1,282,475
|
|
Short-term
obligations:
|
|
|
|
|
|
|
|
|
Federal
funds
purchased
|
|
|
–
|
|
|
|
5,675
|
|
FHLB
Dallas
advances
|
|
|
239,826
|
|
|
|
322,241
|
|
Other
obligations
|
|
|
1,511
|
|
|
|
1,605
|
|
Total
Short-term obligations
|
|
|
241,337
|
|
|
|
329,521
|
|
Long-term
obligations:
|
|
|
|
|
|
|
|
|
FHLB
Dallas
advances
|
|
|
89,393
|
|
|
|
129,379
|
|
Long-term
debt
|
|
|
20,619
|
|
|
|
20,619
|
|
Total
Long-term obligations
|
|
|
110,012
|
|
|
|
149,998
|
|
Other
liabilities
|
|
|
18,583
|
|
|
|
18,378
|
|
TOTAL
LIABILITIES
|
|
|
1,706,282
|
|
|
|
1,780,372
|
|
|
|
|
|
|
|
|
|
|
Off-Balance-Sheet
Arrangements, Commitments and Contingencies (Note 9)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders'
equity:
|
|
|
|
|
|
|
|
|
Common
stock: ($1.25 par, 20,000,000 shares
authorized,
|
|
|
|
|
|
|
|
|
14,805,225
and 14,075,653 shares issued)
|
|
|
18,507
|
|
|
|
17,594
|
|
Paid-in
capital
|
|
|
114,462
|
|
|
|
100,736
|
|
Retained
earnings
|
|
|
21,392
|
|
|
|
29,648
|
|
Treasury
stock (1,724,857 and 1,718,737 shares at cost)
|
|
|
(22,983 |
) |
|
|
(22,850 |
) |
Accumulated
other comprehensive loss
|
|
|
(15,884 |
) |
|
|
(14,524 |
) |
TOTAL
SHAREHOLDERS' EQUITY
|
|
|
115,494
|
|
|
|
110,604
|
|
|
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES AND SHAREHOLDERS' EQUITY
|
|
$ |
1,821,776
|
|
|
$ |
1,890,976
|
|
The
accompanying
notes are an integral part of these consolidated financial
statements.
SOUTHSIDE
BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF INCOME
(UNAUDITED)
(in
thousands,
except per share data)
|
|
Three
Months
|
|
|
Six
Months
|
|
|
|
Ended
June
30,
|
|
|
Ended
June
30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Interest
income
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
$ |
12,733
|
|
|
$ |
11,328
|
|
|
$ |
25,247
|
|
|
$ |
21,956
|
|
Investment
securities – taxable
|
|
|
616
|
|
|
|
594
|
|
|
|
1,452
|
|
|
|
1,337
|
|
Investment
securities – tax-exempt
|
|
|
505
|
|
|
|
490
|
|
|
|
1,012
|
|
|
|
1,089
|
|
Mortgage-backed
and related securities
|
|
|
10,163
|
|
|
|
11,149
|
|
|
|
21,097
|
|
|
|
21,386
|
|
Federal
Home
Loan Bank stock and other investments
|
|
|
330
|
|
|
|
350
|
|
|
|
700
|
|
|
|
694
|
|
Other
interest earning assets
|
|
|
33
|
|
|
|
14
|
|
|
|
69
|
|
|
|
32
|
|
Total
interest income
|
|
|
24,380
|
|
|
|
23,925
|
|
|
|
49,577
|
|
|
|
46,494
|
|
Interest
expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
10,025
|
|
|
|
7,404
|
|
|
|
19,590
|
|
|
|
13,658
|
|
Short-term
obligations
|
|
|
2,776
|
|
|
|
4,037
|
|
|
|
6,722
|
|
|
|
7,587
|
|
Long-term
obligations
|
|
|
1,518
|
|
|
|
1,947
|
|
|
|
3,178
|
|
|
|
4,143
|
|
Total
interest expense
|
|
|
14,319
|
|
|
|
13,388
|
|
|
|
29,490
|
|
|
|
25,388
|
|
Net
interest
income
|
|
|
10,061
|
|
|
|
10,537
|
|
|
|
20,087
|
|
|
|
21,106
|
|
Provision
for
loan losses
|
|
|
217
|
|
|
|
448
|
|
|
|
334
|
|
|
|
729
|
|
Net
interest
income after provision for loan losses
|
|
|
9,844
|
|
|
|
10,089
|
|
|
|
19,753
|
|
|
|
20,377
|
|
Non
interest
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposit
services
|
|
|
4,270
|
|
|
|
3,947
|
|
|
|
8,198
|
|
|
|
7,416
|
|
Gain
on sale
of securities available for sale
|
|
|
6
|
|
|
|
101
|
|
|
|
435
|
|
|
|
224
|
|
Gain
on sale
of loans
|
|
|
724
|
|
|
|
469
|
|
|
|
1,069
|
|
|
|
842
|
|
Trust
income
|
|
|
576
|
|
|
|
403
|
|
|
|
1,040
|
|
|
|
807
|
|
Bank
owned
life insurance income
|
|
|
268
|
|
|
|
265
|
|
|
|
532
|
|
|
|
509
|
|
Other
|
|
|
818
|
|
|
|
782
|
|
|
|
1,526
|
|
|
|
1,267
|
|
Total
non
interest income
|
|
|
6,662
|
|
|
|
5,967
|
|
|
|
12,800
|
|
|
|
11,065
|
|
Non
interest
expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries
and
employee benefits
|
|
|
7,298
|
|
|
|
7,310
|
|
|
|
14,402
|
|
|
|
14,730
|
|
Occupancy
expense
|
|
|
1,190
|
|
|
|
1,201
|
|
|
|
2,358
|
|
|
|
2,374
|
|
Equipment
expense
|
|
|
242
|
|
|
|
225
|
|
|
|
470
|
|
|
|
428
|
|
Advertising,
travel & entertainment
|
|
|
449
|
|
|
|
472
|
|
|
|
870
|
|
|
|
924
|
|
ATM
and debit
card expense
|
|
|
242
|
|
|
|
275
|
|
|
|
496
|
|
|
|
445
|
|
Director
fees
|
|
|
141
|
|
|
|
167
|
|
|
|
268
|
|
|
|
312
|
|
Supplies
|
|
|
188
|
|
|
|
168
|
|
|
|
336
|
|
|
|
352
|
|
Professional
fees
|
|
|
240
|
|
|
|
318
|
|
|
|
551
|
|
|
|
633
|
|
Postage
|
|
|
155
|
|
|
|
155
|
|
|
|
303
|
|
|
|
305
|
|
Telephone
and
communications
|
|
|
193
|
|
|
|
191
|
|
|
|
384
|
|
|
|
354
|
|
Other
|
|
|
1,118
|
|
|
|
1,081
|
|
|
|
2,254
|
|
|
|
2,140
|
|
Total
non
interest expense
|
|
|
11,456
|
|
|
|
11,563
|
|
|
|
22,692
|
|
|
|
22,997
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
before
income tax expense
|
|
|
5,050
|
|
|
|
4,493
|
|
|
|
9,861
|
|
|
|
8,445
|
|
Provision
for
income tax expense
|
|
|
463
|
|
|
|
950
|
|
|
|
1,511
|
|
|
|
1,674
|
|
Net
Income
|
|
$ |
4,587
|
|
|
$ |
3,543
|
|
|
$ |
8,350
|
|
|
$ |
6,771
|
|
Earnings
per
common share –basic
|
|
$ |
0.35
|
|
|
$ |
0.28
|
|
|
$ |
0.64
|
|
|
$ |
0.53
|
|
Earnings
per
common share –diluted
|
|
$ |
0.34
|
|
|
$ |
0.27
|
|
|
$ |
0.62
|
|
|
$ |
0.51
|
|
Dividends
declared per common share
|
|
$ |
0.12
|
|
|
$ |
0.11
|
|
|
$ |
0.23
|
|
|
$ |
0.22
|
|
The
accompanying
notes are an integral part of these consolidated financial
statements.
SOUTHSIDE
BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF SHAREHOLDERS' EQUITY
(UNAUDITED)
(in
thousands,
except share amounts)
|
|
Compre-hensive
Income
|
|
|
Common
Stock
|
|
|
Paid-in
Capital
|
|
|
Retained
Earnings
|
|
|
Treasury
Stock
|
|
|
Accumulated
Other
Compre-
hensive
Income
(Loss)
|
|
|
Total
Share-holders
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at
December
31,
2005
|
|
|
|
|
$ |
16,633
|
|
|
$ |
87,962
|
|
|
$ |
32,054
|
|
|
$ |
(22,850 |
) |
|
$ |
(4,509 |
) |
|
$ |
109,290
|
|
Net
Income
|
|
$ |
6,771
|
|
|
|
|
|
|
|
|
|
|
|
6,771
|
|
|
|
|
|
|
|
|
|
|
|
6,771
|
|
Other
comprehensive loss, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
losses on securities, net of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
reclassification
adjustment
(see Note 3)
|
|
|
(9,167 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9,167 |
) |
|
|
(9,167 |
) |
Comprehensive
loss
|
|
$ |
(2,396 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock
issued (94,803 shares)
|
|
|
|
|
|
|
119
|
|
|
|
714
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
833
|
|
Stock
compensation expense
|
|
|
|
|
|
|
|
|
|
|
14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14
|
|
Tax
benefit
of incentive stock options
|
|
|
|
|
|
|
|
|
|
|
41
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
41
|
|
Dividends
paid on common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,626 |
) |
|
|
|
|
|
|
|
|
|
|
(2,626 |
) |
Stock
dividend
|
|
|
|
|
|
|
728
|
|
|
|
10,978
|
|
|
|
(11,706 |
) |
|
|
|
|
|
|
|
|
|
|
–
|
|
Balance
at
June 30, 2006
|
|
|
|
|
|
$ |
17,480
|
|
|
$ |
99,709
|
|
|
$ |
24,493
|
|
|
$ |
(22,850 |
) |
|
$ |
(13,676 |
) |
|
$ |
105,156
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at
December
31, 2006
|
|
|
|
|
|
$ |
17,594
|
|
|
$ |
100,736
|
|
|
$ |
29,648
|
|
|
$ |
(22,850 |
) |
|
$ |
(14,524 |
) |
|
$ |
110,604
|
|
Net
Income
|
|
$ |
8,350
|
|
|
|
|
|
|
|
|
|
|
|
8,350
|
|
|
|
|
|
|
|
|
|
|
|
8,350
|
|
Other
comprehensive income, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
losses on securities, net of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
reclassification
adjustment
(see
Note
3)
|
|
|
(1,533 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,533 |
) |
|
|
(1,533 |
) |
Adjustment
to
net periodic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
benefit
cost
(see
Note
3)
|
|
|
173
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
173
|
|
|
|
173
|
|
Comprehensive
Income
|
|
$ |
6,990
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock
issued (108,634 shares)
|
|
|
|
|
|
|
137
|
|
|
|
788
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
925
|
|
Stock
compensation expense
|
|
|
|
|
|
|
|
|
|
|
14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14
|
|
Tax
benefit
of incentive stock options
|
|
|
|
|
|
|
|
|
|
|
21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21
|
|
Dividends
paid on common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,927 |
) |
|
|
|
|
|
|
|
|
|
|
(2,927 |
) |
Purchase
of
6,120 shares of common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(133 |
) |
|
|
|
|
|
|
(133 |
) |
Stock
dividend
|
|
|
|
|
|
|
776
|
|
|
|
12,903
|
|
|
|
(13,679 |
) |
|
|
|
|
|
|
|
|
|
|
–
|
|
Balance
at
June 30, 2007
|
|
|
|
|
|
$ |
18,507
|
|
|
$ |
114,462
|
|
|
$ |
21,392
|
|
|
$ |
(22,983 |
) |
|
$ |
(15,884 |
) |
|
$ |
115,494
|
|
The
accompanying
notes are an integral part of these consolidated financial
statements.
SOUTHSIDE
BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(UNAUDITED)
(in
thousands)
|
|
Six
Months
Ended
June
30,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
OPERATING
ACTIVITIES:
|
|
|
|
|
|
|
Net
income
|
|
$ |
8,350
|
|
|
$ |
6,771
|
|
Adjustments
to reconcile net income to net cash provided
by operations:
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
1,085
|
|
|
|
1,132
|
|
Amortization
of premium
|
|
|
2,445
|
|
|
|
3,066
|
|
Accretion
of
discount and loan fees
|
|
|
(1,314 |
) |
|
|
(929 |
) |
Provision
for
loan losses
|
|
|
334
|
|
|
|
729
|
|
Stock
compensation expense
|
|
|
14
|
|
|
|
14
|
|
Decrease
(increase) in interest receivable
|
|
|
189
|
|
|
|
(659 |
) |
Decrease
in
other assets
|
|
|
1,585
|
|
|
|
208
|
|
Net
change in
deferred taxes
|
|
|
(1,077 |
) |
|
|
(176 |
) |
(Decrease)
increase in interest payable
|
|
|
(134 |
) |
|
|
338
|
|
Decrease
in
other liabilities
|
|
|
(434 |
) |
|
|
(4,378 |
) |
Increase
in
loans held for sale
|
|
|
(1,133 |
) |
|
|
(2,839 |
) |
Gain
on sale
of available for sale securities
|
|
|
(435 |
) |
|
|
(224 |
) |
Gain
on sale
of assets
|
|
|
–
|
|
|
|
(1 |
) |
Loss
on sale
of other real estate owned
|
|
|
1
|
|
|
|
–
|
|
Net
cash
provided by operating activities
|
|
|
9,476
|
|
|
|
3,052
|
|
|
|
|
|
|
|
|
|
|
INVESTING
ACTIVITIES:
|
|
|
|
|
|
|
|
|
Proceeds
from
sales of investment securities available for sale
|
|
|
4,953
|
|
|
|
39,197
|
|
Proceeds
from
sales of mortgage-backed securities available for sale
|
|
|
51,430
|
|
|
|
30,651
|
|
Proceeds
from
maturities of investment securities available for sale
|
|
|
57,891
|
|
|
|
14,175
|
|
Proceeds
from
maturities of mortgage-backed securities available for
sale
|
|
|
50,874
|
|
|
|
53,060
|
|
Proceeds
from
maturities of mortgage-backed securities held to maturity
|
|
|
20,596
|
|
|
|
16,683
|
|
Proceeds
from
redemption of Federal Home Loan Bank stock
|
|
|
10,729
|
|
|
|
2,019
|
|
Purchases
of
investment securities available for sale
|
|
|
(51,789 |
) |
|
|
(23,027 |
) |
Purchases
of
investment securities held to maturity
|
|
|
–
|
|
|
|
(1,348 |
) |
Purchases
of
mortgage-backed securities available for sale
|
|
|
(60,474 |
) |
|
|
(157,067 |
) |
Purchases
of
mortgage-backed securities held to maturity
|
|
|
(2,180 |
) |
|
|
(33,749 |
) |
Purchases
of
Federal Home Loan Bank stock and other investments
|
|
|
(654 |
) |
|
|
(657 |
) |
Net
increase
in loans
|
|
|
(10,048 |
) |
|
|
(45,119 |
) |
Purchases
of
premises and equipment
|
|
|
(3,712 |
) |
|
|
(933 |
) |
Proceeds
from
sales of premises and equipment
|
|
|
–
|
|
|
|
1
|
|
Proceeds
from
sales of other real estate owned
|
|
|
334
|
|
|
|
45
|
|
Proceeds
from
sales of repossessed assets
|
|
|
191
|
|
|
|
185
|
|
Net
cash
provided by (used in) investing activities
|
|
|
68,141
|
|
|
|
(105,884 |
) |
The
accompanying
notes are an integral part of these consolidated financial
statements.
SOUTHSIDE
BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS (continued)
(UNAUDITED)
(in
thousands)
|
|
Six
Months
Ended
|
|
|
|
June
30,
|
|
|
|
2007
|
|
|
2006
|
|
FINANCING
ACTIVITIES:
|
|
|
|
|
|
|
Net
increase in demand and savings accounts
|
|
|
21,773
|
|
|
|
5,388
|
|
Net
increase in certificates of deposit
|
|
|
31,944
|
|
|
|
78,801
|
|
Net
(decrease) increase in federal funds purchased
|
|
|
(5,675
|
)
|
|
|
10,600
|
|
Proceeds
from FHLB Advances
|
|
|
2,786,999
|
|
|
|
3,608,804
|
|
Repayment
of FHLB Advances
|
|
|
(2,909,400
|
)
|
|
|
(3,603,261
|
)
|
Tax
benefit of incentive stock options
|
|
|
21
|
|
|
|
41
|
|
Purchases
of common stock
|
|
|
(133
|
)
|
|
|
–
|
|
Proceeds
from the issuance of common stock
|
|
|
925
|
|
|
|
833
|
|
Dividends
paid
|
|
|
(2,927
|
)
|
|
|
(2,626
|
)
|
Net
cash (used in) provided by financing activities
|
|
|
(76,473
|
)
|
|
|
98,580
|
|
|
|
|
|
|
|
|
|
|
Net
increase
(decrease) in cash and cash equivalents
|
|
|
1,144
|
|
|
|
(4,252
|
)
|
Cash
and cash
equivalents at beginning of period
|
|
|
55,012
|
|
|
|
51,829
|
|
Cash
and cash
equivalents at end of period
|
|
$
|
56,156
|
|
|
$
|
47,577
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL
DISCLOSURES FOR CASH FLOW INFORMATION:
|
|
|
|
|
|
|
|
|
Interest
paid
|
|
$
|
29,624
|
|
|
$
|
25,050
|
|
Income
taxes paid
|
|
|
2,000
|
|
|
|
1,150
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL
DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Acquisition
of other repossessed assets and real estate through
foreclosure
|
|
$
|
197
|
|
|
$
|
957
|
|
Payment
of 5% stock dividend
|
|
|
13,679
|
|
|
|
11,706
|
|
Adjustment
to pension liability
|
|
|
(262
|
)
|
|
|
–
|
|
Unsettled
trades to purchase securities
|
|
|
941
|
|
|
|
–
|
|
The
accompanying
notes are an integral part of these consolidated financial
statements
SOUTHSIDE
BANCSHARES, INC. AND SUBSIDIARIES
NOTES
TO FINANCIAL
STATEMENTS
1. Basis
of Presentation
The
term “Company”
is used throughout this report to refer to Southside Bancshares, Inc. and its
subsidiaries. The term “Bank” is used to refer to Southside Bank
wherever a distinction between Southside Bancshares, Inc. and Southside Bank
aids in the understanding of this report.
The
consolidated
balance sheet as of June 30, 2007, and the related consolidated statements
of
income, shareholders' equity and cash flows and notes to the financial
statements for the three and six month periods ended June 30, 2007 and 2006
are
unaudited; 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. 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, 2006. All share data has been adjusted to give retroactive
recognition to stock splits and stock dividends. For a description of
our significant accounting and reporting policies, refer to Note 1 of the Notes
to Financial Statements in our Annual Report on Form 10-K for the year ended
December 31, 2006.
2. Earnings
Per Share
Earnings
per share
on a basic and diluted basis has been adjusted to give retroactive recognition
to stock splits and stock dividends and is calculated as follows (in thousands,
except per share amounts):
|
|
Three
Months
|
|
|
Six
Months
|
|
|
|
Ended
June
30,
|
|
|
Ended
June
30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Basic
Earnings and Shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income
|
|
$
|
4,587
|
|
|
$
|
3,543
|
|
|
$
|
8,350
|
|
|
$
|
6,771
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average
basic shares outstanding
|
|
|
13,035
|
|
|
|
12,853
|
|
|
|
13,008
|
|
|
|
12,830
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
Earnings Per Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income
|
|
$
|
0.35
|
|
|
$
|
0.28
|
|
|
$
|
0.64
|
|
|
$
|
0.53
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
Earnings and Shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income
|
|
$
|
4,587
|
|
|
$
|
3,543
|
|
|
$
|
8,350
|
|
|
$
|
6,771
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average
basic shares outstanding
|
|
|
13,035
|
|
|
|
12,853
|
|
|
|
13,008
|
|
|
|
12,830
|
|
Add: Stock
options
|
|
|
401
|
|
|
|
484
|
|
|
|
421
|
|
|
|
496
|
|
Weighted-average
diluted shares outstanding
|
|
|
13,436
|
|
|
|
13,337
|
|
|
|
13,429
|
|
|
|
13,326
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
Earnings Per Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income
|
|
$
|
0.34
|
|
|
$
|
0.27
|
|
|
$
|
0.62
|
|
|
$
|
0.51
|
|
For
the three and
six month periods ended June 30, 2007 and 2006, there were no antidilutive
options.
3. Comprehensive
Income (Loss)
The
components of
other comprehensive income (loss) are as follows (in thousands):
|
|
Six
Months
Ended June 30, 2007
|
|
|
|
Before-Tax
|
|
|
Tax
(Expense)
|
|
|
Net-of-Tax
|
|
|
|
Amount
|
|
|
Benefit
|
|
|
Amount
|
|
Unrealized
losses on securities:
|
|
|
|
|
|
|
|
|
|
Unrealized
holding losses arising during period
|
|
$ |
(1,888 |
) |
|
$ |
642
|
|
|
$ |
(1,246 |
) |
Less: reclassification
adjustment for gains
|
|
|
|
|
|
|
|
|
|
|
|
|
included
in net income
|
|
|
435
|
|
|
|
(148 |
) |
|
|
287
|
|
Net
unrealized losses on securities
|
|
|
(2,323 |
) |
|
|
790
|
|
|
|
(1,533 |
) |
Adjustment
to net periodic benefit cost
|
|
|
262
|
|
|
|
(89 |
) |
|
|
173
|
|
Other
comprehensive loss
|
|
$ |
(2,061 |
) |
|
$ |
701
|
|
|
$ |
(1,360 |
) |
|
|
Three
Months
Ended June 30, 2007
|
|
|
|
Before-Tax
|
|
|
Tax
(Expense)
|
|
|
Net-of-Tax
|
|
|
|
Amount
|
|
|
Benefit
|
|
|
Amount
|
|
Unrealized
losses on securities:
|
|
|
|
|
|
|
|
|
|
Unrealized
holding losses arising during period
|
|
$ |
(5,556 |
) |
|
$ |
1,889
|
|
|
$ |
(3,667 |
) |
Less: reclassification
adjustment for gains
|
|
|
|
|
|
|
|
|
|
|
|
|
included
in net income
|
|
|
6
|
|
|
|
(2 |
) |
|
|
4
|
|
Net
unrealized losses on securities
|
|
|
(5,562 |
) |
|
|
1,891
|
|
|
|
(3,671 |
) |
Adjustment
to net periodic benefit cost
|
|
|
104
|
|
|
|
(35 |
) |
|
|
69
|
|
Other
comprehensive loss
|
|
$ |
(5,458 |
) |
|
$ |
1,856
|
|
|
$ |
(3,602 |
) |
|
|
Six
Months
Ended June 30, 2006
|
|
|
|
Before-Tax
|
|
|
Tax
(Expense)
|
|
|
Net-of-Tax
|
|
|
|
Amount
|
|
|
Benefit
|
|
|
Amount
|
|
Unrealized
losses on securities:
|
|
|
|
|
|
|
|
|
|
Unrealized
holding losses arising during period
|
|
$ |
(13,665 |
) |
|
$ |
4,646
|
|
|
$ |
(9,019 |
) |
Less: reclassification
adjustment for gains
|
|
|
|
|
|
|
|
|
|
|
|
|
included
in net income
|
|
|
224
|
|
|
|
(76 |
) |
|
|
148
|
|
Net
unrealized losses on securities
|
|
|
(13,889 |
) |
|
|
4,722
|
|
|
|
(9,167 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
comprehensive loss
|
|
$ |
(13,889 |
) |
|
$ |
4,722
|
|
|
$ |
(9,167 |
) |
|
|
Three
Months
Ended June 30, 2006
|
|
|
|
Before-Tax
|
|
|
Tax
(Expense)
|
|
|
Net-of-Tax
|
|
|
|
Amount
|
|
|
Benefit
|
|
|
Amount
|
|
Unrealized
losses on securities:
|
|
|
|
|
|
|
|
|
|
Unrealized
holding losses arising during period
|
|
$ |
(5,982 |
) |
|
$ |
2,034
|
|
|
$ |
(3,948 |
) |
Less: reclassification
adjustment for gains
|
|
|
|
|
|
|
|
|
|
|
|
|
included
in net income
|
|
|
101
|
|
|
|
(34 |
) |
|
|
67
|
|
Net
unrealized losses on securities
|
|
|
(6,083 |
) |
|
|
2,068
|
|
|
|
(4,015 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
comprehensive loss
|
|
$ |
(6,083 |
) |
|
$ |
2,068
|
|
|
$ |
(4,015 |
) |
4. Securities
The
amortized cost
and estimated market value of investment and mortgage-backed securities as
of
June 30, 2007 and December 31, 2006, are reflected in the tables below (in
thousands):
|
|
|
|
|
|
June
30,
2007
|
|
AVAILABLE
FOR
SALE:
|
|
Amortized
Cost
|
|
|
Gross
Unrealized Gains
|
|
|
Gross
Unrealized Losses
|
|
|
Estimated
Market Value
|
|
Investment
Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Treasury
|
|
$ |
18,157
|
|
|
$ |
–
|
|
|
$ |
1,051
|
|
|
$ |
17,106
|
|
Government
Sponsored Enterprise Debentures
|
|
|
8,999
|
|
|
|
–
|
|
|
|
2
|
|
|
|
8,997
|
|
State
and Political Subdivisions
|
|
|
54,361
|
|
|
|
1,077
|
|
|
|
480
|
|
|
|
54,958
|
|
Other
Stocks and Bonds
|
|
|
7,591
|
|
|
|
9
|
|
|
|
95
|
|
|
|
7,505
|
|
Mortgage-backed
Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Government Agencies
|
|
|
73,596
|
|
|
|
274
|
|
|
|
1,669
|
|
|
|
72,201
|
|
Government
Sponsored Enterprises
|
|
|
527,797
|
|
|
|
896
|
|
|
|
8,196
|
|
|
|
520,497
|
|
Other
Private Issues
|
|
|
6,711
|
|
|
|
39
|
|
|
|
122
|
|
|
|
6,628
|
|
Total
|
|
$ |
697,212
|
|
|
$ |
2,295
|
|
|
$ |
11,615
|
|
|
$ |
687,892
|
|
HELD
TO
MATURITY:
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
Stocks and Bonds
|
|
$ |
1,353
|
|
|
$ |
14
|
|
|
$ |
–
|
|
|
$ |
1,367
|
|
Mortgage-backed
Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Government Agencies
|
|
|
28,228
|
|
|
|
–
|
|
|
|
621
|
|
|
|
27,607
|
|
Government
Sponsored Enterprises
|
|
|
179,034
|
|
|
|
44
|
|
|
|
3,485
|
|
|
|
175,593
|
|
Total
|
|
$ |
208,615
|
|
|
$ |
58
|
|
|
$ |
4,106
|
|
|
$ |
204,567
|
|
|
|
|
|
|
|
December
31,
2006
|
|
AVAILABLE
FOR
SALE:
|
|
Amortized
Cost
|
|
|
Gross
Unrealized Gains
|
|
|
Gross
Unrealized Losses
|
|
|
Estimated
Market Value
|
|
Investment
Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Treasury
|
|
$ |
27,104
|
|
|
$ |
–
|
|
|
$ |
721
|
|
|
$ |
26,383
|
|
Government
Sponsored Enterprise Debentures
|
|
|
9,923
|
|
|
|
–
|
|
|
|
–
|
|
|
|
9,923
|
|
State
and Political Subdivisions
|
|
|
54,037
|
|
|
|
1,488
|
|
|
|
390
|
|
|
|
55,135
|
|
Other
Stocks and Bonds
|
|
|
7,611
|
|
|
|
12
|
|
|
|
112
|
|
|
|
7,511
|
|
Mortgage-backed
Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Government Agencies
|
|
|
72,183
|
|
|
|
425
|
|
|
|
1,209
|
|
|
|
71,399
|
|
Government
Sponsored Enterprises
|
|
|
570,777
|
|
|
|
1,250
|
|
|
|
7,377
|
|
|
|
564,650
|
|
Other
Private Issues
|
|
|
7,190
|
|
|
|
20
|
|
|
|
95
|
|
|
|
7,115
|
|
Total
|
|
$ |
748,825
|
|
|
$ |
3,195
|
|
|
$ |
9,904
|
|
|
$ |
742,116
|
|
HELD
TO
MATURITY:
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
Stocks and Bonds
|
|
$ |
1,351
|
|
|
$ |
7
|
|
|
$ |
16
|
|
|
$ |
1,342
|
|
Mortgage-backed
Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Government Agencies
|
|
|
30,788
|
|
|
|
–
|
|
|
|
407
|
|
|
|
30,381
|
|
Government
Sponsored Enterprises
|
|
|
195,374
|
|
|
|
97
|
|
|
|
3,104
|
|
|
|
192,367
|
|
Total
|
|
$ |
227,513
|
|
|
$ |
104
|
|
|
$ |
3,527
|
|
|
$ |
224,090
|
|
The
Bank concluded
that, based on the creditworthiness of the issuer, the unrealized loss on
each
security in the above table represents a temporary impairment and does not
require adjustment to the carrying amount of any of the individual securities.
Additionally, the Bank has the ability and the intent to hold such securities
through recovery of the unrealized losses.
Investment
and mortgage-backed securities with book values of
$322.9 million at June 30, 2007 and $454.6 million at December 31, 2006 were
pledged to collateralize FHLB advances, public funds, trust deposits, repurchase
agreements and for other purposes, as required or permitted by
law.
5. Loans
and Allowance for Probable Loan Losses
The
following table
sets forth loan totals by category for the periods presented (in
thousands):
|
|
At
|
|
|
At
|
|
|
|
June
30,
|
|
|
December
31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
Real
Estate
Loans:
|
|
|
|
|
|
|
Construction
|
|
$ |
46,876
|
|
|
$ |
39,588
|
|
1-4
Family Residential
|
|
|
223,996
|
|
|
|
227,354
|
|
Other
|
|
|
177,918
|
|
|
|
181,047
|
|
Commercial
Loans
|
|
|
125,609
|
|
|
|
118,962
|
|
Municipal
Loans
|
|
|
110,416
|
|
|
|
106,155
|
|
Loans
to
Individuals
|
|
|
83,924
|
|
|
|
86,041
|
|
Total
Loans
|
|
$ |
768,739
|
|
|
$ |
759,147
|
|
The
summaries of
the Allowance for Loan Losses are as follows (in thousands):
|
|
Three
Months
Ended
June
30,
|
|
|
Six
Months
Ended
June
30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at
beginning of period
|
|
$
|
7,261
|
|
|
$
|
7,193
|
|
|
$
|
7,193
|
|
|
$
|
7,090
|
|
Provision
for
loan losses
|
|
|
217
|
|
|
|
448
|
|
|
|
334
|
|
|
|
729
|
|
Loans
charged
off
|
|
|
(616
|
)
|
|
|
(744
|
)
|
|
|
(1,209
|
)
|
|
|
(1,447
|
)
|
Recoveries
of
loans charged off
|
|
|
505
|
|
|
|
449
|
|
|
|
1,049
|
|
|
|
974
|
|
Balance
at
end of period
|
|
$
|
7,367
|
|
|
$
|
7,346
|
|
|
$
|
7,367
|
|
|
$
|
7,346
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6. Employee
Benefit Plans
The
components of
net periodic benefit cost are as follows (in thousands):
|
|
Six
Months
Ended June 30,
|
|
|
|
Defined
Benefit
|
|
|
|
|
|
|
|
|
|
Pension
Plan
|
|
|
Restoration
Plan
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Service
cost
|
|
$
|
665
|
|
|
$
|
669
|
|
|
$
|
31
|
|
|
$
|
34
|
|
Interest
cost
|
|
|
1,156
|
|
|
|
1,095
|
|
|
|
84
|
|
|
|
92
|
|
Expected
return on assets
|
|
|
(1,264
|
)
|
|
|
(1,162
|
)
|
|
|
–
|
|
|
|
–
|
|
Transition
obligation recognition
|
|
|
–
|
|
|
|
–
|
|
|
|
1
|
|
|
|
1
|
|
Net
loss
recognition
|
|
|
241
|
|
|
|
392
|
|
|
|
42
|
|
|
|
90
|
|
Prior
service
credit amortization
|
|
|
(21
|
)
|
|
|
(21
|
)
|
|
|
(1
|
)
|
|
|
(1
|
)
|
Net
periodic
benefit cost
|
|
$
|
777
|
|
|
$
|
973
|
|
|
$
|
157
|
|
|
$
|
216
|
|
|
|
Three
Months
Ended June 30,
|
|
|
|
Defined
Benefit
|
|
|
|
|
|
|
|
|
|
Pension
Plan
|
|
|
Restoration
Plan
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Service
cost
|
|
$
|
356
|
|
|
$
|
347
|
|
|
$
|
16
|
|
|
$
|
16
|
|
Interest
cost
|
|
|
566
|
|
|
|
548
|
|
|
|
39
|
|
|
|
43
|
|
Expected
return on assets
|
|
|
(631
|
)
|
|
|
(581
|
)
|
|
|
–
|
|
|
|
–
|
|
Transition
obligation recognition
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
Net
loss
recognition
|
|
|
105
|
|
|
|
203
|
|
|
|
10
|
|
|
|
40
|
|
Prior
service
credit amortization
|
|
|
(11
|
)
|
|
|
(21
|
)
|
|
|
–
|
|
|
|
(1
|
)
|
Net
periodic
benefit cost
|
|
$
|
385
|
|
|
$
|
496
|
|
|
$
|
65
|
|
|
$
|
98
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employer
Contributions
We
previously
disclosed in our financial statements for the year ended December 31, 2006,
that
we expected to contribute $3.0 million to our defined benefit pension plan
and
$88,000 to our post retirement benefit plan in 2007. As of June 30,
2007, we had contributed $3.0 million to the defined benefit pension plan,
and
$40,000 of contributions had been made to the post retirement benefit
plan.
7. Incentive
Stock Options
In
April 1993, we
adopted the Southside Bancshares, Inc. 1993 Incentive Stock Option Plan ("the
ISO Plan"), a stock-based incentive compensation plan. The ISO Plan
expired March 31, 2003. Prior to January 1, 2006, we applied APB
Opinion 25 and related Interpretations in accounting for the ISO Plan and
disclosed the pro forma information required by SFAS 123 and SFAS
148. There was no compensation expense recognized for the stock
options prior to January 1, 2006.
A
summary of the status of our nonvested shares as of June 30, 2007 is as
follows:
|
|
Six
Months Ended
June
30, 2007
|
|
|
|
Number
of Options
|
|
|
Weighted
Average Grant-Date Fair Value
|
|
Nonvested
at
beginning of the period
|
|
|
12,257
|
|
|
$
|
4.91
|
|
Vested
|
|
|
(6,127
|
)
|
|
$
|
4.91
|
|
Cancelled
|
|
|
(383
|
)
|
|
$
|
4.91
|
|
Nonvested
at
end of period
|
|
|
5,747
|
|
|
$
|
4.91
|
|
For
the three and
six months ended June 30, 2007 and 2006, we recorded approximately $7,000 and
$14,000, respectively, of stock-based compensation expense. As of
June 30, 2007 and 2006, there was $20,000 and $47,000, respectively, of total
unrecognized compensation cost related to the ISO Plan for nonvested options
granted in March 2003. The cost is expected to be recognized over a
weighted-average period of 9 months.
The
fair value of
each stock option granted is estimated on the date of grant using the
Black-Scholes method of option pricing with the following weighted-average
assumptions for grants in 2003: dividend yield of 1.93%; risk-free
interest rate of 4.93%; expected life of 6 years; and expected volatility of
28.90%.
Under
the ISO Plan,
we were authorized to issue shares of common stock pursuant to "Awards" granted
in the form of incentive stock options (intended to qualify under Section 422
of
the Internal Revenue Code of 1986, as amended). Before the ISO Plan
expired, awards were granted to selected employees and directors. No
stock options have been available for grant under the ISO Plan since its
expiration in March 2003. Currently, we do not offer share-based
payment programs to our employees.
The
ISO Plan
provided that the exercise price of any stock option not be less than the fair
market value of the common stock on the date of grant. The
outstanding stock options have contractual terms of 10 years. All
options vest on a graded schedule, 20% per year for 5 years, beginning on the
first anniversary date of the grant date.
A
summary of the
status of our stock options as of June 30, 2007 and the changes during the
six
months ended on those dates is presented below:
|
|
Number
of
Options
|
|
|
Weighted
Average Exercise Prices
|
|
|
Weighted
Average
Remaining
Contract Life (Years)
|
|
|
Aggregate
Intrinsic Value
(in
thousands)
|
|
Outstanding
at December 31, 2006
|
|
|
604,281
|
|
|
$ |
5.76
|
|
|
|
|
|
|
|
Exercised
|
|
|
(90,601 |
) |
|
$ |
5.43
|
|
|
|
|
|
|
|
Cancelled
|
|
|
(383 |
) |
|
$ |
12.61
|
|
|
|
|
|
|
|
Outstanding
at June 30, 2007
|
|
|
513,297
|
|
|
$ |
5.82
|
|
|
|
2.60
|
|
|
$ |
8,278
|
|
Exercisable
at June 30, 2007
|
|
|
507,550
|
|
|
$ |
5.74
|
|
|
|
2.56
|
|
|
$ |
8,226
|
|
The
total intrinsic
value (i.e., the amount by which the fair value of the underlying common stock
exceeds the exercise price of a stock option on exercise date) of stock options
exercised during the six months ended June 30, 2007 and 2006 were $1.5 million
and $1.1 million, respectively.
Cash
received from
stock option exercises for the six months ended June 30, 2007 and 2006 was
$360,000 and $396,000,
respectively. The tax benefit realized for the deductions related to the
stock option exercises were $21,000 and $41,000 for the six months ended June
30, 2007 and 2006, respectively.
8. Accounting
Pronouncements
Statements
of
Financial Accounting Standards
SFAS
No. 159, “The
Fair Value Option for Financial Assets and Financial Liabilities, including
an
amendment of FASB Statement No. 115.” SFAS 159, issued by the
Financial Accounting Standards Board (“FASB”) in February 2007, allows entities
to irrevocably elect fair value as the initial and subsequent measurement
attribute for certain financial assets and financial liabilities that are not
otherwise required to be measured at fair value, with changes in fair value
recognized in earnings as they occur. SFAS 159 also requires entities
to report those financial assets and financial liabilities measured at fair
value in a manner that separates those reported fair values from the carrying
amounts of similar assets and liabilities measured using another measurement
attribute on the face of the statement of financial position. Lastly,
SFAS 159 establishes presentation and disclosure requirements designed to
improve comparability between entities that elect different measurement
attributes for similar assets and liabilities. SFAS 159 is effective
for fiscal years beginning after November 15, 2007, with early adoption
permitted if an entity also early adopts the provisions of SFAS
157. We intend to adopt SFAS 159 on January 1, 2008. We
have not yet determined if, or to what extent, we will elect to use the fair
value option to value our financial assets and liabilities or the impact that
the implementation of SFAS 159 will have on our consolidated financial
statements.
SFAS No. 157,
“Fair Value Measurements.” SFAS 157 defines fair value, establishes a
framework for measuring fair value in GAAP, and expands disclosures about fair
value measurements. SFAS 157 is effective for us on January 1, 2008
and is not expected to have a material impact on our consolidated financial
statements.
SFAS No. 155,
“Accounting for Certain Hybrid Financial Instruments — an amendment of FASB
Statements No. 133 and 140.” SFAS 155 amends SFAS 133,
“Accounting for Derivative Instruments and Hedging Activities” and
SFAS 140, “Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities.” SFAS 155 permits, but does not require,
fair value accounting for hybrid financial instruments that contain an embedded
derivative that would otherwise require bifurcation in accordance with
SFAS 133. SFAS 155 also eliminated the temporary exemption
for interests in securitized financial assets provided for by SFAS 133,
Derivatives Implementation Group (“DIG”) Issue D1, “Application of Statement 133
to Beneficial Interests in Securitized Financial Assets.” However, in
January 2007, the FASB issued interpretive guidance in SFAS 133, DIG
Issue B40, “Application of Paragraph 13(b) to Securitized Interests in
Prepayable Financial Assets.” In DIG Issue B40, the FASB concluded that a
securitized interest in prepayable financial assets was not subject to the
bifurcation requirements of SFAS 155 provided that the interest met both
the following criteria: (1) the right to accelerate the settlement of the
securitized interest cannot be controlled by the investor; and (2) the
securitized interest itself does not contain an embedded derivative for which
bifurcation would be required other than an embedded derivative that results
solely from the embedded call options in the underlying financial assets. The
guidance in DIG Issue B40 is effective upon the adoption of SFAS 155.
SFAS 155 was effective for all financial instruments acquired or issued
after December 31, 2006 as well as to those hybrid financial instruments
that had been previously bifurcated under SFAS 133. The adoption of SFAS
155 did not have a material impact on our consolidated financial
statements.
Emerging
Issues
Task Force Consensuses
In
September 2006,
the Emerging Issues Task Force (“EITF”) reached a final consensus on Issue 06-4,
“Accounting for Deferred Compensation and Postretirement Benefit Aspects of
Endorsement Split-Dollar Life Insurance Arrangements.” EITF 06-4
requires that for a split-dollar life insurance arrangement, an employer should
recognize a liability for future benefits in accordance with SFAS 106,
“Employers' Accounting for Postretirement Benefits Other Than
Pensions.” Under the guidance, the purchase of an endorsement type
policy does not constitute a settlement since the policy does not qualify as
nonparticipating because the policyholders are subject to the favorable and
unfavorable experience of the insurance company. EITF 06-4 is
effective for fiscal years beginning after December 15, 2007. We are
currently assessing the impact of the adoption of EITF 06-4 on our consolidated
financial statements.
In
September 2006,
the EITF reached a final consensus on Issue 06-5, “Accounting for Purchases of
Life Insurance.” EITF 06-5 provides guidance on FASB Technical
Bulletin No. 85-4, “Accounting for Purchases of Life
Insurance.” Under the guidance, the policyholder should consider any
additional amounts included in the contractual terms of the policy in
determining the amount that could be realized under the insurance
contract. In addition, the policyholder should also determine the
amount that could be realized under the life insurance contract assuming the
surrender of an individual-life by individual-life policy. EITF 06-5
was effective for fiscal years beginning after December 15, 2006. The
adoption of EITF 06-5 did not have a material impact on our consolidated
financial statements.
Financial
Accounting Standards Board Staff Positions and Interpretations
FASB
Interpretation
No. 48, “Accounting for Uncertainty in Income Taxes, an interpretation of
FASB Statement 109.” FASB Interpretation No. 48 (“FIN 48”) prescribes a
recognition threshold and a measurement attribute for the financial statement
recognition and measurement of a tax position taken or expected to be taken
in a
tax return. Benefits from tax positions should be recognized in the financial
statements only when it is more likely than not that the tax position will
be
sustained upon examination by the appropriate taxing authority that would have
full knowledge of all relevant information. A tax position that meets the
more-likely-than-not recognition threshold is measured at the largest amount
of
benefit that is greater than fifty percent likely of being realized upon
ultimate settlement. Tax positions that previously failed to meet the
more-likely-than-not recognition threshold should be recognized in the first
subsequent financial reporting period in which that threshold is met. Previously
recognized tax positions that no longer meet the more-likely-than-not
recognition threshold should be derecognized in the first subsequent financial
reporting period in which that threshold is no longer met. Interpretation 48
also provides guidance on the accounting for and disclosure of unrecognized
tax
benefits, interest and penalties.
We
adopted the
provisions of FIN 48 on January 1, 2007. As of the date of adoption, we had
no
unrecognized tax benefits and thus had accrued no interest or penalties on
such
benefits. At adoption, we did not anticipate a significant increase
in unrecognized tax benefits during the subsequent 12 months. As of
January 1, 2007, our 2003 through 2006 tax years were open to examination by
the
Internal Revenue Service and state taxing jurisdictions. There were no material
changes in these items during the current quarter. While we typically
do not incur significant interest or penalties on income tax liabilities, it
is
our policy to classify such amounts as interest expense and miscellaneous
expense, respectively. We did not change our policy on classification of
interest and penalties upon adoption of FIN 48.
9. Off-Balance-Sheet
Arrangements, Commitments and Contingencies
Financial
Instruments with Off-Balance-Sheet-Risk. In the normal course of business,
we are a party to certain financial instruments, with off-balance-sheet risk,
to
meet the financing needs of our customers. These off-balance-sheet
instruments include commitments to extend credit and standby letters of
credit. These instruments involve, to varying degrees, elements of
credit and interest rate risk in excess of the amount reflected in the financial
statements. The contract or notional amounts of these instruments
reflect the extent of involvement and exposure to credit loss we have in these
particular classes of financial instruments.
Commitments
to
extend credit are agreements to lend to a customer provided that the terms
established in the contract are met. Commitments generally have fixed
expiration dates and may require payment of fees. Since some
commitments are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash
requirements. Standby letters of credit are conditional commitments
issued to guarantee the performance of a customer to a third
party. These guarantees are primarily issued to support public and
private borrowing arrangements. The credit risk involved in issuing
letters of credit is essentially the same as that involved in extending loan
commitments to customers.
We
had outstanding
unused commitments to extend credit of $118.0 million and $99.5 million at
June
30, 2007 and 2006, respectively. Each commitment has a maturity date
and the commitment expires on that date with the exception of credit card and
ready reserve commitments, which have no stated maturity date. Unused
commitments for credit card and ready reserve at June 30, 2007 and 2006 were
$9.3 million and $7.9 million, respectively, and are reflected in the due after
one year category. We had outstanding standby letters of credit of
$3.9 million and $3.6 million at June 30, 2007 and 2006,
respectively.
The
scheduled
maturities of unused commitments as of June 30, 2007 and 2006 were as follows
(in thousands):
|
|
June
30,
|
|
|
|
2007
|
|
|
2006
|
|
Unused
commitments:
|
|
|
|
|
|
|
Due
in one
year or less
|
|
$
|
87,271
|
|
|
$
|
57,812
|
|
Due
after one
year
|
|
|
30,691
|
|
|
|
41,697
|
|
Total
|
|
$
|
117,962
|
|
|
$
|
99,509
|
|
|
|
|
|
|
|
|
|
|
We
apply the same
credit policies in making commitments and standby letters of credit as we do
for
on-balance-sheet instruments. We evaluate each customer's credit
worthiness on a case-by-case basis. The amount of collateral
obtained, if deemed necessary, upon extension of credit is based on management's
credit evaluation of the borrower. Collateral held varies but may
include cash or cash equivalents, negotiable instruments, real estate, accounts
receivable, inventory and property, plant, and equipment.
Lease
Commitments. We lease certain branch facilities and office equipment under
operating leases. It is expected that certain leases will be renewed
or equipment replaced with new leased equipment as these leases
expire.
Securities.
In the normal course of business we buy and sell securities. There
were $941,000 of unsettled trades to purchase and no unsettled trades to sell
securities at June 30, 2007. At December 31, 2006, there were no
unsettled trades to purchase or sell securities.
Litigation.
We are subject to litigation in the normal course of
business. Management, after consulting with our legal counsel,
believes that any liability resulting from litigation will not have a material
effect on our financial position and results of operations or our
liquidity.
ITEM
2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The
following is a
discussion of the consolidated financial condition, changes in financial
condition, and results of our operations, and should be read and reviewed in
conjunction with the financial statements, and the notes thereto, in this
presentation and in our Annual Report on Form 10-K for the year ended
December 31, 2006.
We
reported an
increase in net income for the three months and six months ended June 30, 2007
compared to the same periods in 2006. Net income for the three and
six months ended June 30, 2007 was $4.6 million and $8.4 million, respectively,
compared to $3.5 million and $6.8 million, respectively, for the same periods
in
2006.
All
share data has
been adjusted to give retroactive recognition to stock splits and stock
dividends.
Forward
Looking
Statements
Certain
statements
of other than historical fact that are contained in this document and in written
material, press releases and oral statements issued by or on behalf of Southside
Bancshares, Inc., a bank holding company, may be considered to be
“forward-looking statements” within the meaning of and subject to the
protections of the Private Securities Litigation Reform Act of
1995. These forward-looking statements are not guarantees of future
performance, nor should they be relied upon as representing management’s views
as of any subsequent date. These statements may include words such as
"expect," "estimate," "project," "anticipate," “appear,” "believe," "could,"
"should," "may," "intend," "probability," "risk," "target," "objective,"
“plans,” “potential,” and similar expressions. Forward-looking
statements are statements with respect to our beliefs, plans, expectations,
objectives, goals, anticipations, assumptions, estimates, intentions and future
performance, and are subject to significant known and unknown risks and
uncertainties, which could cause our actual results to differ materially from
the results discussed in the forward-looking statements. For example,
discussions of the effect of our expansion, trends in asset quality and earnings
from growth, and certain market risk disclosures are based upon information
presently available to management and are dependent on choices about key model
characteristics and assumptions and are subject to various
limitations. By their nature, certain of the market risk disclosures
are only estimates and could be materially different from what actually occurs
in the future. As a result, actual income gains and losses could
materially differ from those that have been estimated. Other factors
that could cause actual results to differ materially from forward-looking
statements include, but are not limited to, the following:
|
·
|
general
economic conditions,
either globally, nationally, in the State of Texas, or in the specific
markets
|
|
·
|
legislation,
regulatory changes or changes
in monetary or fiscal
policy that
adversely affect the businesses in which we are
engaged;
|
|
·
|
adverse
changes in the status
or financial
condition of
the Government
Sponsored Enterprises (the “GSEs”)
impacting the GSEs’
guarantees or ability to pay or
issue debt;
|
|
·
|
economic
or other disruptions
caused by acts of terrorism in the United States, Europe or other
areas;
|
|
·
|
changes
in the interest rate
yield curve such as flat, inverted or steep yield curves, or changes
in
the interest rate environment that
impact interest margins and may
impact prepayments on the mortgage-backed securities
portfolio;
|
|
·
|
unexpected
outcomes of existing
or new litigation involving us;
|
|
·
|
changes
impacting the leverage
strategy;
|
|
·
|
significant
increases in
competition in the banking and financial services
industry;
|
|
·
|
changes
in consumer spending,
borrowing and saving habits;
|
|
·
|
our
ability to increase market share
and control expenses;
|
|
·
|
the
effect of changes in federal
or state tax laws;
|
|
·
|
the
effect of compliance with
legislation or regulatory
changes;
|
|
·
|
the
effect of changes in
accounting policies and
practices;
|
|
·
|
the
costs and
effects of unanticipated
litigation;
|
|
·
|
risks
of
mergers and acquisitions including the related time and cost of
implementing transactions and the potential failure to achieve expected
gains, revenue growth or expense savings;
and
|
|
·
|
failure
of
assumptions underlying allowance for loan losses and other
estimates.
|
Additional
information concerning us and our business, including additional factors that
could materially affect our financial results, is included in our filings with
the Securities and Exchange Commission. All written or oral
forward-looking statements made by us or attributable to us are expressly
qualified by this cautionary notice. We disclaim any obligation to
update any factors or to announce publicly the result of revisions to any of
the
forward-looking statements included herein to reflect future events or
developments.
Critical
Accounting Estimates
Our
accounting and
reporting estimates conform with accounting principles generally accepted in
the
United States and general practices within the financial services
industry. The preparation of financial statements in conformity with
GAAP requires management to make estimates and assumptions that affect the
amounts reported in the financial statements and accompanying
notes. Actual results could differ from those
estimates. We consider our critical accounting policies to include
the following:
Allowance
for
Losses on Loans. The allowance for losses on loans represents
management’s best estimate of probable losses inherent in the existing loan
portfolio. The allowance for losses on loans is increased by the
provision for losses on loans charged to expense and reduced by loans
charged-off, net of recoveries. The provision for losses on loans is
determined based on our assessment of several factors: reviews and
evaluations of specific loans, changes in the nature and volume of the loan
portfolio, and current economic conditions and the related impact on specific
borrowers and industry groups, historical loan loss experience, the level of
classified and nonperforming loans and the results of regulatory
examinations.
The
loan loss
allowance is based on the most current review of the loan
portfolio. The servicing officer has the primary responsibility for
updating significant changes in a customer's financial position. Each
officer prepares status updates on any credit deemed to be experiencing
repayment difficulties which, in the officer's opinion, would place the
collection of principal or interest in doubt. Our internal loan
review department is responsible for an ongoing review of our loan portfolio
with specific goals set for the loans to be reviewed on an annual
basis.
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 or appraisals of the collateral
securing the debt are used to allocate 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. This list for loans or loan relationships of
$50,000 or more is updated on a periodic basis in order to properly allocate
necessary allowance and keep management informed on the status of attempts
to
correct the deficiencies noted with respect to the loan.
Loans
are
considered impaired if, based on current information and events, it is probable
that we will be unable to collect the scheduled payments of principal or
interest when due according to the contractual terms of the loan
agreement. The measurement of impaired loans is generally based on
the present value of expected future cash flows discounted at the historical
effective interest rate stipulated in the loan agreement, except that all
collateral-dependent loans are measured for impairment based on fair value
of
the collateral. In measuring the fair value of the collateral, we use
assumptions, such as discount rates, and methodologies, such as comparison
to
the recent selling price of similar assets, consistent with those that would
be
utilized by unrelated third parties performing a valuation.
Changes
in the
financial condition of individual borrowers, economic conditions, historical
loss experience and the conditions of the various markets in which collateral
may be sold may all affect the required level of the allowance for losses on
loans and the associated provision for loan losses.
As
of June 30,
2007, our review of the loan portfolio indicated that a loan loss allowance
of
$7.4 million was adequate to cover probable losses in the
portfolio.
Refer
to Part II,
“Item 7. Management’s Discussion and Analysis of Financial Condition and Results
of Operations - Loan Loss Experience and Allowance for Loan Losses” and “Note 1
– Summary of Significant Accounting and Reporting Policies” of the Notes to
Consolidated Financial Statements in our Annual Report on Form 10-K for the
year ended December 31, 2006 for a detailed description of our estimation
process and methodology related to the allowance for loan losses.
Estimation
of
Fair Value. The estimation of fair value is significant to a number of our
assets and liabilities. GAAP requires disclosure of the fair value of
financial instruments as a part of the notes to the consolidated financial
statements. Fair values are volatile and may be influenced by a
number of factors, including market interest rates, prepayment speeds, discount
rates and the shape of yield curves.
Fair
values for
most investment and mortgage-backed securities are based on quoted market
prices, where available. If quoted market prices are not available,
fair values are based on the quoted prices of similar
instruments. The fair value of fixed rate loans is estimated by
discounting the future cash flows using the current rates at which similar
loans
would be made to borrowers with similar credit ratings and for the same
remaining
maturities. Nonperforming
loans are estimated using discounted cash flow analyses or underlying value
of
the collateral where applicable. Fair values for fixed rate
certificates of deposits are estimated using a discounted cash flow calculation
that applies interest rates currently being offered for deposits of similar
remaining maturities. The fair value of Federal Home Loan Bank (“FHLB”) advances
is estimated by discounting the future cash flows using rates at which advances
would be made to borrowers with similar credit ratings and for the same
remaining maturities. The fair values of other real estate owned
(“OREO”) are typically determined based on appraisals by third parties, less
estimated costs to sell, and recorded at the lower of cost or fair
value.
Impairment
of
Investment Securities and Mortgage-backed Securities. Investment
and mortgage-backed securities classified as available for sale (“AFS”) are
carried at fair value and the impact of changes in fair value are recorded
on
our consolidated balance sheet as an unrealized gain or loss in “Accumulated
other comprehensive income (loss),” a separate component of shareholders’
equity. Securities classified as AFS or held to maturity (“HTM”) are
subject to our review to identify when a decline in value is other than
temporary. Factors considered in determining whether a decline in
value is other than temporary include: whether the decline is substantial;
the
duration of the decline; the reasons for the decline in value; whether the
decline is related to a credit event or to a change in interest rate; our
ability and intent to hold the investment for a period of time that will allow
for a recovery of value; and the financial condition and near-term prospects
of
the issuer. When it is determined that a decline in value is other
than temporary, the carrying value of the security is reduced to its estimated
fair value, with a corresponding charge to earnings.
Defined
Benefit
Pension Plan. The plan obligations and related assets of the defined
benefit pension plan (the “Plan”) are presented in “Note 12 – Employee Benefits”
of the Notes to Consolidated Financial Statements in our Annual Report on Form
10-K for the year ended December 31, 2006. Plan assets, which consist
primarily of marketable equity and debt instruments, are valued using market
quotations. Plan obligations and the annual pension expense are
determined by independent actuaries and through the use of a number of
assumptions. Key assumptions in measuring the plan obligations
include the discount rate, the rate of salary increases and the estimated future
return on plan assets. In determining the discount rate, we utilized
a cash flow matching analysis to determine a range of appropriate discount
rates
for our defined benefit pension and restoration plans. In developing
the cash flow matching analysis, we constructed a portfolio of high quality
non-callable bonds (rated AA- or better) to match as close as possible the
timing of future benefit payments of the plans at December 31,
2006. Based on this cash flow matching analysis, we were able to
determine an appropriate discount rate.
Salary
increase
assumptions are based upon historical experience and our anticipated future
actions. The expected long-term rate of return assumption reflects
the average return expected based on the investment strategies and asset
allocation on the assets invested to provide for the Plan’s
liabilities. We considered broad equity and bond indices, long-term
return projections, and actual long-term historical Plan performance when
evaluating the expected long-term rate of return assumption. At June
30, 2007, the weighted-average actuarial assumptions of the Plan were: a
discount rate of 6.05%; a long-term rate of return on plan assets of 7.50%;
and
assumed salary increases of 4.50%. Material changes in pension
benefit costs may occur in the future due to changes in these
assumptions. Future annual amounts could be impacted by changes in
the number of plan participants, changes in the level of benefits provided,
changes in the discount rates, changes in the expected long-term rate of return,
changes in the level of contributions to the Plan and other
factors.
Off-Balance-Sheet
Arrangements, Commitments and Contingencies
Details
of our
off-balance-sheet arrangements, commitments and contingencies as of June 30,
2007 and 2006, are included in “Note 9 – Off-Balance-Sheet Arrangements,
Commitments and Contingencies” in the accompanying Notes to Financial Statements
included in this report.
Leverage
Strategy
We
utilize
wholesale funding and securities to enhance our profitability and balance sheet
composition by determining acceptable levels of credit, interest rate and
liquidity risk consistent with prudent capital management. The
leverage strategy consists of borrowing a combination of long and short-term
funds from the FHLB and issuing brokered CDs. These funds are invested primarily
in mortgage-backed securities, and to a lesser extent, long-term municipal
securities. Although mortgage-backed securities often carry lower
yields than traditional mortgage loans and other types of loans we make, these
securities generally increase the overall quality of our assets because of
underlying insurance or guarantees, are more liquid than individual loans and
may be used to collateralize our borrowings or other
obligations. While the strategy of investing a substantial portion of
our assets in mortgage-backed and municipal securities has resulted in lower
interest rate spreads and margins, we believe that the lower operating expenses
and reduced credit risk combined with the managed interest rate risk of this
strategy have enhanced our overall profitability over the last several
years. At this time, we utilize the leverage strategy with the goal
of enhancing overall profitability by maximizing the use of our
capital.
Risks
associated
with the asset structure we maintain include a lower net interest rate spread
and margin when compared to our peers, changes in the slope of the yield curve,
which can reduce our net interest rate spread and margin, increased interest
rate risk, the length of interest rate cycles, and the unpredictable nature
of
mortgage-backed securities prepayments. See “Item 1A. Risk
Factors – Risks Related to our Business” in our Annual Report on Form 10-K for
the year ended December 31, 2006. During 2006, the interest rate
yield curve inverted. An inverted yield curve is defined as shorter
term interest rates at a higher level than longer term interest
rates. During the quarter ended June 30, 2007, longer term interest
rates increased faster than shorter term interest rates and at June 30, 2007,
the U. S. Treasury yield curve was no longer inverted. Should the
yield curve invert again, our net interest margin and spread could
decrease. Our asset structure, net interest spread and net interest
margin require an increase in the need to monitor our interest rate
risk. An additional risk is the change in market value of the AFS
securities portfolio as a result of changes in interest
rates. Significant increases in interest rates, especially long-term
interest rates, could adversely impact the market value of the AFS securities
portfolio which could also significantly impact our equity
capital. Due to the unpredictable nature of mortgage-backed
securities prepayments, the length of interest rate cycles, and the slope of
the
interest rate yield curve, net interest income could fluctuate more than
simulated under the scenarios modeled by our Asset/Liability Committee (“ALCO”)
and described under “Item 3. Quantitative and Qualitative Disclosures
about Market Risk” in this report.
The
management of
the securities portfolio as a percent of earning assets is guided by changes
in
our overall loan and deposit levels combined with changes in our wholesale
funding levels. If adequate quality loan growth is not available to
achieve our goal of enhancing profitability by maximizing the use of capital,
as
described above, then we could purchase additional securities, if appropriate,
which could cause securities as a percentage of earning assets to
increase. Should we determine that increasing the securities
portfolio or replacing the current securities maturities and principal payments
is not an efficient use of capital, we could adjust the level of securities
through proceeds from maturities, principal payments on mortgage-backed
securities or sales. During the quarter ended June 30, 2007, our loan
growth was less than desired but due to the yield curve, we determined a slight
decrease in the securities portfolio as a percentage of total assets was
appropriate. At June 30, 2007, the securities portfolio as a
percentage of total assets decreased to 50.1% from 50.7% at March 31, 2007
and
52.7% at December 31, 2006. The current interest rate environment is
more investment friendly and changes to the securities portfolio as a
percent of earning assets will be guided by changes in our loan and deposit
levels during the third quarter of 2007. During the first six
months of 2007, we reduced our investment and mortgage-backed securities
approximately $70.5 million as investment and mortgage-backed securities
excluding the net unrealized loss on available for sale securities decreased
from $976.3 million at December 31, 2006 to $905.8 million at June 30,
2007. Our strategy will be reevaluated as market conditions warrant.
The leverage strategy is dynamic and requires ongoing management. As
interest rates, yield curves, mortgage-backed securities prepayments, funding
costs and security spreads change, our determination of the proper types and
maturities of securities to own, proper amount of securities to own and funding
needs and funding sources will continue to be reevaluated.
With
respect to
liabilities, we will continue to utilize a combination of FHLB advances and
deposits to achieve our strategy of minimizing cost while achieving overall
interest rate risk objectives as well as the liability management objectives
of
the ALCO. The FHLB funding and the brokered CDs represent wholesale
funding sources. Our FHLB borrowings at June 30, 2007 decreased
27.1%, or $122.4 million, to $329.2 million from $451.6 million at December
31,
2006 as a result of the decrease in the securities portfolio and an increase
in
deposits in excess of loan growth. During the second quarter ended
June 30, 2007, FHLB borrowings decreased $24.5 million due to an increase in
deposits in excess of loan growth. During the quarter and six months
ended June 30, 2007, we did not issue any additional callable brokered
CDs. At June 30, 2007, our callable brokered CDs totaled $123.4
million. These brokered CDs have maturities from approximately 1 to
4.5 years and have calls that we control, all of which are currently six months
or less. During the last twelve months we utilized long-term
brokered CDs to a greater extent than long-term FHLB funding because the
brokered CDs better matched overall ALCO objectives by protecting Southside
Bank
with fixed rates should interest rates increase, while providing Southside
Bank options to call the funding should interest rates decrease. Our
wholesale funding policy currently allows maximum brokered CDs of $150 million;
however, this amount could be increased to match changes in ALCO
objectives. The potential higher interest expense and lack of
customer loyalty are risks associated with the use of brokered
CDs. Due to the non-brokered deposit growth and the decrease in FHLB
borrowings during the quarter and six months ended June 30, 2007, our total
wholesale funding as a percentage of deposits, not including brokered CDs,
decreased to 37.3% at June 30, 2007, from 40.2% at March 31, 2007, and 49.6%
at
December 31, 2006, reflective of our strategy to deleverage during these
periods.
Net
Interest
Income
Net
interest income
is the difference between interest income earned on assets (loans and
investments) and interest expense due on our funding sources (deposits and
borrowings) during a particular period.
Net
interest income
for the six months ended June 30, 2007 was $20.1 million, a decrease of $1.0
million, or 4.8%, when compared to the same period in 2006. Average
interest earning assets increased $9.9 million, or 0.6%, to $1.73 billion,
while
the net interest spread decreased from 1.99% for the six months ended June
30,
2006 to 1.68% for the same period in 2007 and the net interest margin decreased
from 2.67% for the six months ended June 30, 2006 to 2.52% for the same period
in 2007. Net interest income decreased as a result of decreases in
our net interest spread and net interest margin during the six months of
2007 when compared to the same period in 2006, which more than offset the
increase in our average interest earning assets.
For
the three
months ended June 30, 2007, when compared to the same period in 2006, net
interest income decreased $476,000, or 4.5%, to $10.1 million, primarily as
a
result of a decrease in our net interest margin and spread and a decrease in
our
average earning assets. For the three months ended June 30, 2007,
when compared to the same period in 2006, average interest earning assets
decreased $51.3 million, or 2.9%, to $1.69 billion, and the net interest margin
and net interest spread decreased to 2.57% and 1.71%, respectively, from 2.61%
and 1.90%, respectively. The decrease in our net interest margin and
net interest spread was due primarily to the increase in short-term funding
costs during the three months ended June 30, 2007 when compared to the same
period in 2006. Future changes in interest rates or the yield curve
could influence our net interest margin and net interest spread during future
quarters. Future changes in interest rates could also impact
prepayment speeds on our mortgage-backed securities, which could influence
our
net interest margin and net interest spread during future quarters.
During
the six
months ended June 30, 2007, average loans, funded by the growth in average
deposits, increased $62.3 million, or 8.8%, to $767.2 million, compared to
$704.8 million for the same period in 2006. The average yield on
loans increased from 6.57% for the six months ended June 30, 2006 to 6.90%
for
the six months ended June 30, 2007. For the three months ended June
30, 2007, average loans increased $53.3 million, or 7.5%, to $768.7 million,
compared to $715.4 million for the same period in 2006. The average
yield on loans increased from 6.62% for the three months ended June 30, 2006
to
6.91% for the three months ended June 30, 2007. The increase in
interest income on loans of $3.3 million, or 15.0%, to $25.2 million for the
six
months ended June 30, 2007, when compared to $22.0 million for the same period
in 2006, and the increase in interest income on loans of $1.4 million, or 12.4%,
to $12.7 million for the three months ended June 30, 2007, when compared to
$11.3 million for the same period in 2006 was the result of an increase in
average loans and the average yield. The rate at which loan yields
are increasing has been partially impacted by repricing characteristics of
the
loans, interest rates at the time the loans repriced, and the competitive loan
pricing environment. Due to the competitive loan pricing environment,
we anticipate that we may be required to continue to offer lower interest rate
loans that compete with those offered by other financial institutions in order
to retain quality loan relationships. Offering lower interest rate
loans could impact the overall loan yield and, therefore
profitability.
Average
investment
and mortgage-backed securities decreased $45.5 million, or 4.6%, to $933.4
million, for the six months ended June 30, 2007, when compared to $978.9 million
for the same period in 2006. This decrease was the result of
implementing a strategy designed to reduce our overall leverage. The
overall yield on average investment and mortgage-backed securities increased
to
5.18% during the six months ended June 30, 2007, from 5.01% during the same
period in 2006. Interest income on investment and mortgage-backed
securities for the six months ended June 30, 2007 decreased $251,000, or
1.1%, to $23.6 million compared to $23.8 million for the same period in
2006. For the three months ended June 30, 2007, average investment
and mortgage-backed securities decreased $94.7 million, or 9.6%, to $895.4
million, when compared to $990.0 million for the same period in 2006, which
is
also reflective of the strategy to reduce our balance sheet leverage during
that
time. The overall yield on average investment and mortgage-backed
securities increased to 5.15% during the three months ended June 30, 2007,
from
5.05% during the same period in 2006. Interest income from investment
and mortgage-backed securities decreased $949,000, or 7.8%, to $11.3 million
for
the three months ended June 30, 2007, compared to $12.2 million for the same
period in 2006. The decrease in interest income for the three and six
month periods ending June 30, 2007 was due to the decrease in the average
balance which more than offset the increase in the average yield. The
increase in the average yield primarily reflects decreased prepayment rates
on
mortgage-backed securities, which led to decreased amortization expense,
combined with reinvestment of proceeds from lower-yielding matured securities
into higher yielding securities due to the overall higher interest rate
environment. The overall higher interest rate environment during 2007
when compared to 2006 contributed to a decrease in residential mortgage
refinancing nationwide and in our market area. The decrease in
prepayments on mortgage loans combined with a previous restructuring of the
securities portfolio reduced overall amortization expense which contributed to
the increase in interest income. A return to lower long-term interest
rate levels similar to that experienced in May and June of 2003 could impact
our
net interest margin in the future due to increased prepayments and
repricing.
Average
FHLB stock
and other investments decreased $7.5 million, or 25.9%, to $21.5 million, for
the six months ended June 30, 2007 when compared to $29.1 million for the same
period in 2006 due to the decrease in FHLB Dallas advances. The
average yield of FHLB stock and other investments increased to 6.56% for the
six
months ended June 30, 2007, when compared to 4.82% for the same period in 2006
due to the higher average short-term interest rates. Interest income
from our FHLB stock and other investments increased $6,000, or 0.9%, to $700,000
for the six months ended June 30, 2007, when compared to $694,000 for the same
period in 2006 due to increases in the average yield which more than offset
the decrease in average balance. For the three months ended June 30,
2007, average FHLB stock and other investments decreased $10.7 million, or
37.6%, to $17.8 million, when compared to $28.5 million for the same period
in
2006. For the three months ended June 30, 2007, interest income from
FHLB stock and other investments decreased $20,000, or 5.7%, to $330,000, when
compared to $350,000 for the same period in 2006 as a result of the decrease
in
the average balance which more than offset the increase in the average yield
from 4.92% in 2006 to 7.45% in 2007.
Average
federal
funds sold and other interest earning assets increased $1.3 million, or 94.4%,
to $2.7 million, for the six months ended June 30, 2007, when compared to $1.4
million for the same period in 2006. Interest income from federal
funds sold and other interest earning assets increased $37,000, or 115.6%,
for
the six months ended June 30, 2007, when compared to the same period in 2006,
as
a result of the increase in the average balance and yield from 4.66% in 2006
to
5.17% in 2007, which was due to the higher average short-term interest
rates. Average federal funds sold and other interest earning assets
increased $1.1 million, or 82.4%, to $2.5 million, for the three months ended
June 30, 2007, when compared to $1.4 million for the same period in
2006. Interest income from federal funds sold and other interest
earning assets increased $19,000, or 135.7%, for the three months ended June
30,
2007, when compared to the same period in 2006, as a result of the increase
in
the average balance and the average yield from 4.10% in 2006 to 5.31% in
2007.
Total
interest
expense increased $4.1 million, or 16.2%, to $29.5 million during the six months
ended June 30, 2007 as compared to $25.4 million during the same period in
2006. The increase was primarily attributable to an increase in the
average yield on interest bearing liabilities from 3.65% for the six months
ended June 30, 2006 to 4.28% for the six months ended June 30,
2007. Average interest bearing liabilities decreased $11.3 million,
or 0.8%, for the six months ended June 30, 2007 as compared to the same period
in 2006. For the three months ended June 30, 2007, total interest
expense increased $931,000, or 7.0%, to $14.3 million, compared to $13.4 million
for the same period in 2006 primarily as a result of an increase in the average
yield on interest bearing liabilities. Average interest bearing
liabilities decreased $73.4 million, or 5.2%, while the average yield on
interest bearing liabilities increased from 3.79% for the three month period
ended June 30, 2006 to 4.27% for the three month period ended June 30,
2007.
Average
interest
bearing deposits increased $143.3 million, or 17.0%, to $985.1 million during
the six months ended June 30, 2007, when compared to $841.9 million for the
same
period in 2006, and the average rate paid increased from 3.27% for the six
month
period ended June 30, 2006 to 4.01% for the same period in 2007. For
the three months ended June 30, 2007, average interest bearing deposits
increased $131.0 million, or 15.1%, when compared to the same period in 2006
and
the average rate paid increased from 3.43% for the three month period
ended June 30, 2006 to 4.03% for the three month period ended June 30,
2007. The largest increase in average interest bearing deposits
resulted from the issuance of callable brokered CDs. The remaining
increase in our average total deposits is the result of overall bank growth
and
branch expansion. Interest expense for interest bearing deposits for
the three and six months ended June 30, 2007 increased $2.6 million, or 35.4%,
and $5.9 million, or 43.4%, when compared to the same periods in 2006 due to
the
increase in the average balance and yield.
Average
short-term
interest bearing liabilities, consisting primarily of FHLB advances and federal
funds purchased, decreased $88.3 million, or 23.9%, to $280.7 million for the
six months ended June 30, 2007, when compared to $369.0 million for the same
period in 2006. Interest expense associated with short-term interest
bearing liabilities decreased $865,000, or 11.4%, and the average rate paid
increased 68 basis points to 4.83% for the six month period ended June 30,
2007
when compared to 4.15% for the same period in 2006. For the three
months ended June 30, 2007, average short-term interest bearing liabilities
decreased $146.7 million, or 38.8%, when compared to the same period in
2006. Interest expense associated with short-term interest bearing
liabilities decreased $1.3 million, or 31.2%, while the average rate paid
increased 52 basis points to 4.80% for the three month period ended June 30,
2007 when compared to 4.28% for the same period in 2006. The decrease
in the interest expense for the three and six month periods ended June 30,
2007
when compared to 2006 was due to the decrease in the average balance for
short-term interest bearing liabilities which more than offset the increase
in
the average yield.
Average
long-term
interest bearing liabilities consisting of FHLB advances decreased $66.2
million, or 39.0%, during the six months ended June 30, 2007 to $103.5 million
as compared to $169.7 million for the six month period ending June 30,
2006. The decrease in the average long-term FHLB advances
occurred primarily as a result of long-term FHLB advances moving into the
short-term FHLB advances category combined with the increase in the use of
brokered CDs to better match ALCO objectives. Interest expense
associated with long-term FHLB advances decreased $1.0 million, or 30.7%, while
the average rate paid increased 55 basis points to 4.52% for the six months
ended June 30, 2007 when compared to 3.97% for the same period in
2006. For the three months ended June 30, 2007, long-term interest
bearing liabilities decreased $57.7 million, or 38.0%, when compared to the
same
period in 2006. Interest expense associated with long-term FHLB
advances decreased $448,000, or 29.2%, and the average rate paid increased
58
basis points to 4.63% for the three month period ended June 30, 2007 when
compared to 4.05% for the same period in 2006. The decrease in
interest expense was due to the decrease in the average balance of long-term
interest bearing liabilities more than offsetting the increase in the average
rate paid. FHLB advances are collateralized by FHLB stock, securities
and nonspecific real estate loans.
Average
long-term
debt, consisting entirely of our junior subordinated debentures issued in 2003
in connection with the issuance of trust preferred securities by our subsidiary
Southside Statutory Trust III, was $20.6 million for the three and six
months ended June 30, 2007 and 2006. Interest expense increased
$62,000, or 7.8%, to $860,000 for the six months ended June 30, 2007 when
compared to $798,000 for the same period in 2006 as a result of the increase
in
three-month LIBOR due to higher short-term interest rates during 2007 when
compared to 2006. Interest expense increased $19,000, or 4.6%, to
$432,000 for the three months ended June 30, 2007 when compared to $413,000
for
the same period in 2006. The long-term debt adjusts quarterly at a
rate equal to three-month LIBOR plus 294 basis points.
RESULTS
OF
OPERATIONS
The
analysis below
shows average interest earning assets and interest bearing liabilities together
with the average yield on the interest earning assets and the average cost
of
the interest bearing liabilities.
|
|
AVERAGE
BALANCES AND YIELDS
|
|
|
|
(dollars
in
thousands)
|
|
|
|
(unaudited)
|
|
|
|
Six
Months
Ended
|
|
|
|
June
30,
2007
|
|
|
June
30,
2006
|
|
|
|
AVG
BALANCE
|
|
|
INTEREST
|
|
|
AVG
YIELD
|
|
|
AVG
BALANCE
|
|
|
INTEREST
|
|
|
AVG
YIELD
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INTEREST
EARNING ASSETS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans(1)
(2)
|
|
$ |
767,168
|
|
|
$ |
26,259
|
|
|
|
6.90 |
% |
|
$ |
704,827
|
|
|
$ |
22,952
|
|
|
|
6.57 |
% |
Loans
Held
For Sale
|
|
|
3,884
|
|
|
|
96
|
|
|
|
4.98 |
% |
|
|
4,645
|
|
|
|
117
|
|
|
|
5.08 |
% |
Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
Securities (Taxable)(4)
|
|
|
59,374
|
|
|
|
1,452
|
|
|
|
4.93 |
% |
|
|
59,593
|
|
|
|
1,337
|
|
|
|
4.52 |
% |
Investment
Securities (Tax-Exempt)(3)(4)
|
|
|
40,893
|
|
|
|
1,449
|
|
|
|
7.15 |
% |
|
|
44,994
|
|
|
|
1,591
|
|
|
|
7.13 |
% |
Mortgage-backed
and
Related
Securities (4)
|
|
|
833,161
|
|
|
|
21,097
|
|
|
|
5.11 |
% |
|
|
874,318
|
|
|
|
21,386
|
|
|
|
4.93 |
% |
Total
Securities
|
|
|
933,428
|
|
|
|
23,998
|
|
|
|
5.18 |
% |
|
|
978,905
|
|
|
|
24,314
|
|
|
|
5.01 |
% |
Federal
Home
Loan Bank stock and other investments, at cost
|
|
|
21,517
|
|
|
|
700
|
|
|
|
6.56 |
% |
|
|
29,056
|
|
|
|
694
|
|
|
|
4.82 |
% |
Interest
Earning Deposits
|
|
|
551
|
|
|
|
17
|
|
|
|
6.22 |
% |
|
|
691
|
|
|
|
17
|
|
|
|
4.96 |
% |
Federal
Funds
Sold
|
|
|
2,140
|
|
|
|
52
|
|
|
|
4.90 |
% |
|
|
693
|
|
|
|
15
|
|
|
|
4.36 |
% |
Total
Interest Earning Assets
|
|
|
1,728,688
|
|
|
|
51,122
|
|
|
|
5.96 |
% |
|
|
1,718,817
|
|
|
|
48,109
|
|
|
|
5.64 |
% |
NONINTEREST
EARNING ASSETS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and Due
From Banks
|
|
|
42,669
|
|
|
|
|
|
|
|
|
|
|
|
45,926
|
|
|
|
|
|
|
|
|
|
Bank
Premises
and Equipment
|
|
|
33,952
|
|
|
|
|
|
|
|
|
|
|
|
33,534
|
|
|
|
|
|
|
|
|
|
Other
Assets
|
|
|
43,359
|
|
|
|
|
|
|
|
|
|
|
|
41,854
|
|
|
|
|
|
|
|
|
|
Less: Allowance
for Loan Loss
|
|
|
(7,298 |
) |
|
|
|
|
|
|
|
|
|
|
(7,139 |
) |
|
|
|
|
|
|
|
|
Total
Assets
|
|
$ |
1,841,370
|
|
|
|
|
|
|
|
|
|
|
$ |
1,832,992
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND SHAREHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INTEREST
BEARING LIABILITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings
Deposits
|
|
$ |
51,815
|
|
|
|
334
|
|
|
|
1.30 |
% |
|
$ |
50,663
|
|
|
|
312
|
|
|
|
1.24 |
% |
Time
Deposits
|
|
|
540,684
|
|
|
|
13,072
|
|
|
|
4.88 |
% |
|
|
433,362
|
|
|
|
8,827
|
|
|
|
4.11 |
% |
Interest
Bearing Demand Deposits
|
|
|
392,614
|
|
|
|
6,184
|
|
|
|
3.18 |
% |
|
|
357,837
|
|
|
|
4,519
|
|
|
|
2.55 |
% |
Total
Interest Bearing Deposits
|
|
|
985,113
|
|
|
|
19,590
|
|
|
|
4.01 |
% |
|
|
841,862
|
|
|
|
13,658
|
|
|
|
3.27 |
% |
Short-term
Interest Bearing Liabilities
|
|
|
280,657
|
|
|
|
6,722
|
|
|
|
4.83 |
% |
|
|
368,963
|
|
|
|
7,587
|
|
|
|
4.15 |
% |
Long-term
Interest Bearing Liabilities – FHLB Dallas
|
|
|
103,515
|
|
|
|
2,318
|
|
|
|
4.52 |
% |
|
|
169,749
|
|
|
|
3,345
|
|
|
|
3.97 |
% |
Long-term
Debt (5)
|
|
|
20,619
|
|
|
|
860
|
|
|
|
8.30 |
% |
|
|
20,619
|
|
|
|
798
|
|
|
|
7.70 |
% |
Total
Interest Bearing Liabilities
|
|
|
1,389,904
|
|
|
|
29,490
|
|
|
|
4.28 |
% |
|
|
1,401,193
|
|
|
|
25,388
|
|
|
|
3.65 |
% |
NONINTEREST
BEARING LIABILITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand
Deposits
|
|
|
318,189
|
|
|
|
|
|
|
|
|
|
|
|
311,844
|
|
|
|
|
|
|
|
|
|
Other
Liabilities
|
|
|
18,692
|
|
|
|
|
|
|
|
|
|
|
|
11,014
|
|
|
|
|
|
|
|
|
|
Total
Liabilities
|
|
|
1,726,785
|
|
|
|
|
|
|
|
|
|
|
|
1,724,051
|
|
|
|
|
|
|
|
|
|
SHAREHOLDERS’
EQUITY
|
|
|
114,585
|
|
|
|
|
|
|
|
|
|
|
|
108,941
|
|
|
|
|
|
|
|
|
|
Total
Liabilities and Shareholders’ Equity
|
|
$ |
1,841,370
|
|
|
|
|
|
|
|
|
|
|
$ |
1,832,992
|
|
|
|
|
|
|
|
|
|
NET
INTEREST
INCOME
|
|
|
|
|
|
$ |
21,632
|
|
|
|
|
|
|
|
|
|
|
$ |
22,721
|
|
|
|
|
|
NET
YIELD ON
AVERAGE EARNING ASSETS
|
|
|
|
|
|
|
|
|
|
|
2.52 |
% |
|
|
|
|
|
|
|
|
|
|
2.67 |
% |
NET
INTEREST
SPREAD
|
|
|
|
|
|
|
|
|
|
|
1.68 |
% |
|
|
|
|
|
|
|
|
|
|
1.99 |
% |
(1) Interest
on loans includes fees on loans that are not material in amount.
(2) Interest
income includes taxable-equivalent adjustments of $1,108 and $1,113 for the
six
months ended June 30, 2007 and 2006, respectively.
(3) Interest
income includes taxable-equivalent adjustments of $437 and $502 for the six
months ended June 30, 2007 and 2006, respectively.
(4) For
the purpose of calculating the average yield, the average balance of securities
is presented at historical cost.
(5) Represents
junior subordinated debentures issued by Southside Bancshares, Inc. to Southside
Statutory Trust III in connection with the
issuance
by Southside Statutory Trust III of $20 million of trust preferred
securities.
|
Note:
As of
June 30, 2007 and 2006, loans totaling $1,637 and $1,424, respectively,
were on nonaccrual status. The policy is to reverse previously
accrued but unpaid interest on nonaccrual loans; thereafter, interest
income is recorded to the extent received when
appropriate.
|
|
|
AVERAGE
BALANCES AND YIELDS
|
|
|
|
(dollars
in
thousands)
|
|
|
|
(unaudited)
|
|
|
|
Three
Months
Ended
|
|
|
|
June
30,
2007
|
|
|
June
30,
2006
|
|
|
|
AVG
BALANCE
|
|
|
INTEREST
|
|
|
AVG
YIELD
|
|
|
AVG
BALANCE
|
|
|
INTEREST
|
|
|
AVG
YIELD
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INTEREST
EARNING ASSETS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans(1)
(2)
|
|
$ |
768,744
|
|
|
$ |
13,238
|
|
|
|
6.91 |
% |
|
$ |
715,423
|
|
|
$ |
11,816
|
|
|
|
6.62 |
% |
Loans
Held
For Sale
|
|
|
4,458
|
|
|
|
55
|
|
|
|
4.95 |
% |
|
|
4,826
|
|
|
|
64
|
|
|
|
5.32 |
% |
Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
Securities (Taxable)(4)
|
|
|
50,584
|
|
|
|
616
|
|
|
|
4.88 |
% |
|
|
51,840
|
|
|
|
594
|
|
|
|
4.60 |
% |
Investment
Securities (Tax-Exempt)(3)(4)
|
|
|
40,747
|
|
|
|
726
|
|
|
|
7.15 |
% |
|
|
40,557
|
|
|
|
720
|
|
|
|
7.12 |
% |
Mortgage-backed
and
Related
Securities (4)
|
|
|
804,026
|
|
|
|
10,163
|
|
|
|
5.07 |
% |
|
|
897,645
|
|
|
|
11,149
|
|
|
|
4.98 |
% |
Total
Securities
|
|
|
895,357
|
|
|
|
11,505
|
|
|
|
5.15 |
% |
|
|
990,042
|
|
|
|
12,463
|
|
|
|
5.05 |
% |
Federal
Home
Loan Bank stock and other investments, at cost
|
|
|
17,778
|
|
|
|
330
|
|
|
|
7.45 |
% |
|
|
28,507
|
|
|
|
350
|
|
|
|
4.92 |
% |
Interest
Earning Deposits
|
|
|
550
|
|
|
|
10
|
|
|
|
7.29 |
% |
|
|
825
|
|
|
|
8
|
|
|
|
3.89 |
% |
Federal
Funds
Sold
|
|
|
1,945
|
|
|
|
23
|
|
|
|
4.74 |
% |
|
|
543
|
|
|
|
6
|
|
|
|
4.43 |
% |
Total
Interest Earning Assets
|
|
|
1,688,832
|
|
|
|
25,161
|
|
|
|
5.98 |
% |
|
|
1,740,166
|
|
|
|
24,707
|
|
|
|
5.69 |
% |
NONINTEREST
EARNING ASSETS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and Due
From Banks
|
|
|
40,259
|
|
|
|
|
|
|
|
|
|
|
|
43,345
|
|
|
|
|
|
|
|
|
|
Bank
Premises
and Equipment
|
|
|
35,342
|
|
|
|
|
|
|
|
|
|
|
|
33,549
|
|
|
|
|
|
|
|
|
|
Other
Assets
|
|
|
42,910
|
|
|
|
|
|
|
|
|
|
|
|
39,442
|
|
|
|
|
|
|
|
|
|
Less: Allowance
for Loan Loss
|
|
|
(7,360 |
) |
|
|
|
|
|
|
|
|
|
|
(7,200 |
) |
|
|
|
|
|
|
|
|
Total
Assets
|
|
$ |
1,799,983
|
|
|
|
|
|
|
|
|
|
|
$ |
1,849,302
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND SHAREHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INTEREST
BEARING LIABILITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings
Deposits
|
|
$ |
52,454
|
|
|
|
170
|
|
|
|
1.30 |
% |
|
$ |
51,402
|
|
|
|
165
|
|
|
|
1.29 |
% |
Time
Deposits
|
|
|
548,969
|
|
|
|
6,711
|
|
|
|
4.90 |
% |
|
|
460,139
|
|
|
|
4,897
|
|
|
|
4.27 |
% |
Interest
Bearing Demand Deposits
|
|
|
395,653
|
|
|
|
3,144
|
|
|
|
3.19 |
% |
|
|
354,549
|
|
|
|
2,342
|
|
|
|
2.65 |
% |
Total
Interest Bearing Deposits
|
|
|
997,076
|
|
|
|
10,025
|
|
|
|
4.03 |
% |
|
|
866,090
|
|
|
|
7,404
|
|
|
|
3.43 |
% |
Short-term
Interest Bearing Liabilities
|
|
|
231,818
|
|
|
|
2,776
|
|
|
|
4.80 |
% |
|
|
378,536
|
|
|
|
4,037
|
|
|
|
4.28 |
% |
Long-term
Interest Bearing Liabilities – FHLB Dallas
|
|
|
94,082
|
|
|
|
1,086
|
|
|
|
4.63 |
% |
|
|
151,794
|
|
|
|
1,534
|
|
|
|
4.05 |
% |
Long-term
Debt (5)
|
|
|
20,619
|
|
|
|
432
|
|
|
|
8.29 |
% |
|
|
20,619
|
|
|
|
413
|
|
|
|
7.92 |
% |
Total
Interest Bearing Liabilities
|
|
|
1,343,595
|
|
|
|
14,319
|
|
|
|
4.27 |
% |
|
|
1,417,039
|
|
|
|
13,388
|
|
|
|
3.79 |
% |
NONINTEREST
BEARING LIABILITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand
Deposits
|
|
|
320,966
|
|
|
|
|
|
|
|
|
|
|
|
313,422
|
|
|
|
|
|
|
|
|
|
Other
Liabilities
|
|
|
18,927
|
|
|
|
|
|
|
|
|
|
|
|
11,958
|
|
|
|
|
|
|
|
|
|
Total
Liabilities
|
|
|
1,683,488
|
|
|
|
|
|
|
|
|
|
|
|
1,742,419
|
|
|
|
|
|
|
|
|
|
SHAREHOLDERS’
EQUITY
|
|
|
116,495
|
|
|
|
|
|
|
|
|
|
|
|
106,883
|
|
|
|
|
|
|
|
|
|
Total
Liabilities and Shareholders’ Equity
|
|
$ |
1,799,983
|
|
|
|
|
|
|
|
|
|
|
$ |
1,849,302
|
|
|
|
|
|
|
|
|
|
NET
INTEREST
INCOME
|
|
|
|
|
|
$ |
10,842
|
|
|
|
|
|
|
|
|
|
|
$ |
11,319
|
|
|
|
|
|
NET
YIELD ON
AVERAGE EARNING ASSETS
|
|
|
|
|
|
|
|
|
|
|
2.57 |
% |
|
|
|
|
|
|
|
|
|
|
2.61 |
% |
NET
INTEREST
SPREAD
|
|
|
|
|
|
|
|
|
|
|
1.71 |
% |
|
|
|
|
|
|
|
|
|
|
1.90 |
% |
(1) Interest
on loans includes fees on loans that are not material in amount.
(2) Interest
income includes taxable-equivalent adjustments of $560 and $552 for the three
months ended June 30, 2007 and 2006, respectively.
(3) Interest
income includes taxable-equivalent adjustments of $221 and $230 for the three
months ended June 30, 2007 and 2006, respectively.
(4) For
the purpose of calculating the average yield, the average balance of securities
is presented at historical cost.
(5) Represents
junior subordinated debentures issued by Southside Bancshares, Inc. to Southside
Statutory Trust III in connection with the
issuance
by Southside Statutory Trust III of $20 million of trust preferred
securities.
|
Note:
As of
June 30, 2007 and 2006, loans totaling $1,637 and $1,424, respectively,
were on nonaccrual status. The policy is to reverse previously
accrued but unpaid interest on nonaccrual loans; thereafter, interest
income is recorded to the extent received when
appropriate.
|
We
earn noninterest
income from a variety of sources which include deposit related fees such as
ATM,
overdraft, and check processing fees. In addition, we earn income
from the sale of loans and securities, trust services, bank owned life insurance
(“BOLI”), brokerage services, and other fee generating programs that we either
provide or participate in.
Noninterest
income
was $12.8 million for the six months ended June 30, 2007 compared to $11.1
million for the same period in 2006, an increase of $1.7 million, or
15.7%. For the three months ended June 30, 2007, noninterest income
was $6.7 million, compared to $6.0 million for the same period in 2006, an
increase of $695,000, or 11.6%. During the six months ended June 30,
2007, we had gains on the sale of AFS securities of $435,000 compared to
gains of $224,000 for the same period in 2006. Gains on the sale of
AFS securities for the three months ended June 30, 2007 were $6,000 compared
to
$101,000 for the same period in 2006. The market value of the AFS
securities portfolio at June 30, 2007 was $687.9 million with a net unrealized
loss on that date of $9.3 million. The net unrealized loss is
comprised of $11.6 million in unrealized losses and $2.3 million in unrealized
gains. The market value of the HTM securities portfolio at June 30,
2007 was $204.6 million with a net unrealized loss on that date of $4.0
million. The net unrealized loss is comprised of $4.1 million in
unrealized losses and $58,000 in unrealized gains. During the six
months ended June 30, 2007 we sold securities out of our AFS portfolio as a
result of the inverted yield curve, low volatility and tight credit spreads
with
the primary objective of decreasing the overall securities
portfolio.
Deposit
services
income increased $323,000, or 8.2%, and $782,000, or 10.5%, for the three and
six months ended June 30, 2007, respectively, when compared to the same periods
in 2006, primarily as a result of increases in overdraft income, increased
numbers of deposit accounts and an increase in debit card income.
Trust
income
increased $173,000, or 42.9%, and $233,000, or 28.9%, for the three and six
months ended June 30, 2007, respectively, when compared to the same periods
in
2006 due to growth experienced in our trust department.
Gain
on sale of
loans increased $255,000, or 54.4%, and $227,000, or 27.0%, for the three and
six months ended June 30, 2007, respectively, when compared to the same periods
in 2006. The increase was due to an increase in premiums on student
loans sold when compared to the same period in 2006.
Other
noninterest
income increased $36,000, or 4.6%, and $259,000, or 20.4%, for the three and
six
months ended June 30, 2007, respectively, when compared to the same periods
in
2006. The increases for the three and six month periods ended June
30, 2007 were primarily a result of increases in brokerage services income,
credit card fee income, and Mastercard income which was offset by decreases
in
other recoveries, including a recovery of a loss from 2005 on a check of
$150,000 received during the second quarter of 2006.
Noninterest
Expense
We
incur numerous
types of noninterest expenses associated with the operation of our various
business activities, the largest of which are salaries and employee
benefits. In addition, we incur numerous other expenses, the largest
of which are detailed in the consolidated statements of income.
Noninterest
expense
was $11.5 million and $22.7 million for the three and six months ended June
30,
2007, respectively, compared to $11.6 million and $23.0 million for the same
periods in 2006, respectively, representing decreases of $107,000, or 0.9%,
and
$305,000, or 1.3%, respectively.
Salaries
and
employee benefits expense decreased $12,000, or 0.2%, and $328,000, or 2.2%,
during the three and six months ended June 30, 2007, respectively, when compared
to the same periods in 2006. Direct salary expense and payroll taxes
decreased $83,000, or 1.4%, and $198,000, or 1.6%, for the three and six months
ended June 30, 2007, respectively, when compared to the same periods in
2006. These decreases were the result of department managers
completing an evaluation of work flow in their respective departments during
the
third quarter of 2006, with the primary objective of identifying any
opportunities to increase productivity primarily through the use of technology
investments with less personnel expense. In certain departments the
evaluations identified the ability to utilize part-time employees to better
staff for peak customer transaction times in lieu of full-time
employees. In addition, management is utilizing productivity gains to
not fill certain vacancies created by normal attrition. The
combination of these initiatives resulted in salary and employee benefit expense
savings and improved productivity gains.
Retirement
expense,
included in salary and benefits, decreased $166,000, or 26.5%, and $303,000,
or
24.2%, for the three and six months ended June 30, 2007, respectively, when
compared to the same periods in 2006, primarily as a result of the amendments
to
the Plan and the changes in the actuarial assumptions used to determine net
periodic pension costs for 2007 when compared to 2006. Specifically,
the assumed long-term rate of return was reduced to 7.50% and the assumed
discount rate was increased to 6.05%. We will continue to evaluate
the assumed long-term rate of return and the discount rate to determine if
either should be changed in the future. If either of these
assumptions were decreased, the cost and funding required for the retirement
plan could increase.
Health
and life
insurance expense, included in salary and benefits, increased $238,000, or
38.2%, and $174,000, or 13.8%, for the three and six months ended June 30,
2007,
respectively, when compared to the same periods in 2006 due to increased health
claims expense. We have a self-insured health plan that is
supplemented with stop loss insurance policies. Health insurance
costs are rising nationwide and these costs may continue to increase during
the
remainder of 2007.
ATM
and debit card
expense decreased $33,000, or 12.0%, for the three months ended June 30, 2007,
and increased $51,000, or 11.5%, for the six months ended June 30, 2007,
respectively, compared to the same periods in 2006. The decrease for
the three months ended June 30, 2007 as compared to the same period in 2006
was
the result of the implementation of the new billing system from our service
provider during the second quarter of 2006. The increase for the six
months ended June 30, 2007 as compared to the same period in 2006, was primarily
due to an increase in combined use of ATM and debit cards and point of sale
activity.
Director
fees
decreased $26,000, or 15.6%, and $44,000, or 14.1%, for the three and six months
ended June 30, 2007, respectively, compared to the same periods in 2006 due
to a
decrease in the number of directors.
Professional
fees
decreased $78,000, or 24.5%, and $82,000, or 13.0%, for the three and six months
ended June 30, 2007, respectively, compared to the same periods in
2006. The decrease occurred primarily due to a decrease in legal fees
associated with legal matters and litigation resulting from the normal course
of
business.
Other
expense
increased $37,000, or 3.4%, and $114,000, or 5.3%, for the three and six months
ended June 30, 2007, respectively, compared to the same periods in
2006. The increase occurred primarily due to increases in bank exam
fees, bank analysis fees, brokerage services expense and student loan
origination and lender fee expense.
Income
Taxes
Pre-tax
income for
the three and six months ended June 30, 2007 was $5.1 million and $9.9 million,
respectively, compared to $4.5 million and $8.4 million, respectively, for
the
same periods in 2006.
Income
tax expense
was $463,000 and $1.5 million for the three and six months ended June 30, 2007,
respectively, compared to $950,000 and $1.7 million for the three and six months
ended June 30, 2006, respectively. The effective tax rate as a
percentage of pre-tax income was 9.2% and 15.3% for the three and six months
ended June 30, 2007, respectively, compared to 21.1% and 19.8% for the
three and six months ended June 30, 2006, respectively.
The
decrease in the
effective tax rate and income tax expense for 2007 was due to a one-time state
tax credit resulting from a change in Texas tax law during the quarter ended
June 30, 2007, related to the new margin tax. The state tax credit
was $770,000, which was partially offset by an increase in our estimated margin
tax of $109,000, net of tax. Excluding the effect of the state tax
credit and estimated margin tax, the effective tax rate for the three and six
months ended June 30, 2007, would have been 22.3% and 22.0%,
respectively.
Our
current
estimated alternative minimum tax position has been reduced to less than
$100,000. We believe the remaining alternative minimum tax position
is reversible in the future and no valuation allowance against the related
deferred tax asset is deemed necessary at this time. We continue to
review the appropriate level of tax-free income so as to minimize any
alternative minimum tax position in the future.
Capital
Resources
Our
total
shareholders' equity at June 30, 2007, was $115.5 million, representing an
increase of $4.9 million from December 31, 2006, and represented 6.3%
of total assets at June 30, 2007 compared to 5.8% of total assets at December
31, 2006.
Increases
to
shareholders’ equity consisted of net income of $8.4 million and the issuance of
$925,000 in common stock (108,634 shares) through our incentive stock option
and
dividend reinvestment plans, which more than offset an increase in accumulated
other comprehensive loss of $1.4 million, and $2.9 million in dividends
paid.
Under
the Federal
Reserve Board's risk-based capital guidelines for bank holding companies, the
minimum ratio of total capital to risk-adjusted assets (including certain
off-balance sheet items, such as standby letters of credit) is currently
8%. The minimum Tier 1 capital to risk-adjusted assets is
4%. Our $20 million of trust preferred securities issued by our
subsidiary, Southside Statutory Trust III, is considered Tier 1 capital by
the
Federal Reserve Board. The Federal Reserve Board also requires bank
holding companies to comply with the minimum leverage ratio
guidelines. The leverage ratio is the ratio of bank holding company's
Tier 1 capital to its total consolidated quarterly average assets, less goodwill
and certain other intangible assets. The guidelines require a minimum
leverage ratio of 4% for bank holding companies that meet certain specified
criteria. Failure to meet minimum capital regulations can initiate
certain mandatory and possibly additional discretionary actions by regulators,
which could have a material adverse effect on our financial condition and
results of operations. Management believes that, as of June 30, 2007,
we met all capital adequacy requirements to which we were
subject.
The
Federal Deposit
Insurance Act requires bank regulatory agencies to take "prompt corrective
action" with respect to FDIC-insured depository institutions that do not meet
minimum capital requirements. A depository institution's treatment
for purposes of the prompt corrective action provisions will depend on how
its
capital levels compare to various capital measures and certain other factors,
as
established by regulation. Prompt corrective action and other
discretionary actions could have a material effect on our financial condition
and results of operation.
It
is management's
intention to maintain our capital at a level acceptable to all regulatory
authorities and future dividend payments will be determined
accordingly. Regulatory authorities require that any dividend
payments made by either us or Southside Bank not exceed earnings for that
year. Shareholders should not anticipate a continuation of the cash
dividend simply because of the existence of a dividend reinvestment
program. The payment of dividends is at the discretion of
our board of directors and will depend upon future earnings, our financial
condition, and other related factors.
To
be categorized
as well capitalized, we must maintain minimum Total risk-based, Tier 1
risk-based, and Tier 1 leverage ratios as set forth in the following
table:
|
|
Actual
|
|
|
For
Capital
Adequacy
Purposes
|
|
|
To
Be Well
Capitalized Under Prompt Corrective Actions Provisions
|
|
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
As
of June
30, 2007:
|
|
(dollars
in
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Capital
(to Risk Weighted Assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$ |
158,503
|
|
|
|
18.54 |
% |
|
$ |
68,387
|
|
|
|
8.00 |
% |
|
N/A
|
|
|
N/A
|
|
Bank
Only
|
|
$ |
151,064
|
|
|
|
17.67 |
% |
|
$ |
68,385
|
|
|
|
8.00 |
% |
|
$ |
85,481
|
|
|
|
10.00 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier
1
Capital (to Risk Weighted Assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$ |
151,136
|
|
|
|
17.68 |
% |
|
$ |
34,193
|
|
|
|
4.00 |
% |
|
N/A
|
|
|
N/A
|
|
Bank
Only
|
|
$ |
143,697
|
|
|
|
16.81 |
% |
|
$ |
34,193
|
|
|
|
4.00 |
% |
|
$ |
51,289
|
|
|
|
6.00 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier
1
Capital (to Average Assets) (1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$ |
151,136
|
|
|
|
8.41 |
% |
|
$ |
71,924
|
|
|
|
4.00 |
% |
|
N/A
|
|
|
N/A
|
|
Bank
Only
|
|
$ |
143,697
|
|
|
|
7.99 |
% |
|
$ |
71,896
|
|
|
|
4.00 |
% |
|
$ |
89,870
|
|
|
|
5.00 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
of June
30, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Capital
(to Risk Weighted Assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$ |
145,506
|
|
|
|
17.60 |
% |
|
$ |
66,141
|
|
|
|
8.00 |
% |
|
N/A
|
|
|
N/A
|
|
Bank
Only
|
|
$ |
140,251
|
|
|
|
16.98 |
% |
|
$ |
66,090
|
|
|
|
8.00 |
% |
|
$ |
82,612
|
|
|
|
10.00 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier
1
Capital (to Risk Weighted Assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$ |
138,160
|
|
|
|
16.71 |
% |
|
$ |
33,070
|
|
|
|
4.00 |
% |
|
N/A
|
|
|
N/A
|
|
Bank
Only
|
|
$ |
132,905
|
|
|
|
16.09 |
% |
|
$ |
33,045
|
|
|
|
4.00 |
% |
|
$ |
49,567
|
|
|
|
6.00 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier
1
Capital (to Average Assets) (1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$ |
138,160
|
|
|
|
7.44 |
% |
|
$ |
74,290
|
|
|
|
4.00 |
% |
|
N/A
|
|
|
N/A
|
|
Bank
Only
|
|
$ |
132,905
|
|
|
|
7.16 |
% |
|
$ |
74,262
|
|
|
|
4.00 |
% |
|
$ |
92,827
|
|
|
|
5.00 |
% |
(1)
Refers to
quarterly average assets as calculated by bank regulatory agencies.
Liquidity
and
Interest Rate Sensitivity
Liquidity
management involves our ability to convert assets to cash with a minimum of
loss
to enable us to meet our obligations to our customers at any
time. This means addressing: (1) the immediate cash withdrawal
requirements of depositors and other funds providers; (2) the funding
requirements of all lines and letters of credit; and (3) the short-term credit
needs of customers. Liquidity is provided by short-term investments
that can be readily liquidated with a minimum risk of loss. Cash,
interest earning deposits, federal funds sold and short-term investments with
maturities or repricing characteristics of one year or less continue to be
a
substantial percentage of total assets. At June 30, 2007, these
investments were 14.7% of total assets compared to 15.2% at June 30,
2006. Liquidity is further provided through the matching, by time
period, of rate sensitive interest earning assets with rate sensitive interest
bearing liabilities. We have three lines of credit for the purchase
of overnight federal funds at prevailing rates. Two $15.0 million and
one $10.0 million unsecured lines of credit have been established with Bank
of
America, Frost Bank and TIB - The Independent BankersBank,
respectively. At June 30, 2007, the amount of additional funding we
could obtain from FHLB using our unpledged securities at FHLB was approximately
$440.0 million, net of FHLB stock purchases required. We have
obtained a $12.0 million letter of credit from FHLB as collateral for a portion
of our public fund deposits.
Interest
rate
sensitivity management seeks to avoid fluctuating net interest margins and
to
enhance consistent growth of new interest income through periods of changing
interest rates. The ALCO closely monitors various liquidity ratios,
interest rate spreads and margins, interest rate simulation tests utilizing
various interest rate scenarios including immediate shocks and market value
of
portfolio equity (“MVPE”) with interest rates immediately shocked plus and minus
200 basis points to assist in determining our overall interest rate risk and
adequacy of the liquidity position. In addition, the ALCO utilizes a
simulation model to determine the impact of net interest income of several
different interest rate scenarios. By utilizing this technology, we
can determine changes that need to be made to the asset and liability mixes
to
minimize the change in net interest income under these various interest rate
scenarios.
Composition
of
Loans
One
of our main
objectives is to seek attractive lending opportunities in Texas, primarily
in
the counties in which we operate. Substantially all of our loans are
made to borrowers who live in and conduct business in the counties in Texas
in
which we operate, with the exception of municipal loans. Municipal
loans are made to municipalities, school districts and colleges primarily
throughout the state of Texas. We look forward to the possibility
that our loan growth will continue to accelerate in the future as we work to
identify and develop additional markets and strategies to expand our
lending territory.
The
following table
sets forth loan totals by category for the periods presented (in
thousands):
|
|
At
|
|
|
At
|
|
|
At
|
|
|
|
June
30,
|
|
|
December
31,
|
|
|
June
30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
Real
Estate
Loans:
|
|
|
|
|
|
|
|
|
|
Construction
|
|
$ |
46,876
|
|
|
$ |
39,588
|
|
|
$ |
33,084
|
|
1-4
Family Residential
|
|
|
223,996
|
|
|
|
227,354
|
|
|
|
222,332
|
|
Other
|
|
|
177,918
|
|
|
|
181,047
|
|
|
|
173,776
|
|
Commercial
Loans
|
|
|
125,609
|
|
|
|
118,962
|
|
|
|
104,623
|
|
Municipal
Loans
|
|
|
110,416
|
|
|
|
106,155
|
|
|
|
105,316
|
|
Loans
to
Individuals
|
|
|
83,924
|
|
|
|
86,041
|
|
|
|
84,793
|
|
Total
Loans
|
|
$ |
768,739
|
|
|
$ |
759,147
|
|
|
$ |
723,924
|
|
Construction
loans
increased $7.3 million, or 18.4%, to $46.9 million for the six month period
ended June 30, 2007 from $39.6 million at December 31, 2006, and $13.8 million,
or 41.7%, from $33.1 million at June 30, 2006. Commercial loans increased
$6.6 million, or 5.6%, to $125.6 million for the six month period ended June
30,
2007 from $119.0 million at December 31, 2006, and $21.0 million, or 20.1%,
from
$104.6 million at June 30, 2006. Municipal loans increased $4.3
million, or 4.0%, to $110.4 million for the six month period ended June 30,
2007
from $106.2 million at December 31, 2006, and $5.1 million, or 4.8%, from $105.3
million at June 30, 2006.
Our
1-4 family residential mortgage loans
decreased
$3.4
million, or 1.5%,
to $224.0 million
for the six
month period ended June 30, 2007
from $227.4
million at December 31,
2006,
and increased $1.7
million,
or 0.7%,
from $222.3
million at June 30, 2006. Commercial
real estate
loans decreased
$3.1 million,
or 1.7%
to $177.9 million
for the six
month period ended June 30, 2007
from $181.0 million
at December 31, 2006,
and increased $4.1
million, or 2.4%,
from $173.8
million at June 30, 2006. Loans
to individuals
decreased
$2.1 million,
or 2.5%
to $83.9 million
for the six
month period ended June 30, 2007
from $86.0
million at December 31,
2006,
and $869,000,
or 1.0%,
from $84.8
million at June 30, 2006.
Loan
Loss
Experience and Allowance for Loan Losses
The
loan loss
allowance is based on the most current review of the loan
portfolio. Several methods are used to maintain the review in the
most current manner. First, the servicing officer has the primary
responsibility for updating significant changes in a customer's financial
position. Accordingly, each officer prepares status updates on any
credit deemed to be experiencing repayment difficulties that, in the officer's
opinion, would place the collection of principal or interest in
doubt. Second, our internal loan review department is responsible for
an ongoing review of our loan portfolio with specific goals set for the loans
to
be reviewed on an annual basis.
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 or appraisals of the collateral
securing the debt are used to allocate 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. This list for loan and loan relationships of
$50,000 or more is updated on a periodic basis in order to properly allocate
necessary allowances and keep management informed on the status of attempts
to
correct the deficiencies noted with respect to the loan.
Industry
experience
shows that a portion of our loans will become delinquent and a portion of the
loans will require partial or entire charge-off. Regardless of the
underwriting criteria utilized, losses may be experienced as a result of various
factors beyond our control, including, among other things, changes in market
conditions affecting the value of properties used as collateral for loans and
problems affecting the credit of the borrower and the ability of the borrower
to
make payments on the loan. Our determination of the adequacy of
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 that would have loan loss
potential, delinquency trends, estimated fair value of the underlying
collateral, current economic conditions, the views of the bank regulators (who
have the authority to require additional allowances), and geographic and
industry loan concentration.
As
of June 30,
2007, our review of the loan portfolio indicated that a loan loss allowance
of
$7.4 million was adequate to cover probable losses in the
portfolio.
For
the three and
six months ended June 30, 2007, loan charge-offs were $616,000 and $1.2 million
and recoveries were $505,000 and $1.0 million, resulting in net charge-offs
of
$111,000 and $160,000, respectively. For the three and six months
ended June 30, 2006, loan charge-offs were $744,000 and $1.4 million and
recoveries were $449,000 and $974,000, resulting in net charge-offs of $295,000
and $473,000, respectively. The necessary provision expense was
estimated at $217,000 and $334,000 for the three and six months ended June
30,
2007, respectively.
Nonperforming
Assets
Nonperforming
assets consist of delinquent loans 90 days or more past due, nonaccrual loans,
OREO, repossessed assets and restructured loans. Nonaccrual loans are
those loans which are 90 days or more delinquent and collection in full of
both
the principal and interest is in doubt. Additionally, some loans that
are not delinquent may be placed on nonaccrual status due to doubts about full
collection of principal or interest. When a loan is categorized as
nonaccrual, the accrual of interest is discontinued and the accrued balance
is
reversed for financial statement purposes. Restructured loans
represent loans that have been renegotiated to provide a reduction or deferral
of interest or principal because of deterioration in the financial position
of
the borrowers. Categorization of a loan as nonperforming is not in
itself a reliable indicator of potential loan loss. Other factors,
such as the value of collateral securing the loan and the financial condition
of
the borrower must be considered in judgments as to potential loan
loss. OREO represents real estate taken in full or partial
satisfaction of debts previously contracted. The dollar amount of
OREO is based on a current valuation of the OREO at the time it is recorded
on
our books, net of estimated selling costs. Updated valuations are
obtained as needed and any additional impairments are recognized.
The
following table
sets forth nonperforming assets for the periods presented (in
thousands):
|
|
At
|
|
|
At
|
|
|
At
|
|
|
|
June
30,
|
|
|
December
31,
|
|
|
June
30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonaccrual loans
|
|
$
|
1,637
|
|
|
$
|
1,333
|
|
|
$
|
1,424
|
|
Loans
90 days
past due
|
|
|
408
|
|
|
|
128
|
|
|
|
692
|
|
Restructured loans
|
|
|
179
|
|
|
|
220
|
|
|
|
239
|
|
Other
real
estate owned
|
|
|
23
|
|
|
|
351
|
|
|
|
841
|
|
Repossessed
assets
|
|
|
77
|
|
|
|
78
|
|
|
|
41
|
|
Total
Nonperforming Assets
|
|
$
|
2,324
|
|
|
$
|
2,110
|
|
|
$
|
3,237
|
|
Total
nonperforming
assets at June 30, 2007 were $2.3 million, an increase of $214,000, or
10.1%, from $2.1 million at December 31, 2006 and a decrease of $913,000,
or
28.2%, from $3.2 million at June 30, 2006. From December 31, 2006 to
June 30, 2007, nonaccrual loans increased $304,000, or 22.8%, to $1.6 million
and from June 30, 2006, increased $213,000, or 15.0%. Of the total at
June 30, 2007, 18.0% are residential real estate loans, 46.3% are commercial
real estate loans, 11.1% are commercial loans, 23.8% are loans to individuals
and 0.8% are construction loans. OREO decreased $328,000, or 93.4%,
to $23,000 at June 30, 2007 from $351,000 at December 31, 2006 and decreased
$818,000, or 97.3%, from $841,000 at June 30, 2006. The primary
decrease in OREO resulted from the sale of one residential dwelling during
the
first quarter of 2007, which comprised approximately 90% of OREO at December
31,
2006. Total OREO at June 30, 2007 consist of one residential
dwelling. We actively market all properties and none are held for
investment purposes. Loans 90 days or more past due increased
$280,000, or 218.8%, to $408,000 at June 30, 2007 from $128,000 at December
31,
2006 and decreased $284,000, or 41.0%, from $692,000 at June 30,
2006. Repossessed assets decreased $1,000, or 1.3%, to $77,000 at
June 30, 2007 from $78,000 at December 31, 2006 and increased $36,000, or
87.8%,
from $41,000 at June 30, 2006. Approximately $51,000 of the
repossessed assets at June 30, 2007 represented two loans with an SBA guarantee
of 85.0%. Restructured loans decreased $41,000, or 18.6%, to $179,000
at June 30, 2007 from $220,000 at December 31, 2006 and decreased $60,000,
or
25.1%, from $239,000 at June 30, 2006.
Expansion
We
opened our sixth full service grocery store branch in our largest market area,
the city of Tyler, in Smith County in July 2007.
On
May 17, 2007, we
announced that we had entered into a definitive agreement with Fort Worth
Bancshares, Inc., the bank holding company of Fort Worth National Bank, that
provides for the merger of Fort Worth Bancshares, Inc. into a wholly-owned
subsidiary of Southside Bancshares, Inc. The merger has been approved by
the Federal Reserve Board, but consummation of the merger is still subject
to
the approval of the shareholders of Fort Worth Bancshares, Inc. and other
customary closing conditions. The merger is expected to be
consummated in the third quarter of 2007.
This
merger expands
our presence in Texas into the Fort Worth, Arlington and Austin markets in
Tarrant and Travis Counties. The expansion will make the Tarrant
County market our second largest lending market and third largest deposit
market. We will retain the Fort Worth National Bank charter
and continue to operate Fort Worth National Bank under that
name. The bank has two branches in Fort Worth, one branch in
adjoining Arlington and a loan production office in Austin. Under the
terms of the definitive agreement, the all cash transaction is valued at $36.5
million, based on a purchase price of $52.00 per share of Fort Worth Bancshares,
Inc. common stock, subject to customary closing adjustments.
Accounting
Pronouncements
See
“Note
8 -
Accounting Pronouncements” in our financial statements included in this
report.
ITEM
3. QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
In
the banking
industry, a major risk exposure is changing interest rates. The
primary objective of monitoring our interest rate sensitivity, or risk, is
to
provide management the tools necessary to manage the balance sheet to minimize
adverse changes in net interest income as a result of changes in the direction
and level of interest rates. Federal Reserve Board monetary control
efforts, the effects of deregulation and legislative changes have been
significant factors affecting the task of managing interest rate sensitivity
positions in recent years.
In
an attempt to
manage our exposure to changes in interest rates, management closely monitors
our exposure to interest rate risk through our ALCO. Our ALCO meets
regularly and reviews our interest rate risk position and makes recommendations
to our board for adjusting this position. In addition,
our board reviews our asset/liability position on a monthly
basis. We primarily use two methods for measuring and analyzing
interest rate risk: Net income simulation analysis and MVPE
modeling. Through these simulations we attempt to estimate the impact
on net interest income of a 200 basis point parallel shift in the yield
curve. Our policy guidelines seek to limit the estimated change in
net interest income to 10 percent of forecasted net interest income over the
succeeding 12 months and 200 basis point parallel rate shock. Our
policy guidelines limit the change in market value of equity in a 200 basis
point parallel rate shock to 20 percent of the base case. The results
of the valuation analysis as of June 30, 2007 were within policy guidelines
for
all scenarios except for the immediate down 200 basis point shock scenario,
which reflected net interest income would increase approximately
11%. Due to the level of our interest bearing demand and savings
deposit rates at June 30, 2007, some of these rates cannot move down 200 basis
points. As part of the overall assumptions, certain assets and
liabilities have been given reasonable floors. This type of
simulation analysis requires numerous assumptions including but not limited
to
changes in balance sheet mix, prepayment rates on mortgage-related assets and
fixed rate loans, cash flows and repricings of all financial instruments,
changes in volumes and pricing, future shapes of the yield curve, relationship
of market interest rates to each other (basis risk), credit spread and deposit
sensitivity. Assumptions are based on management’s best estimates but
may not accurately reflect actual results under certain changes in interest
rates.
The
following table
provides information about our financial instruments that are sensitive to
changes in interest rates. Except for the effects of prepayments and
scheduled principal amortization on fixed rate loans and mortgage-backed
securities, the table presents principal cash flows and related weighted average
interest rates by the contractual term to maturity. Adjustable rate
student loans totaling $3.2 million are classified in the one year
category. Callable FHLB Advances are presented based on contractual
maturity. Callable brokered CDs are presented based on contractual
maturity. Loans held for sale totaling $5.0 million are classified in
the one-year category. Nonaccrual loans totaling $1.6 million are not
included in total loans. All instruments are classified as other than
trading.
|
|
EXPECTED
MATURITY DATE
|
|
|
|
(dollars
in
thousands)
|
|
|
|
Twelve
Months
Ending June 30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
|
Thereafter
|
|
|
Total
|
|
|
Value
|
|
Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed
Rate
|
|
$ |
199,669
|
|
|
$ |
92,291
|
|
|
$ |
51,125
|
|
|
$ |
32,158
|
|
|
$ |
20,107
|
|
|
$ |
108,030
|
|
|
$ |
503,380
|
|
|
$ |
497,547
|
|
|
|
|
6.88 |
% |
|
|
6.78 |
% |
|
|
6.70 |
% |
|
|
6.63 |
% |
|
|
6.48 |
% |
|
|
5.72 |
% |
|
|
6.56 |
% |
|
|
|
|
Adjustable
Rate
|
|
|
58,066
|
|
|
|
18,173
|
|
|
|
8,828
|
|
|
|
7,817
|
|
|
|
3,995
|
|
|
|
171,885
|
|
|
|
268,764
|
|
|
|
268,764
|
|
|
|
|
8.36 |
% |
|
|
7.94 |
% |
|
|
8.26 |
% |
|
|
8.16 |
% |
|
|
8.29 |
% |
|
|
6.65 |
% |
|
|
7.23 |
% |
|
|
|
|
Mortgage-backed
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed
Rate
|
|
|
183,801
|
|
|
|
186,089
|
|
|
|
154,461
|
|
|
|
109,180
|
|
|
|
69,297
|
|
|
|
103,760
|
|
|
|
806,588
|
|
|
|
802,526
|
|
|
|
|
5.27 |
% |
|
|
5.05 |
% |
|
|
5.01 |
% |
|
|
5.06 |
% |
|
|
5.00 |
% |
|
|
4.75 |
% |
|
|
5.05 |
% |
|
|
|
|
Investments
and Other Interest Earning Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed
Rate
|
|
|
40,898
|
|
|
|
1,690
|
|
|
|
3,250
|
|
|
|
3,470
|
|
|
|
3,330
|
|
|
|
60,189
|
|
|
|
112,827
|
|
|
|
112,841
|
|
|
|
|
5.19 |
% |
|
|
6.08 |
% |
|
|
6.64 |
% |
|
|
6.66 |
% |
|
|
6.10 |
% |
|
|
6.04 |
% |
|
|
5.77 |
% |
|
|
|
|
Adjustable
Rate
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
5,907
|
|
|
|
5,907
|
|
|
|
5,907
|
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
7.06 |
% |
|
|
7.06 |
% |
|
|
|
|
Total
Interest
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earning
Assets
|
|
$ |
482,434
|
|
|
$ |
298,243
|
|
|
$ |
217,664
|
|
|
$ |
152,625
|
|
|
$ |
96,729
|
|
|
$ |
449,771
|
|
|
$ |
1,697,466
|
|
|
$ |
1,687,585
|
|
|
|
|
6.30 |
% |
|
|
5.77 |
% |
|
|
5.56 |
% |
|
|
5.59 |
% |
|
|
5.48 |
% |
|
|
5.91 |
% |
|
|
5.90 |
% |
|
|
|
|
Savings
Deposits
|
|
$ |
5,264
|
|
|
$ |
2,632
|
|
|
$ |
2,632
|
|
|
$ |
2,632
|
|
|
$ |
2,632
|
|
|
$ |
36,846
|
|
|
$ |
52,638
|
|
|
$ |
52,638
|
|
|
|
|
1.31 |
% |
|
|
1.31 |
% |
|
|
1.31 |
% |
|
|
1.31 |
% |
|
|
1.31 |
% |
|
|
1.31 |
% |
|
|
1.31 |
% |
|
|
|
|
NOW
Deposits
|
|
|
95,473
|
|
|
|
5,229
|
|
|
|
5,229
|
|
|
|
5,229
|
|
|
|
5,229
|
|
|
|
73,210
|
|
|
|
189,599
|
|
|
|
189,599
|
|
|
|
|
4.63 |
% |
|
|
0.85 |
% |
|
|
0.85 |
% |
|
|
0.85 |
% |
|
|
0.85 |
% |
|
|
0.85 |
% |
|
|
2.75 |
% |
|
|
|
|
Money
Market
Deposits
|
|
|
24,873
|
|
|
|
8,290
|
|
|
|
8,290
|
|
|
|
8,290
|
|
|
|
8,290
|
|
|
|
24,872
|
|
|
|
82,905
|
|
|
|
82,905
|
|
|
|
|
3.12 |
% |
|
|
3.12 |
% |
|
|
3.12 |
% |
|
|
3.12 |
% |
|
|
3.12 |
% |
|
|
3.12 |
% |
|
|
3.12 |
% |
|
|
|
|
Platinum
Money Market
|
|
|
70,984
|
|
|
|
10,775
|
|
|
|
10,775
|
|
|
|
10,775
|
|
|
|
10,775
|
|
|
|
12,676
|
|
|
|
126,760
|
|
|
|
126,760
|
|
|
|
|
3.95 |
% |
|
|
3.95 |
% |
|
|
3.95 |
% |
|
|
3.95 |
% |
|
|
3.95 |
% |
|
|
3.95 |
% |
|
|
3.95 |
% |
|
|
|
|
Certificates
of Deposit
|
|
|
385,901
|
|
|
|
40,764
|
|
|
|
41,016
|
|
|
|
31,435
|
|
|
|
56,824
|
|
|
|
147
|
|
|
|
556,087
|
|
|
|
553,991
|
|
|
|
|
4.87 |
% |
|
|
4.71 |
% |
|
|
5.00 |
% |
|
|
5.24 |
% |
|
|
5.44 |
% |
|
|
4.34 |
% |
|
|
4.95 |
% |
|
|
|
|
FHLB
Advances
|
|
|
225,432
|
|
|
|
43,649
|
|
|
|
36,811
|
|
|
|
18,171
|
|
|
|
1,099
|
|
|
|
4,057
|
|
|
|
329,219
|
|
|
|
327,061
|
|
|
|
|
4.81 |
% |
|
|
4.69 |
% |
|
|
4.65 |
% |
|
|
5.20 |
% |
|
|
4.99 |
% |
|
|
5.14 |
% |
|
|
4.80 |
% |
|
|
|
|
Other
Borrowings
|
|
|
1,511
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
20,619
|
|
|
|
22,130
|
|
|
|
22,130
|
|
|
|
|
5.10 |
% |
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
8.30 |
% |
|
|
8.08 |
% |
|
|
|
|
Total
Interest
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bearing
Liabilities
|
|
$ |
809,438
|
|
|
$ |
111,339
|
|
|
$ |
104,753
|
|
|
$ |
76,532
|
|
|
$ |
84,849
|
|
|
$ |
172,427
|
|
|
$ |
1,359,338
|
|
|
$ |
1,355,084
|
|
|
|
|
4.67 |
% |
|
|
4.25 |
% |
|
|
4.32 |
% |
|
|
4.38 |
% |
|
|
4.61 |
% |
|
|
2.50 |
% |
|
|
4.31 |
% |
|
|
|
|
Residential
fixed
rate loans are assumed to have annual prepayment rates between 7% and 35% of
the
portfolio. Residential adjustable rate loans are assumed to have
annual prepayment rates between 12% and 50%. Commercial and
multi-family real estate loans are assumed to prepay at an annualized rate
between 8% and 40%. Consumer loans are assumed to prepay at an
annualized rate between 8% and 30%. Commercial loans are assumed to
prepay at an annual rate between 8% and 45%. Municipal loans are
assumed to prepay at an annual rate between 6% and 18%. Fixed rate
mortgage-backed securities, including Collateralized Mortgage Obligations
("CMOs") and Real Estate Mortgage Investment Conduits ("REMICs"), have annual
payment assumptions ranging from 6% to 50%. At June 30, 2007, the
contractual maturity of substantially all of our mortgage-backed or related
securities was in excess of ten years. The actual maturity of a
mortgage-backed or related security is less than its stated maturity due to
regular principal payments and prepayments of the underlying
mortgages. Prepayments that are faster than anticipated may shorten
the life of the security and affect its yield to maturity. The yield
to maturity is based upon the interest income and the amortization of any
premium or accretion of any discount related to the security. In
accordance with GAAP, premiums and discounts are amortized or accreted over
the
estimated lives of the loans, which decrease and increase interest income,
respectively. The prepayment assumptions used to determine the
amortization period for premiums and discounts can significantly affect the
yield of the mortgage-backed or related security, and these assumptions are
reviewed periodically to reflect actual prepayments. Although
prepayments of underlying mortgages depend on many factors, including the type
of mortgages, the coupon rate, the age of mortgages, the geographical location
of the underlying real estate collateralizing the mortgages and general levels
of market interest rates, the difference between the interest rates on the
underlying mortgages and the prevailing mortgage interest rates generally is
the
most significant determinant of the rate of prepayments. During
periods of falling mortgage interest rates, if the coupon rate of the underlying
mortgages exceeds the prevailing market interest rates offered for mortgage
loans, refinancing may increase and accelerate the prepayment of the underlying
mortgages and the related security. At June 30, 2007, 100% of the
mortgage-backed and related securities we held were secured by fixed-rate
mortgage loans.
We
assume 70% of
savings accounts and non public fund transaction accounts at June 30, 2007,
are core deposits and are, therefore, expected to mature after five
years. All public fund transaction accounts are assumed to mature
within one year. We assume 30% of money market accounts at June 30,
2007 are core deposits and are, therefore, expected to mature after five
years. We assume 10% of our platinum money market accounts are core
deposits and are, therefore, expected to mature after five
years. Fixed maturity deposits reprice at maturity.
In
evaluating our
exposure to interest rate risk, certain limitations inherent in the method
of
analysis presented in the foregoing table must be considered. For
example, although certain assets and liabilities may have similar maturities
or
periods to repricing, they may react in different degrees to changes in market
interest rates. Also, the interest rates on certain types of assets
and liabilities may fluctuate in advance of changes in market interest rates,
while interest rates on other types may lag behind changes in market
rates. Certain assets, such as adjustable rate mortgages, have
features which restrict changes in interest rates. Prepayment and
early withdrawal levels associated with mortgage-backed securities may deviate
significantly from those assumed in calculating the table. Finally,
the ability of many borrowers to service their debt may decrease in the event
of
an interest rate increase. We consider all of these factors in
monitoring our exposure to interest rate risk.
Our
Chief Executive
Officer and our Chief Financial Officer undertook an evaluation of our
disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)
of the Securities Exchange Act of 1934) as of the end of the period covered
by
this report and concluded that our disclosure controls and procedures were
effective as of the end of the period covered by this report. No
changes were made to our internal control over financial reporting (as
defined in Rule 13a-15(f) under the Securities Exchange Act of 1934) during
our
last fiscal quarter that materially affected, or are reasonably likely to
materially affect, our internal control over financial
reporting.
We
are a party to
legal proceedings arising in the normal course of
business. Management believes that at June 30, 2007 such
litigation is not material to our financial position or results of
operations.
Information
regarding risk factors appears in “Item 2. Management’s Discussion
and Analysis of Financial Condition and Results of Operations - Forward Looking
Statements” of this Form 10-Q and in Part I — “Item 1A Risk Factors” in our
Annual Report on Form 10-K for the year ended December 31, 2006. There have
been
no material changes from the risk factors previously disclosed in our Annual
Report on Form 10-K.
ITEM
2. UNREGISTERED
SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The
following table
provides information with respect to purchases made by or on our behalf or
any
“affiliated purchaser” (as defined in Rule 10b-18(a)(3) under the Securities
Exchange Act of 1934), of our common stock during the three months ended June
30, 2007.
|
|
Total
Number
of
Shares
Purchased
|
|
Average
Price
Paid Per Share
|
|
Total
Number
of Shares Purchased as Part of Publicly Announced Plan
|
|
Maximum
Number of Shares That May Yet Be Purchased Under the Plan at the
End of
the Period
|
April
1, 2007
to April 30, 2007
|
|
–
|
|
$
|
–
|
|
–
|
|
|
–
|
May
1, 2007
to May 31, 2007
|
|
6,120
|
(1)
|
$
|
21.56
|
|
–
|
|
|
–
|
June
1, 2007
to June 30, 2007
|
|
–
|
|
$
|
–
|
|
–
|
|
|
–
|
Total
|
|
6,120
|
|
$
|
21.56
|
|
–
|
|
|
–
|
(1) Repurchase
of shares made in connection with the exercise of certain employee stock
options.
ITEM
3. DEFAULTS
UPON SENIOR SECURITIES
Not
Applicable
ITEM
4. SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS
|
(a)
|
An
annual
meeting of shareholders was held on April 19,
2007.
|
|
(b)
|
The
election
of three directors (terms expiring at the 2010 Annual Meeting) were
as
follows:
|
FOR WITHHELD
Alton
Cade 9,091,763 306,918
B.
G.
Hartley 9,090,750 307,931
Paul
W.
Powell 9,017,862 380,819
|
The
other
directors, whose terms of office continued after the annual meeting,
are:
Sam Dawson, Melvin B. Lovelady, William Sheehy, Herbert C. Buie,
Robbie N.
Edmonson, Michael D. Gollob, and Joe
Norton.
|
Not
Applicable
Exhibit
No.
|
3
(a)(i) -
|
|
Articles
of
Incorporation as amended and in effect on December 31, 1992, of SoBank,
Inc. (now
|
|
named
Southside Bancshares, Inc.)(filed as Exhibit 3 to the Registrant's
Form
10-K for the year
|
|
ended
December 31, 1992, (commission file number 000-12247) and incorporated
herein by
|
|
3
(a)(ii) -
|
|
Articles
of
Amendment effective May 9, 1994 to Articles of Incorporation of SoBank,
Inc. (now
|
|
named
Southside Bancshares, Inc.) (filed as Exhibit 3(a)(ii) to the Registrant’s
Form 10-K for the
|
|
year
ended
December 31, 1994, (commission file number 000-12247) and incorporated
herein by
|
|
3
(b)
-
|
|
Amended
and
Restated Bylaws of Southside
Bancshares,
|
|
Inc.
(filed
as Exhibit 3(b) to the Registrant’s Form 8-K, filed June 28, 2006, and
incorporated
|
*
31.1 - Certification
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
*
31.2 - Certification
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
**
32
- Certification
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
.
*
Filed herewith.
**The
certifications attached as
Exhibit 32 accompany this quarterly Report on Form 10-Q and are
“furnished”
to
the
Commission pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and
shall
not
be deemed
“filed” by us for purposes of Section 18 of the Securities Exchange Act of 1934,
as
amended.
Pursuant
to the
requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934,
the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
|
SOUTHSIDE
BANCSHARES, INC.
|
|
|
|
|
BY:
|
/s/
B. G.
HARTLEY
|
|
B.
G.
Hartley, Chairman of the Board
|
|
and
Chief
Executive Officer
|
|
(Principal
Executive Officer)
|
|
|
DATE:
August
6, 2007
|
|
|
/s/
LEE R.
GIBSON
|
|
Lee
R.
Gibson, Executive Vice President
|
|
and
Chief
Financial Officer (Principal Financial
|
|
and
Accounting Officer)
|
|
|
DATE:
August
6, 2007
|
|
Exhibit
Number Description
|
|
31.1
|
Certification
Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002
|
31.2
|
Certification
Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002
|
32
|
Certification
Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
|