form_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 March 31, 2008
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
|
(Address of
principal executive offices)
|
(Zip
Code)
|
903-531-7111
(Registrant's
telephone number, including area code)
Indicate by check
mark whether the registrant (1) has filed all reports required to be filed by
section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days. Yes x . No
o .
Indicate by check
mark whether the registrant is a large accelerated filer, an accelerated filer,
or a non-accelerated filer or a small reporting company. See the
definitions of “large accelerated filer,” “accelerated filer” and “small
reporting company” in Rule 12b-2 of the Exchange Act. (Check
one):
Large
accelerated filer o
|
Accelerated
filer x
|
Non-accelerated
filer o
|
Small
reporting company 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 April
25, 2008 was 13,818,622 shares.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL
STATEMENTS
SOUTHSIDE
BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
(UNAUDITED)
(in thousands,
except share amounts)
|
|
March
31,
|
|
|
December
31,
|
|
ASSETS
|
|
2008
|
|
|
2007
|
|
Cash and due
from banks
|
|
$ |
52,318 |
|
|
$ |
74,040 |
|
Interest
earning deposits
|
|
|
725 |
|
|
|
1,414 |
|
Federal funds
sold
|
|
|
9,325 |
|
|
|
550 |
|
Total cash
and cash equivalents
|
|
|
62,368 |
|
|
|
76,004 |
|
Investment
securities:
|
|
|
|
|
|
|
|
|
Available for
sale, at estimated fair value
|
|
|
179,430 |
|
|
|
109,928 |
|
Held to
maturity, at cost
|
|
|
476 |
|
|
|
475 |
|
Mortgage-backed
and related securities:
|
|
|
|
|
|
|
|
|
Available for
sale, at estimated fair value
|
|
|
702,928 |
|
|
|
727,553 |
|
Held to
maturity, at cost
|
|
|
183,555 |
|
|
|
189,965 |
|
Federal Home
Loan Bank and FRB stock, at cost
|
|
|
26,175 |
|
|
|
19,850 |
|
Other
investments, at cost
|
|
|
2,069 |
|
|
|
2,069 |
|
Loans held
for sale
|
|
|
3,416 |
|
|
|
3,361 |
|
Loans:
|
|
|
|
|
|
|
|
|
Loans
|
|
|
980,879 |
|
|
|
961,230 |
|
Less: allowance
for loan losses
|
|
|
(10,611
|
) |
|
|
(9,753
|
) |
Net
Loans
|
|
|
970,268 |
|
|
|
951,477 |
|
Premises and
equipment, net
|
|
|
39,937 |
|
|
|
40,249 |
|
Goodwill
|
|
|
22,034 |
|
|
|
21,639 |
|
Other
intangible assets, net
|
|
|
1,808 |
|
|
|
1,925 |
|
Interest
receivable
|
|
|
12,369 |
|
|
|
11,784 |
|
Deferred tax
asset
|
|
|
1,305 |
|
|
|
4,320 |
|
Other
assets
|
|
|
54,733 |
|
|
|
35,723 |
|
TOTAL
ASSETS
|
|
$ |
2,262,871 |
|
|
$ |
2,196,322 |
|
LIABILITIES
AND SHAREHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
|
|
|
Noninterest
bearing
|
|
$ |
367,835 |
|
|
$ |
357,083 |
|
Interest
bearing
|
|
|
1,074,834 |
|
|
|
1,173,408 |
|
Total
Deposits
|
|
|
1,442,669 |
|
|
|
1,530,491 |
|
Short-term
obligations:
|
|
|
|
|
|
|
|
|
Federal funds
purchased and repurchase agreements
|
|
|
9,020 |
|
|
|
7,023 |
|
FHLB
advances
|
|
|
325,404 |
|
|
|
353,792 |
|
Other
obligations
|
|
|
1,240 |
|
|
|
2,500 |
|
Total
Short-term obligations
|
|
|
335,664 |
|
|
|
363,315 |
|
Long-term
obligations:
|
|
|
|
|
|
|
|
|
FHLB advances
|
|
|
255,562 |
|
|
|
86,247 |
|
Long-term
debt
|
|
|
60,311 |
|
|
|
60,311 |
|
Total
Long-term obligations
|
|
|
315,873 |
|
|
|
146,558 |
|
Other
liabilities
|
|
|
26,258 |
|
|
|
23,132 |
|
TOTAL
LIABILITIES
|
|
|
2,120,464 |
|
|
|
2,063,496 |
|
|
|
|
|
|
|
|
|
|
Off-Balance-Sheet
Arrangements, Commitments and Contingencies (Note 12)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority
interest in Southside Financial Group
|
|
|
260 |
|
|
|
498 |
|
|
|
|
|
|
|
|
|
|
Shareholders'
equity:
|
|
|
|
|
|
|
|
|
Common stock
- $1.25 par, 20,000,000 shares authorized, 15,543,029
shares
|
|
|
|
|
|
|
|
|
issued
in 2008 (including 659,261 shares issued on April 28, 2008 as a
stock
dividend)
and 14,865,134 shares issued in 2007
|
|
|
19,428 |
|
|
|
18,581 |
|
Paid-in
capital
|
|
|
128,934 |
|
|
|
115,250 |
|
Retained
earnings
|
|
|
15,559 |
|
|
|
26,187 |
|
Treasury
stock (1,724,857 shares at cost)
|
|
|
(22,983
|
) |
|
|
(22,983
|
) |
Accumulated
other comprehensive income (loss)
|
|
|
1,209 |
|
|
|
(4,707
|
) |
TOTAL
SHAREHOLDERS' EQUITY
|
|
|
142,147 |
|
|
|
132,328 |
|
|
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES AND SHAREHOLDERS' EQUITY
|
|
$ |
2,262,871 |
|
|
$ |
2,196,322 |
|
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
|
|
|
|
Ended March
31,
|
|
|
|
2008
|
|
|
2007
|
|
Interest
income
|
|
|
|
|
|
|
Loans
|
|
$ |
18,296 |
|
|
$ |
12,514 |
|
Investment
securities – taxable
|
|
|
680 |
|
|
|
836 |
|
Investment
securities – tax-exempt
|
|
|
818 |
|
|
|
507 |
|
Mortgage-backed
and related securities
|
|
|
11,973 |
|
|
|
10,934 |
|
Federal Home
Loan Bank stock and other investments
|
|
|
262 |
|
|
|
370 |
|
Other
interest earning assets
|
|
|
67 |
|
|
|
36 |
|
Total
interest income
|
|
|
32,096 |
|
|
|
25,197 |
|
Interest
expense
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
10,755 |
|
|
|
9,565 |
|
Short-term
obligations
|
|
|
3,300 |
|
|
|
3,946 |
|
Long-term
obligations
|
|
|
2,671 |
|
|
|
1,660 |
|
Total
interest expense
|
|
|
16,726 |
|
|
|
15,171 |
|
Net interest
income
|
|
|
15,370 |
|
|
|
10,026 |
|
Provision for
loan losses
|
|
|
2,239 |
|
|
|
117 |
|
Net interest
income after provision for loan losses
|
|
|
13,131 |
|
|
|
9,909 |
|
Noninterest
income
|
|
|
|
|
|
|
|
|
Deposit
services
|
|
|
4,417 |
|
|
|
3,928 |
|
Gain on
securities available for sale
|
|
|
2,092 |
|
|
|
429 |
|
Gain on sale
of loans
|
|
|
465 |
|
|
|
345 |
|
Trust
income
|
|
|
593 |
|
|
|
464 |
|
Bank owned
life insurance income
|
|
|
310 |
|
|
|
264 |
|
Other
|
|
|
825 |
|
|
|
708 |
|
Total
noninterest income
|
|
|
8,702 |
|
|
|
6,138 |
|
Noninterest
expense
|
|
|
|
|
|
|
|
|
Salaries and
employee benefits
|
|
|
8,713 |
|
|
|
7,104 |
|
Occupancy
expense
|
|
|
1,388 |
|
|
|
1,168 |
|
Equipment
expense
|
|
|
312 |
|
|
|
228 |
|
Advertising,
travel & entertainment
|
|
|
464 |
|
|
|
421 |
|
ATM and debit
card expense
|
|
|
288 |
|
|
|
254 |
|
Director
fees
|
|
|
144 |
|
|
|
127 |
|
Supplies
|
|
|
177 |
|
|
|
148 |
|
Professional
fees
|
|
|
434 |
|
|
|
311 |
|
Postage
|
|
|
184 |
|
|
|
148 |
|
Telephone and
communications
|
|
|
258 |
|
|
|
191 |
|
Other
|
|
|
1,989 |
|
|
|
1,136 |
|
Total
noninterest expense
|
|
|
14,351 |
|
|
|
11,236 |
|
|
|
|
|
|
|
|
|
|
Income before
income tax expense
|
|
|
7,482 |
|
|
|
4,811 |
|
Provision for
income tax expense
|
|
|
1,936 |
|
|
|
1,048 |
|
Net
Income
|
|
$ |
5,546 |
|
|
$ |
3,763 |
|
Earnings per
common share –basic
|
|
$ |
0.40 |
|
|
$ |
0.28 |
|
Earnings per
common share –diluted
|
|
$ |
0.39 |
|
|
$ |
0.27 |
|
Dividends
declared per common share
|
|
$ |
0.12 |
|
|
$ |
0.11 |
|
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)
|
|
Comprehensive
Income
|
|
|
Common
Stock
|
|
|
Paid-in
Capital
|
|
|
Retained
Earnings
|
|
|
Treasury
Stock
|
|
|
Accu-mulated
Other
Compre-
hensive
Income
(Loss)
|
|
|
Total
Share-holders
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
December 31, 2006
|
|
|
|
|
$ |
17,594 |
|
|
$ |
100,736 |
|
|
$ |
29,648 |
|
|
$ |
(22,850 |
) |
|
$ |
(14,524 |
) |
|
$ |
110,604 |
|
Net
Income
|
|
$ |
3,763 |
|
|
|
|
|
|
|
|
|
|
|
3,763 |
|
|
|
|
|
|
|
|
|
|
|
3,763 |
|
Other
comprehensive income, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
gains on securities, net of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
reclassification
adjustment (see Note 3)
|
|
|
2,138 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,138 |
|
|
|
2,138 |
|
Adjustment
to net periodic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
benefit
cost (see Note 3)
|
|
|
104 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
104 |
|
|
|
104 |
|
Comprehensive
income
|
|
$ |
6,005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock
issued (25,813 shares)
|
|
|
|
|
|
|
32 |
|
|
|
267 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
299 |
|
Stock
compensation expense
|
|
|
|
|
|
|
|
|
|
|
7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7 |
|
Tax benefit
of incentive stock options
|
|
|
|
|
|
|
|
|
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2 |
|
Dividends
paid on common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,361
|
) |
|
|
|
|
|
|
|
|
|
|
(1,361
|
) |
Balance at
March 31, 2007
|
|
|
|
|
|
$ |
17,626 |
|
|
$ |
101,012 |
|
|
$ |
32,050 |
|
|
$ |
(22,850 |
) |
|
$ |
(12,282 |
) |
|
$ |
115,556 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
December 31, 2007
|
|
|
|
|
|
$ |
18,581 |
|
|
$ |
115,250 |
|
|
$ |
26,187 |
|
|
$ |
(22,983 |
) |
|
$ |
(4,707 |
) |
|
$ |
132,328 |
|
Net
Income
|
|
$ |
5,546 |
|
|
|
|
|
|
|
|
|
|
|
5,546 |
|
|
|
|
|
|
|
|
|
|
|
5,546 |
|
Other
comprehensive income, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
gains on securities, net of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
reclassification
adjustment (see Note 3)
|
|
|
5,723 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,723 |
|
|
|
5,723 |
|
Adjustment
to net periodic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
benefit
cost (see Note 3)
|
|
|
193 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
193 |
|
|
|
193 |
|
Comprehensive
Income
|
|
$ |
11,462 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock
issued (18,634 shares)
|
|
|
|
|
|
|
23 |
|
|
|
241 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
264 |
|
Stock
compensation expense
|
|
|
|
|
|
|
|
|
|
|
7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7 |
|
Tax benefit
of incentive stock options
|
|
|
|
|
|
|
|
|
|
|
14 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14 |
|
Cumulative
effect of adoption of a new accounting principle on January 1, 2008 (see
Note 11)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(351
|
) |
|
|
|
|
|
|
|
|
|
|
(351
|
) |
Dividends
paid on common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,577
|
) |
|
|
|
|
|
|
|
|
|
|
(1,577
|
) |
Stock
dividend
|
|
|
|
|
|
|
824 |
|
|
|
13,422 |
|
|
|
(14,246
|
) |
|
|
|
|
|
|
|
|
|
|
- |
|
Balance at
March 31, 2008
|
|
|
|
|
|
$ |
19,428 |
|
|
$ |
128,934 |
|
|
$ |
15,559 |
|
|
$ |
(22,983 |
) |
|
$ |
1,209 |
|
|
$ |
142,147 |
|
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)
|
|
Three Months
Ended
March
31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
OPERATING
ACTIVITIES:
|
|
|
|
|
|
|
Net
income
|
|
$ |
5,546 |
|
|
$ |
3,763 |
|
Adjustments
to reconcile net income to net cash provided
by operations:
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
604 |
|
|
|
540 |
|
Amortization
of premium
|
|
|
1,914 |
|
|
|
1,253 |
|
Accretion of
discount and loan fees
|
|
|
(1,114
|
) |
|
|
(808
|
) |
Provision for
loan losses
|
|
|
2,239 |
|
|
|
117 |
|
Stock
compensation expense
|
|
|
7 |
|
|
|
7 |
|
(Increase) decrease
in interest receivable
|
|
|
(585
|
) |
|
|
642 |
|
Decrease in
other assets
|
|
|
396 |
|
|
|
1,677 |
|
Net change in
deferred taxes
|
|
|
(61
|
) |
|
|
(408
|
) |
Decrease in
interest payable
|
|
|
(367
|
) |
|
|
(242
|
) |
Increase in
other liabilities
|
|
|
1,245 |
|
|
|
1,400 |
|
(Increase)
decrease in loans held for sale
|
|
|
(55
|
) |
|
|
1,100 |
|
Gain on
securities available-for-sale
|
|
|
(2,092
|
) |
|
|
(429
|
) |
Loss on sale
of assets
|
|
|
2 |
|
|
|
- |
|
Loss on sale
of other real estate owned
|
|
|
6 |
|
|
|
1 |
|
Earnings
allocated to minority interest
|
|
|
48 |
|
|
|
- |
|
Net cash
provided by operating activities
|
|
|
7,733 |
|
|
|
8,613 |
|
|
|
|
|
|
|
|
|
|
INVESTING
ACTIVITIES:
|
|
|
|
|
|
|
|
|
Proceeds from
sales of investment securities available for sale
|
|
|
9,341 |
|
|
|
4,953 |
|
Proceeds from
sales of mortgage-backed securities available for sale
|
|
|
95,755 |
|
|
|
50,684 |
|
Proceeds from
maturities of investment securities available for sale
|
|
|
31,114 |
|
|
|
54,601 |
|
Proceeds from
maturities of mortgage-backed securities available for
sale
|
|
|
28,394 |
|
|
|
25,305 |
|
Proceeds from
maturities of mortgage-backed securities held to maturity
|
|
|
7,877 |
|
|
|
10,066 |
|
Proceeds from
redemption of Federal Home Loan Bank stock
|
|
|
- |
|
|
|
5,501 |
|
Purchases of
investment securities available for sale
|
|
|
(100,812
|
) |
|
|
(51,789
|
) |
Purchases of
mortgage-backed securities available for sale
|
|
|
(116,652
|
) |
|
|
(21,650
|
) |
Purchases of
mortgage-backed securities held to maturity
|
|
|
(1,664
|
) |
|
|
- |
|
Purchases of
Federal Home Loan Bank stock and other investments
|
|
|
(6,325
|
) |
|
|
(338
|
) |
Net increase
in loans
|
|
|
(21,614
|
) |
|
|
(7,434
|
) |
Purchases of
premises and equipment
|
|
|
(652
|
) |
|
|
(2,994
|
) |
Proceeds from
sales of premises and equipment
|
|
|
358 |
|
|
|
- |
|
Proceeds from
sales of other real estate owned
|
|
|
75 |
|
|
|
322 |
|
Proceeds from
sales of repossessed assets
|
|
|
860 |
|
|
|
125 |
|
Net cash
(used in) provided by investing activities
|
|
|
(73,945
|
) |
|
|
67,352 |
|
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)
|
|
Three Months
Ended
|
|
|
|
March
31,
|
|
|
|
2008
|
|
|
2007
|
|
FINANCING
ACTIVITIES:
|
|
|
|
|
|
|
Net
(decrease) increase in demand and savings accounts
|
|
|
(2,084
|
)
|
|
|
10,327
|
|
Net
(decrease) increase in certificates of deposit
|
|
|
(86,679
|
)
|
|
|
16,462
|
|
Net
increase (decrease) in federal funds purchased and repurchase
agreements
|
|
|
1,997
|
|
|
|
(5,675
|
)
|
Proceeds
from FHLB Advances
|
|
|
4,012,699
|
|
|
|
1,793,395
|
|
Repayment
of FHLB Advances
|
|
|
(3,871,772
|
)
|
|
|
(1,891,312
|
)
|
Net
capital distributions from minority interest investment in consolidated
entities
|
|
|
(286
|
)
|
|
|
-
|
|
Tax
benefit of incentive stock options
|
|
|
14
|
|
|
|
2
|
|
Proceeds
from the issuance of common stock
|
|
|
264
|
|
|
|
299
|
|
Dividends
paid
|
|
|
(1,577
|
)
|
|
|
(1,361
|
)
|
Net
cash provided by (used in) financing activities
|
|
|
52,576
|
|
|
|
(77,863
|
)
|
|
|
|
|
|
|
|
|
|
Net decrease
in cash and cash equivalents
|
|
|
(13,636
|
)
|
|
|
(1,898
|
)
|
Cash and cash
equivalents at beginning of period
|
|
|
76,004
|
|
|
|
55,012
|
|
Cash and cash
equivalents at end of period
|
|
$
|
62,368
|
|
|
$
|
53,114
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL
DISCLOSURES FOR CASH FLOW INFORMATION:
|
|
|
|
|
|
|
|
|
Interest
paid
|
|
$
|
17,093
|
|
|
$
|
15,413
|
|
Income
taxes paid
|
|
|
500
|
|
|
|
500
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL
DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Acquisition
of other repossessed assets and real estate through
foreclosure
|
|
$
|
1,240
|
|
|
$
|
109
|
|
Declaration
of 5% stock dividend
|
|
|
14,246
|
|
|
|
-
|
|
Adjustment
to pension liability
|
|
|
(121
|
)
|
|
|
(158
|
)
|
Unsettled
trades to purchase securities
|
|
|
(6,899
|
)
|
|
|
-
|
|
Unsettled
trades to sell securities
|
|
|
19,287
|
|
|
|
-
|
|
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
In this report, the
words “the Company,” “we,” “us,” and “our” refer to the combined entities of
Southside Bancshares, Inc. and its subsidiaries. The words
“Southside” and “Southside Bancshares” refer to Southside Bancshares,
Inc. The words “Southside Bank” and “Fort Worth National Bank” refer
to those entities, respectively, and the words “the Banks” refers to those
entities collectively. The word “SFG” refers to Southside Financial
Group, LLC., of which Southside owns a 50% interest.
The consolidated
balance sheet as of March 31, 2008, and the related consolidated statements of
income, shareholders' equity and cash flows and notes to the financial
statements for the three month periods ended March 31, 2008 and 2007 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, 2007. 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, 2007.
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
|
|
|
|
Ended March
31,
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
Basic
Earnings and Shares:
|
|
|
|
|
|
|
Net
Income
|
|
$
|
5,546
|
|
|
$
|
3,763
|
|
Weighted-average
basic shares outstanding
|
|
|
13,805
|
|
|
|
13,631
|
|
|
|
|
|
|
|
|
|
|
Basic
Earnings Per Share:
|
|
|
|
|
|
|
|
|
Net
Income
|
|
$
|
0.40
|
|
|
$
|
0.28
|
|
|
|
|
|
|
|
|
|
|
Diluted
Earnings and Shares:
|
|
|
|
|
|
|
|
|
Net
Income
|
|
$
|
5,546
|
|
|
$
|
3,763
|
|
Weighted-average
basic shares outstanding
|
|
|
13,805
|
|
|
|
13,631
|
|
Add: Stock
options
|
|
|
354
|
|
|
|
464
|
|
Weighted-average
diluted shares outstanding
|
|
|
14,159
|
|
|
|
14,095
|
|
|
|
|
|
|
|
|
|
|
Diluted
Earnings Per Share:
|
|
|
|
|
|
|
|
|
Net
Income
|
|
$
|
0.39
|
|
|
$
|
0.27
|
|
For the three month
periods ended March 31, 2008 and 2007, there were no antidilutive
options.
3. Comprehensive
Income
The components of
other comprehensive income are as follows (in thousands):
|
Three Months
Ended March 31, 2008
|
|
|
Before-Tax
|
|
Tax
(Expense)
|
|
Net-of-Tax
|
|
|
Amount
|
|
Benefit
|
|
Amount
|
|
Unrealized
gains on securities:
|
|
|
|
|
|
|
Unrealized
holding gains arising during period
|
|
$ |
10,963 |
|
|
$ |
(3,880 |
) |
|
$ |
7,083 |
|
Less: reclassification
adjustment for gains
|
|
|
|
|
|
|
|
|
|
|
|
|
included
in net income
|
|
|
2,092 |
|
|
|
(732
|
) |
|
|
1,360 |
|
Net
unrealized gains on securities
|
|
|
8,871 |
|
|
|
(3,148
|
) |
|
|
5,723 |
|
Change
in pension plans
|
|
|
121 |
|
|
|
72 |
|
|
|
193 |
|
Other
comprehensive income
|
|
$ |
8,992 |
|
|
$ |
(3,076 |
) |
|
$ |
5,916 |
|
|
Three Months
Ended March 31, 2007
|
|
|
Before-Tax
|
|
Tax
(Expense)
|
|
Net-of-Tax
|
|
|
Amount
|
|
Benefit
|
|
Amount
|
|
Unrealized
gains on securities:
|
|
|
|
|
|
|
Unrealized
holding gains arising during period
|
|
$ |
3,668 |
|
|
$ |
(1,247 |
) |
|
$ |
2,421 |
|
Less: reclassification
adjustment for gains
|
|
|
|
|
|
|
|
|
|
|
|
|
included
in net income
|
|
|
429 |
|
|
|
(146
|
) |
|
|
283 |
|
Net
unrealized gains on securities
|
|
|
3,239 |
|
|
|
(1,101
|
) |
|
|
2,138 |
|
Change in
pension plans
|
|
|
158 |
|
|
|
(54
|
) |
|
|
104 |
|
Other
comprehensive income
|
|
$ |
3,397 |
|
|
$ |
(1,155 |
) |
|
$ |
2,242 |
|
4. Securities
The amortized cost
and estimated market value of investment and mortgage-backed securities as of
March 31, 2008 and December 31, 2007, are reflected in the tables below (in
thousands):
|
|
March 31,
2008
|
|
|
|
Amortized
Cost
|
|
|
Gross
Unrealized Gains
|
|
|
Gross
Unrealized Losses
|
|
|
Estimated
Market Value
|
|
Investment
Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Treasury
|
|
$ |
4,890 |
|
|
$ |
8 |
|
|
$ |
36 |
|
|
$ |
4,862 |
|
Government
Sponsored Enterprise Debentures
|
|
|
23,251 |
|
|
|
22 |
|
|
|
- |
|
|
|
23,273 |
|
State
and Political Subdivisions
|
|
|
140,817 |
|
|
|
3,817 |
|
|
|
117 |
|
|
|
144,517 |
|
Other
Stocks and Bonds
|
|
|
7,586 |
|
|
|
- |
|
|
|
809 |
|
|
|
6,777 |
|
Mortgage-backed
Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Government Agencies
|
|
|
87,623 |
|
|
|
1,740 |
|
|
|
33 |
|
|
|
89,330 |
|
Government
Sponsored Enterprises
|
|
|
603,534 |
|
|
|
10,614 |
|
|
|
549 |
|
|
|
613,599 |
|
Total
|
|
$ |
867,701 |
|
|
$ |
16,201 |
|
|
$ |
1,544 |
|
|
$ |
882,358 |
|
|
|
March 31,
2008
|
|
HELD TO
MATURITY:
|
|
Amortized
Cost
|
|
|
Gross
Unrealized Gains
|
|
|
Gross
Unrealized Gains
|
|
|
Estimated
Market Value
|
|
Investment
Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
Stocks and Bonds
|
|
$ |
476 |
|
|
$ |
24 |
|
|
$ |
- |
|
|
$ |
500 |
|
Mortgage-backed
Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Government Agencies
|
|
|
25,074 |
|
|
|
294 |
|
|
|
9 |
|
|
|
25,359 |
|
Government
Sponsored Enterprises
|
|
|
158,481 |
|
|
|
2,105 |
|
|
|
47 |
|
|
|
160,539 |
|
Total
|
|
$ |
184,031 |
|
|
$ |
2,423 |
|
|
$ |
56 |
|
|
$ |
186,398 |
|
|
|
December 31,
2007
|
|
AVAILABLE FOR
SALE:
|
|
Amortized
Cost
|
|
|
Gross
Unrealized Gains
|
|
|
Gross
Unrealized Gains
|
|
|
Estimated
Market Value
|
|
Investment
Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Treasury
|
|
$ |
4,880 |
|
|
$ |
8 |
|
|
$ |
2 |
|
|
$ |
4,886 |
|
Government
Sponsored Enterprise Debentures
|
|
|
31,764 |
|
|
|
3 |
|
|
|
8 |
|
|
|
31,759 |
|
State
and Political Subdivisions
|
|
|
64,868 |
|
|
|
1,599 |
|
|
|
223 |
|
|
|
66,244 |
|
Other
Stocks and Bonds
|
|
|
7,586 |
|
|
|
- |
|
|
|
547 |
|
|
|
7,039 |
|
Mortgage-backed
Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Government Agencies
|
|
|
88,937 |
|
|
|
1,234 |
|
|
|
451 |
|
|
|
89,720 |
|
Government
Sponsored Enterprises
|
|
|
628,768 |
|
|
|
5,847 |
|
|
|
1,555 |
|
|
|
633,060 |
|
Other
Private Issues
|
|
|
4,773 |
|
|
|
- |
|
|
|
- |
|
|
|
4,773 |
|
Total
|
|
$ |
831,576 |
|
|
$ |
8,691 |
|
|
$ |
2,786 |
|
|
$ |
837,481 |
|
|
|
December 31,
2007 |
|
HELD TO
MATURITY:
|
|
Amortized
Cost
|
|
|
Gross
Unrealized Gains
|
|
|
Gross
Unrealized Gains
|
|
|
Estimated
Market Value |
|
Investment
Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
Stocks and Bonds
|
|
$ |
475 |
|
|
$ |
2 |
|
|
$ |
- |
|
|
$ |
477 |
|
Mortgage-backed
Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Government Agencies
|
|
|
25,965 |
|
|
|
36 |
|
|
|
58 |
|
|
|
25,943 |
|
Government
Sponsored Enterprises
|
|
|
164,000 |
|
|
|
501 |
|
|
|
531 |
|
|
|
163,970 |
|
Total
|
|
$ |
190,440 |
|
|
$ |
539 |
|
|
$ |
589 |
|
|
$ |
190,390 |
|
The Company
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 Company 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 $644.6 million at March 31,
2008 and $496.8 million at December 31, 2007 were pledged to collateralize
Federal Home Loan Bank (“FHLB”) advances, repurchase agreements, public
funds and trust deposits or for other purposes as required 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
|
|
|
March
31,
|
|
|
December
31,
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
Real Estate
Loans:
|
|
|
|
|
|
Construction
|
|
$ |
101,574 |
|
|
$ |
96,356 |
|
1-4
Family Residential
|
|
|
240,856 |
|
|
|
237,888 |
|
Other
|
|
|
205,513 |
|
|
|
211,280 |
|
Commercial
Loans
|
|
|
156,137 |
|
|
|
154,171 |
|
Municipal
Loans
|
|
|
119,015 |
|
|
|
112,523 |
|
Loans to
Individuals
|
|
|
157,784 |
|
|
|
149,012 |
|
Total
Loans
|
|
$ |
980,879 |
|
|
$ |
961,230 |
|
The summaries of
the Allowance for Loan Losses and Reserve for Unfunded Loan Commitments are as
follows (in thousands):
|
|
Three
Months
Ended March
31,
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
Allowance
for Loan Losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
beginning of period
|
|
$
|
9,753
|
|
|
$
|
7,193
|
|
Provision for
loan losses
|
|
|
2,239
|
|
|
|
117
|
|
Loans charged
off
|
|
|
(1,858
|
)
|
|
|
(593
|
)
|
Recoveries of
loans charged off
|
|
|
477
|
|
|
|
544
|
|
Balance at
end of period
|
|
$
|
10,611
|
|
|
$
|
7,261
|
|
|
|
|
|
|
|
|
|
|
Reserve for
Unfunded Loan Commitments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
beginning of period
|
|
$
|
50
|
|
|
$
|
–
|
|
Provision
for losses on unfunded loan
commitments
|
|
|
20
|
|
|
|
–
|
|
Balance
at end of period
|
|
$
|
70
|
|
|
$
|
–
|
|
6. Goodwill and Core Deposit
Intangible Assets
Goodwill. Goodwill
totaled $22.0 million at March 31, 2008 and $21.6 million at December 31,
2007. During the first quarter of 2008, we recorded goodwill totaling
$395,000 in connection with the acquisition of Fort Worth National Bancshares,
Inc.
Core Deposit
Intangibles. Core deposit intangible assets totaled $1.8
million at March 31, 2008 and $1.9 million at December 31, 2007.
During the fourth
quarter of 2007, we recorded core deposit intangibles totaling $2.0 million in
connection with the acquisition of Fort Worth National Bancshares,
Inc. Core deposit intangibles are amortized on an accelerated basis
over their estimated lives, which range from 4 to 10 years.
For the three
months ended March 31, 2008, amortization expense related to intangible assets
totaled $117,000. The estimated aggregate future amortization expense
for intangible assets remaining as of March 31, 2008 is as follows (in
thousands):
Remainder of
2008
|
|
$ |
329 |
|
2009
|
|
|
383 |
|
2010
|
|
|
319 |
|
2011
|
|
|
255 |
|
2012
|
|
|
198 |
|
Thereafter
|
|
|
324 |
|
|
|
$ |
1,808 |
|
Long-term
obligations are summarized as follows:
|
|
March
31,
|
|
|
December
31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(dollars in
thousands)
|
|
Federal Home
Loan Bank Advances (1)
|
|
|
|
|
|
|
Varying
maturities to 2017
|
|
$ |
255,562 |
|
|
$ |
86,247 |
|
|
|
|
|
|
|
|
|
|
Long-term
Debt (2)
|
|
|
|
|
|
|
|
|
Southside
Bancshares Statutory Trust III Due 2033 (3)
|
|
|
20,619 |
|
|
|
20,619 |
|
Southside
Statutory Trust IV Due 2037 (4)
|
|
|
23,196 |
|
|
|
23,196 |
|
Southside
Statutory Trust V Due 2037 (5)
|
|
|
12,887 |
|
|
|
12,887 |
|
Magnolia
Trust Company I Due 2035 (6)
|
|
|
3,609 |
|
|
|
3,609 |
|
Total
Long-term Debt
|
|
|
60,311 |
|
|
|
60,311 |
|
|
|
|
|
|
|
|
|
|
Total
Long-term Obligations
|
|
$ |
315,873 |
|
|
$ |
146,558 |
|
(1) At
March 31, 2008, the weighted average cost of these advances was
3.26%.
|
(2)
|
This
long-term debt consists of trust preferred securities that qualify under
the risk-based capital guidelines as Tier 1 capital, subject to certain
limitations.
|
|
(3)
|
This debt
carries an adjustable rate of 5.63625% through June 30, 2008 and adjusts
quarterly at a rate equal to three-month LIBOR plus 294 basis
points.
|
|
(4)
|
This debt
carries a fixed rate of 6.518% through October 30, 2012 and thereafter,
adjusts quarterly at a rate equal to three-month LIBOR plus 130 basis
points.
|
|
(5)
|
This debt
carries a fixed rate of 7.48% through December 15, 2012 and thereafter,
adjusts quarterly at a rate equal to three-month LIBOR plus 225 basis
points.
|
|
(6)
|
This debt
carries an adjustable rate of 4.8925% through May 22, 2008 and adjusts
quarterly at a rate equal to three-month LIBOR plus 180 basis
points.
|
8. Employee Benefit
Plans
The components of
net periodic benefit cost are as follows (in thousands):
|
|
Three Months
Ended March 31,
|
|
|
|
Defined
Benefit
|
|
|
|
|
|
|
|
|
|
Pension
Plan
|
|
|
Restoration
Plan
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Service
cost
|
|
$
|
327
|
|
|
$
|
309
|
|
|
$
|
15
|
|
|
$
|
15
|
|
Interest
cost
|
|
|
618
|
|
|
|
590
|
|
|
|
45
|
|
|
|
45
|
|
Expected
return on assets
|
|
|
(732
|
)
|
|
|
(633
|
)
|
|
|
–
|
|
|
|
–
|
|
Transition
obligation recognition
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
1
|
|
Net loss
recognition
|
|
|
113
|
|
|
|
136
|
|
|
|
19
|
|
|
|
32
|
|
Prior service
credit amortization
|
|
|
(10
|
)
|
|
|
(10
|
)
|
|
|
(1
|
)
|
|
|
(1
|
)
|
Net periodic
benefit cost
|
|
$
|
316
|
|
|
$
|
392
|
|
|
$
|
78
|
|
|
$
|
92
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employer
Contributions
We previously
disclosed in our financial statements for the year ended December 31, 2007, that
we expected to contribute $3.0 million to our defined benefit pension plan and
$80,000 to our post retirement benefit plan in 2008. As of March 31,
2008, no contributions had been made to the defined benefit pension plan, and
contributions of $20,000 had been made to the post retirement benefit
plan.
9. 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.
A
summary of the status of our nonvested shares as of March 31, 2008 is as
follows:
|
|
Three
Months Ended
March
31, 2008
|
|
|
|
Number
of Options
|
|
|
Weighted
Average Grant-Date Fair Value
|
|
Nonvested at
beginning of the period
|
|
|
6,030
|
|
|
$
|
4.91
|
|
Vested
|
|
|
(6,030
|
)
|
|
$
|
4.91
|
|
Nonvested at
end of period
|
|
|
–
|
|
|
$
|
–
|
|
For the three
months ended March 31, 2008 and 2007, we recorded approximately $7,000 of
stock-based compensation expense. As of March 31, 2008 there was no
unrecognized compensation cost related to the ISO Plan for nonvested options
granted in March 2003. At March 31, 2007, there was $27,000 of total
unrecognized cost.
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 six 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 five years, beginning on the
first anniversary date of the grant date.
A summary of the
status of our stock options as of March 31, 2008 and the changes during the
three 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, 2007
|
500,510
|
|
$
|
5.52
|
–
|
|
|
–
|
|
Exercised
|
(9,607
|
)
|
$
|
5.44
|
–
|
|
|
–
|
|
Cancelled
|
–
|
|
$
|
–
|
–
|
|
|
–
|
|
Outstanding
at March 31, 2008
|
490,903
|
|
$
|
5.52
|
1.90
|
|
$
|
8,498
|
|
Exercisable
at March 31, 2008
|
490,903
|
|
$
|
5.52
|
1.90
|
|
$
|
8,498
|
|
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 three months ended March 31, 2008 and 2007 were $136,000
and $299,000, respectively.
Cash received from
stock option exercises for the three months ended March 31, 2008 and 2007 was
$52,000 and $97,000, respectively. The tax benefit realized for the
deductions related to the stock option exercises were $14,000 and $2,000 for the
three months ended March 31, 2008 and 2007, respectively.
10. Fair Value
Measurement
Effective
January 1, 2008, we adopted the provisions of SFAS No. 157,
"Fair Value Measurements," for financial assets. In accordance with
Financial Accounting Standards Board Staff Position (FSP) No. 157-2,
"Effective Date of FASB Statement No. 157," we will delay application
of SFAS 157 for non-financial assets, until January 1, 2009.
SFAS 157 defines fair value, establishes a framework for measuring
fair value in accordance with GAAP and expands disclosures about fair
value measurements.
|
FAS 157
defines fair value as the price that would be received to sell an asset or
paid to transfer a liability in an orderly transaction between market
participants. A fair value measurement assumes that the transaction to
sell the asset or transfer the liability occurs in the principal market
for the asset or liability or, in the absence of a principal market, the
most advantageous market for the asset or liability. The price in the
principal (or most advantageous) market used to measure the fair value of
the asset or liability shall not be adjusted for transaction costs. An
orderly transaction is a transaction that assumes exposure to the market
for a period prior to the measurement date to allow for marketing
activities that are usual and customary for transactions involving such
assets and liabilities; it is not a forced transaction. Market
participants are buyers and sellers in the principal market that are
(i) independent, (ii) knowledgeable, (iii) able to transact
and (iv) willing to transact.
|
SFAS 157
requires the use of valuation techniques that are consistent with the
market approach, the income approach and/or the cost
approach. Inputs to valuation techniques refer to the
assumptions that market participants would use in pricing the asset or
liability. Inputs may be observable, meaning those that reflect
the assumptions market participants would use in pricing the asset or
liability developed based on market data obtained from independent
sources, or unobservable, meaning those that reflect the reporting
entity’s own assumptions about the assumptions market participants would
use in pricing the asset or liability developed based on the best
information available in the circumstances. SFAS 157
establishes a fair value hierarchy for valuation inputs that gives the
highest priority to quoted prices in active markets for identical assets
or liabilities and the lowest priority to unobservable inputs. The fair
value hierarchy is as follows:
|
|
Level 1 Inputs -
Unadjusted quoted prices in active markets for identical assets or
liabilities that the reporting entity has the ability to access at the
measurement date.
|
|
Level 2 Inputs -
Inputs other than quoted prices included in Level 1 that are
observable for the asset or liability, either directly or indirectly.
These might include quoted prices for similar assets or liabilities in
active markets, quoted prices for identical or similar assets or
liabilities in markets that are not active, inputs other than quoted
prices that are observable for the asset or liability (such as interest
rates, volatilities, prepayment speeds, credit risks, etc.) or inputs that
are derived principally from or corroborated by market data by correlation
or other means.
|
|
Level 3 Inputs -
Unobservable inputs for determining the fair values of assets or
liabilities that reflect an entity's own assumptions about the assumptions
that market participants would use in pricing the assets or
liabilities.
|
A description
of the valuation methodologies used for assets and liabilities measured at
fair value, as well as the general classification of such instruments
pursuant to the valuation hierarchy, is set forth below.
Securities
Available for Sale - Securities classified as available for sale are
reported at fair value utilizing Level 1 and Level 2 inputs. The
fair value measurements consider observable data that may include dealer
quotes, market spreads, cash flows, the U.S. Treasury yield curve, live
trading levels, trade execution data, market consensus prepayment speeds,
credit information and the bond's terms and conditions, among other
things.
Loans Held
for Sale - These loans are reported at the lower of cost or fair value.
Fair value is determined based on expected proceeds based on sales
contracts and commitments and are considered Level 2 inputs.
Impaired
Loans – Certain impaired loans may be reported at the fair value of the
underlying collateral if repayment is expected solely from the
collateral. Collateral values are estimated using Level 3 inputs
based on customized discounting criteria.
The following
table summarizes financial assets and financial liabilities measured at
fair value on a recurring basis as of March 31, 2008, segregated by
the level of the valuation inputs within the fair value hierarchy utilized
to measure fair value (dollars in thousands):
|
|
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
|
Total
|
|
|
Input
|
|
Input
|
|
Input
|
|
Fair
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities
available for sale
|
|
$ |
6,361 |
|
|
$ |
875,997 |
|
|
$ |
– |
|
|
$ |
882,358 |
|
11. Accounting
Pronouncements
Statements of
Financial Accounting Standards
SFAS No. 141,
“Business Combinations (Revised 2007).” SFAS 141R replaces SFAS 141,
“Business Combinations,” and applies to all transactions and other events in
which one entity obtains control over one or more other
businesses. SFAS 141R requires an acquirer, upon initially obtaining
control of another entity, to recognize the assets, liabilities and any
non-controlling interest in the acquiree at fair value as of the acquisition
date. Contingent consideration is required to be recognized and
measured at fair value on the date of acquisition rather than at a later date
when the amount of that consideration may be determinable beyond a reasonable
doubt. This fair value approach replaces the cost-allocation process
required under SFAS 141 whereby the cost of an acquisition was allocated to the
individual assets acquired and liabilities assumed. Under SFAS 141R,
the requirements of SFAS 146, “Accounting for Costs Associated with Exit or
Disposal Activities,” would have to be met in order to accrue for a
restructuring plan in purchase accounting. Pre-acquisition
contingencies are to be recognized at fair value, unless it is a non-contractual
contingency that is not likely to materialize, in which case, nothing should be
recognized in purchase accounting and, instead, that contingency would be
subject to the probable and estimable recognition criteria of SFAS 5,
“Accounting for Contingencies.” SFAS 141R is expected to have a
significant impact on our accounting for business combinations closing on or
after January 1, 2009.
SFAS No. 160,
“Noncontrolling Interest in Consolidated Financial Statements, an amendment of
ARB Statement No. 51.” SFAS 160 amends Accounting Research Bulletin
(ARB) No. 51, “Consolidated Financial Statements,” to establish accounting and
reporting standards for the non-controlling interest in a subsidiary and for
deconsolidation of a subsidiary. SFAS 160 clarifies that a
non-controlling interest in a subsidiary, which is sometimes referred to as
minority interest, is an ownership interest in the consolidated entity that
should be reported as a component of equity in the consolidated financial
statements. Among other requirements, SFAS 160 requires consolidated
net income to be reported at amounts that include the amounts attributable to
both the parent and the non-controlling interest. It also requires
disclosure, on the face of the consolidated income statement, of the amounts of
consolidated net income attributable to the parent and to the non-controlling
interest. SFAS 160 is effective for us on January 1, 2009 and is not
expected to have a significant impact on our financial statements.
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. We adopted SFAS 159 on January
1, 2008. We did not identify any financial assets or liabilities for
which we elected the fair value option. In future periods, we will
consider if, or to what extent, we will elect to use the fair value option to
value our financial assets and liabilities.
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. We adopted SFAS 157 on January 1, 2008 and it 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
adopted EITF 06-4 as of January 1, 2008 as a change in accounting principle
through a cumulative-effect adjustment to retained earnings. The
amount of the adjustment was $351,000.
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.
SEC Staff
Accounting Bulletins
SAB No. 109,
“Written Loan Commitments Recorded at Fair Value Through
Earnings.” SAB No. 109 supersedes SAB 105, “Application of Accounting
Principles to Loan Commitments,” and indicates that the expected net future cash
flows related to the associated servicing of the loan should be included in the
measurement of all written loan commitments that are accounted for at fair value
through earnings. The guidance in SAB 109 became effective on January
1, 2008 and did not have a material impact on our financial
statements.
12. 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 $130.0 million and $108.0 million at
March 31, 2008 and 2007, 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 were $8.6
million for both March 31, 2008 and 2007, and are reflected in the due after one
year category. We had outstanding standby letters of credit of $4.8
million and $3.4 million at March 31, 2008 and 2007, respectively.
The scheduled
maturities of unused commitments as of March 31, 2008 and 2007 were as follows
(in thousands):
|
|
March
31,
|
|
|
|
2008
|
|
|
2007
|
|
Unused
commitments:
|
|
|
|
|
|
|
Due in one
year or less
|
|
$
|
80,982
|
|
|
$
|
79,520
|
|
Due after one
year
|
|
|
48,998
|
|
|
|
28,513
|
|
Total
|
|
$
|
129,980
|
|
|
$
|
108,033
|
|
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, oil, gas and mineral interests, 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 $6.9
million of unsettled trades to purchase and $19.3 million of unsettled trades to
sell securities at March 31, 2008. At December 31, 2007, there were
$6.1 million unsettled trades to sell securities. There were no
unsettled trades to purchase securities at December 31, 2007.
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.
13. Variable Interest
Entities
Effective December
31, 2003, we adopted FASB Interpretation No. 46 (R) (“FIN 46 (R)”),
Consolidation of Variable Interest Entities in connection with our consolidated
financial statements. FIN 46 (R) requires companies to consolidate
“variable interest entities” (“VIEs”) if those companies are the primary
beneficiaries of those VIEs.
Southside Bank, our
wholly-owned subsidiary, is the sole owner of Southside Venue I, LLC
(“Venue”). On August 21, 2007, Southside Financial Group, LLC (“SFG”)
was formed and is considered a VIE in accordance with FIN 46
(R). Venue has 50% ownership rights and 51% voting rights of SFG
based on their investment of $500,000 in the entity. The remaining
50% ownership rights are held by an unrelated third party. Southside
Bank currently has extended credit to finance SFG’s activities. Based
on the credit facility and investment, Southside Bank and Venue are obligated to
absorb the majority of SFG’s expected losses and receive a majority of SFG’s
expected residual returns, and therefore Southside Bank is considered the
primary beneficiary of SFG. SFG is accordingly consolidated by
Southside Bank in accordance with FIN 46 (R).
SFG is a limited
liability company that buys consumer loans secured by automobiles, primarily
through the purchase of existing automobile loan portfolios from lenders
throughout the United States. As of March 31, 2008, SFG had purchased
approximately $63.5 million in automobile loan portfolios.
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, 2007.
We reported
an increase in net income for the three months ended March 31, 2008
compared to the same period in 2007. Net income for the
three months ended March 31, 2008 was $5.5 million, compared to $3.8
million, for the same period in 2007.
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
|
in
which we operate, including, without limitation, the recent deterioration of the
subprime, mortgage, credit and liquidity markets, which could cause compression
of the Company’s net interest margin;
·
|
legislation,
regulatory changes or changes in monetary or fiscal policy that adversely
affect the businesses in which we are engaged, including the Federal
Reserve’s actions with respect to interest
rates;
|
·
|
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;
|
·
|
credit risks
of borrowers, including any increase in those risks due to changing
economic conditions;
|
·
|
risks related
to loans secured by real estate, including the risk that the value and
marketability of collateral could
decline;
|
·
|
increases in
the Company’s non-performing
assets;
|
·
|
the Company’s
ability to maintain adequate liquidity to fund its operations and growth;
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 (“GAAP”) 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 our 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. In addition, a list of 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 March 31,
2008, our review of the loan portfolio indicated that a loan loss allowance of
$10.6 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, 2007 for a detailed description of our estimation
process and methodology related to the allowance for loan losses.
Estimation of Fair Value. On
January 1, 2008, we adopted SFAS 157, “Fair Value Measurements”, as presented in
“Note 10 – Fair Value Measurement” in the accompanying Notes to Financial
Statements included in this report. 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.
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 14 – Employee Benefits” of the Notes to
Consolidated Financial Statements in our Annual Report on Form 10-K for the year
ended December 31, 2007. 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 closely as possible the
timing of future benefit payments of the Plan at December 31,
2007. 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 March
31, 2008, the weighted-average actuarial assumptions of the Plan were: a
discount rate of 6.25%; 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 March 31,
2008 and 2007, are included in “Note 12 – 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 certificates of deposits (“CDs”). These
funds are invested primarily in agency mortgage-backed securities, and to a
lesser extent, long-term municipal securities. Although agency
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 agency 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 “Part I - Item
1A. Risk Factors – Risks Related to Our Business.” in our Annual
Report on Form 10-K for the fiscal year ended December 31, 2007 for a discussion
of risks related to interest rates. During the first half of 2007,
the interest rate yield curve was relatively flat to only slightly positively
sloped. During the second half of 2007, the Federal Reserve decreased
the overnight federal funds rate by 100 basis points while at the same time
short-term U. S. Treasury interest rates decreased more than long-term U. S.
Treasury interest rates. These changes during 2007 resulted in a
positively sloped U. S. Treasury yield curve at December 31,
2007. During the first quarter ended March 31, 2008, the Federal
Reserve decreased the overnight federal funds rate by 200 basis points resulting
in a more positively sloped yield curve at March 31, 2008 than existed at
December 31, 2007. 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 percentage 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 decrease the level of securities
through proceeds from maturities, principal payments on mortgage-backed
securities or sales. During the quarter ended March 31, 2008, credit
and volatility spreads remained wide which, combined with the steeper yield
curve, led to buying opportunities in agency mortgage-backed securities and
municipal securities. While loan growth during the quarter was
adequate, the buying opportunities for securities resulted in an increase in
securities as a percentage of assets. At March 31, 2008, the
securities portfolio as a percentage of total assets increased to 48.4% from
47.8% at December 31, 2007 primarily due to an increase in investment securities
that exceeded the growth in loans during the quarter. The current
interest rate yield curve and spreads remain investment friendly and changes to
the securities portfolio as a percentage of earning assets will be guided by
changes in our loan and deposit levels during the second quarter of 2008 as well
as the availability of attractive investment opportunities. During
the quarter ended March 31, 2008, we increased our investment and
mortgage-backed securities approximately $38.5 million as investment and
mortgage-backed securities increased from $1.028 billion at December 31, 2007 to
$1.066 billion at March 31, 2008. Our leverage strategy is dynamic
and requires ongoing management and will be reevaluated as market conditions
warrant. As interest rates, yield curves, mortgage-backed securities
prepayments, funding costs, security spreads and loan and deposit portfolios
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 we currently utilize. Our FHLB borrowings at March
31, 2008 increased 32.0%, or $140.9 million, to $581.0 million from $440.0
million at December 31, 2007 primarily as a result of a decrease in brokered CDs
and an increase in securities. At December 31, 2007, our callable
brokered CDs totaled $123.4 million and our other brokered CDs, all of which
were acquired through Fort Worth National Bank, were $9.5 million, for total
brokered CDs of $132.9 million. Due to the significant decrease in
interest rates, including brokered CD rates during the first quarter of 2008, we
called approximately $91.3 million of the callable brokered CDs and the calls
for the callable brokered CDs maturing during April were also
exercised. During April 2008 remaining calls associated with the
callable brokered CDs maturing in May 2008 were exercised. During the
first quarter, another $2.8 million of brokered CDs issued by Fort Worth
National Bank matured. As we integrate our funds management
processes, the Banks will likely issue similar structures of brokered CDs when
needed. We utilized long-term brokered CDs because the brokered CDs
better matched overall ALCO objectives at that time by protecting us with fixed
rates should interest rates increase, while providing us 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. We replaced all of the long-term callable
brokered CDs that were called or will be called with long-term funding with
long-term FHLB borrowings. For the quarter ended March 31, 2008, the
large increase in FHLB borrowings more than offset the decrease in brokered CDs
and resulted in an increase in our total wholesale funding as a percentage of
deposits, not including brokered CDs, from 41.0% at December 31, 2007, to 44.2%
at March 31, 2008.
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 three months ended March 31, 2008 was $15.4 million, an increase of
$5.3 million, or 53.3%, when compared to the same period in
2007. Average interest earning assets increased $285.0 million, or
16.1%, to $2.05 billion, the net interest spread increased from 1.67% for the
three months ended March 31, 2007 to 2.55% for the same period in 2008, and the
net interest margin increased from 2.47% for the three months ended March 31,
2007 to 3.22% for the same period in 2008. Net interest income
increased as a result of increases in our average earning assets, net
interest spread and net interest margin during the three months of 2008 when
compared to the same period in 2007.
During the three
months ended March 31, 2008, average loans increased $210.5 million, or
27.5%, to $976.1 million, compared to $765.6 million for the same period in
2007. Approximately half of this increase is the result of the Fort
Worth National Bank loans acquired on October 10, 2007. Automobile
loans purchased through SFG represent the next largest part of this
increase. The average yield on loans increased from 6.90% for the
three months ended March 31, 2007 to 7.77% for the three months ended March 31,
2008. The increase in interest income on loans of $5.8 million, or
46.2%, to $18.3 million for the three months ended March 31, 2008, when compared
to $12.5 million for the same period in 2007, was the result of an increase in
average loans and the average yield. The increase in the yield on
loans was due to the increase in credit spreads, the repricing characteristics
of Southside Bank’s loan portfolio, the addition of higher yielding
subprime automobile loan portfolios purchased during the second half of
2007 and first quarter of 2008 and the higher yielding Fort Worth National Bank
loan portfolio acquired October 10, 2007. 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 increased $69.6 million, or 7.2%, to
$1.04 billion, for the three months ended March 31, 2008, when compared to
$971.9 million for the same period in 2007. The increase was the
result of securities purchased due to buying opportunities available during the
last half of 2007 and the first quarter ended March 31, 2008. The
overall yield on average investment and mortgage-backed securities increased to
5.38% during the three months ended March 31, 2008, from 5.21% during the same
period in 2007. Interest income on investment and mortgage-backed
securities for the three months ended March 31, 2008 increased $1.2
million, or 9.7%, to $13.5 million compared to $12.3 million for the same period
in 2007. The increase in interest income for the three month period
ending March 31, 2008 was due to the increase in the average balance and the
increase in the average yield. The increase in the average yield
primarily reflects purchases of higher-yielding securities combined with
reinvestment of proceeds from lower-yielding matured securities into
higher-yielding securities. This was due primarily to increased
credit and volatility spreads. A return to lower long-term interest
rate levels similar to that experienced in May and June of 2003 could negatively
impact our net interest margin in the future due to increased prepayments and
repricing.
Average FHLB stock
and other investments decreased $312,000, or 1.2%, to $25.0 million, for
the three months ended March 31, 2008 when compared to $25.3 million for the
same period in 2007. The average yield on FHLB stock and other
investments decreased to 4.22% for the three months ended March 31, 2008, when
compared to 5.93% for the same period in 2007 due to the lower average
short-term interest rates. Interest income from our FHLB stock and
other investments decreased $108,000, or 29.2%, to $262,000 for the three months
ended March 31, 2008, when compared to $370,000 for the same period in
2007 due to a decrease in the average balance and average
yield.
Average federal
funds sold and other interest earning assets increased $5.6 million, or 194.8%,
to $8.5 million, for the three months ended March 31, 2008, when compared to
$2.9 million for the same period in 2007. Interest income from
federal funds sold and other interest earning assets increased $31,000, or
86.1%, for the three months ended March 31, 2008, when compared to the same
period in 2007, as a result of the increase in the average balance, which more
than offset the decrease in the average yield from 5.05% in 2007 to 3.16% in
2008.
Total interest
expense increased $1.6 million, or 10.2%, to $16.7 million during the three
months ended March 31, 2008 as compared to $15.2 million during the same period
in 2007. Included in interest expense on deposits was approximately
$560,000 of interest expense associated with exercising the calls on the
callable brokered CDs during the first quarter ended March 31,
2008. The increase in interest expense was primarily attributable to
an increase in the average balance which more than offset a decrease in the
yield on interest bearing liabilities from 4.28% for the three months ended
March 31, 2007 to 3.94% for the three months ended March 31,
2008. Average interest bearing liabilities increased $268.8 million,
or 18.7%, for the three months ended March 31, 2008 as compared to the same
period in 2007.
Average interest
bearing deposits increased $155.1 million, or 15.9%, to $1.13 billion during the
three months ended March 31, 2008, when compared to $973.0 million for the same
period in 2007, while the average rate paid decreased from 3.99% for the three
month period ended March 31, 2007 to 3.83% for the same period in 2008. The
increase in our average total deposits is the result of overall bank growth,
branch expansion and the acquisition of Fort Worth National
Bank. Interest expense for interest bearing deposits for the three
months ended March 31, 2008 increased $1.2 million, or 12.4%, when compared to
the same period in 2007 due to the increase in the average balance which more
than offset the decrease in the average rate paid.
Average short-term
interest bearing liabilities, consisting primarily of FHLB advances, federal
funds purchased and repurchase agreements, increased $30.0 million, or 9.1%, to
$360.0 million for the three months ended March 31, 2008, when compared to
$330.0 million for the same period in 2007. Interest expense
associated with short-term interest bearing liabilities decreased $646,000, or
16.4%, and the average rate paid decreased 116 basis points to 3.69% for the
three month period ended March 31, 2008 when compared to 4.85% for the same
period in 2007. The decrease in the interest expense for the
three month period ended March 31, 2008 when compared to 2007 was due to the
decrease in the average rate paid, which more than offset the increase in the
average balance.
Average long-term
interest bearing liabilities consisting of FHLB advances increased $44.0
million, or 38.9%, during the three months ended March 31, 2008 to $157.1
million as compared to $113.1 million for the three months ended March
31, 2007. The increase in the average long-term FHLB advances
occurred primarily as a result of our decision to call outstanding brokered CDs
and replace with FHLB borrowings. Interest expense associated with
long-term FHLB advances increased $354,000, or 28.7%, while the average rate
paid decreased 36 basis points to 4.06% for the three months ended March 31,
2008 when compared to 4.42% for the same period in 2007. The increase
in interest expense was due to the increase in the average balance of long-term
interest bearing liabilities which more than offset the decrease in the average
rate paid. FHLB advances are collateralized by FHLB stock, securities
and nonspecific real estate loans.
Average long-term
debt, consisting of our junior subordinated debentures issued in 2003 and August
2007 and junior subordinated debentures acquired in the purchase of Fort Worth
Bancshares, Inc., was $60.3 million for the three months ended March 31, 2008
compared to $20.6 million for the three months ended March 31,
2007. During the third quarter ended September 30, 2007, we issued
$36.1 million of junior subordinated debentures in connection with the issuance
of trust preferred securities by our subsidiaries Southside Statutory Trusts IV
and V. The $36.1 million in debentures were issued to fund the
purchase of Fort Worth Bancshares, Inc., which occurred on October 10,
2007. Interest expense increased $657,000, or 153.5%, to $1.1 million
for the three months ended March 31, 2008 when compared to $428,000 for the same
period in 2007 primarily as a result of the increase in the average balance
during the three months ended March 31, 2008 when compared to the same period in
2007. The interest rate on the $20.6 million of long-term debentures
issued to Southside Statutory Trust III adjusts quarterly at a rate equal to
three-month LIBOR plus 294 basis points. The $23.2 million of
long-term debentures issued to Southside Statutory Trusts IV and the $12.9
million of long-term debentures issued to Southside Trust V have fixed rates of
6.518% through October 30, 2012 and 7.48% through December 15, 2012,
respectively, and thereafter, adjusts quarterly. The interest rate on
the $3.6 million of long-term debentures issued to Magnolia Trust Company I,
assumed in the purchase of Fort Worth Bancshares, Inc., adjusts quarterly at a
rate equal to three-month LIBOR plus 180 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)
|
|
|
|
Three Months
Ended
|
|
|
|
March 31,
2008
|
|
|
March 31,
2007
|
|
|
|
AVG
BALANCE
|
|
|
INTEREST
|
|
|
AVG
YIELD
|
|
|
AVG
BALANCE
|
|
|
INTEREST
|
|
|
AVG
YIELD
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INTEREST
EARNING ASSETS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans (1)
(2)
|
|
$ |
976,099 |
|
|
$ |
18,855 |
|
|
|
7.77
|
% |
|
$ |
765,575 |
|
|
$ |
13,021 |
|
|
|
6.90
|
% |
Loans Held
For Sale
|
|
|
2,849 |
|
|
|
31 |
|
|
|
4.38
|
% |
|
|
3,303 |
|
|
|
41 |
|
|
|
5.03
|
% |
Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
Securities (Taxable)(4)
|
|
|
61,115 |
|
|
|
680 |
|
|
|
4.48
|
% |
|
|
68,262 |
|
|
|
836 |
|
|
|
4.97
|
% |
Investment
Securities (Tax-Exempt)(3)(4)
|
|
|
76,952 |
|
|
|
1,290 |
|
|
|
6.74
|
% |
|
|
41,040 |
|
|
|
723 |
|
|
|
7.14
|
% |
Mortgage-backed
and Related Securities (4)
|
|
|
903,436 |
|
|
|
11,973 |
|
|
|
5.33
|
% |
|
|
862,621 |
|
|
|
10,934 |
|
|
|
5.14
|
% |
Total
Securities
|
|
|
1,041,503 |
|
|
|
13,943 |
|
|
|
5.38
|
% |
|
|
971,923 |
|
|
|
12,493 |
|
|
|
5.21
|
% |
FHLB stock
and other investments, at cost
|
|
|
24,985 |
|
|
|
262 |
|
|
|
4.22
|
% |
|
|
25,297 |
|
|
|
370 |
|
|
|
5.93
|
% |
Interest
Earning Deposits
|
|
|
1,534 |
|
|
|
15 |
|
|
|
3.93
|
% |
|
|
552 |
|
|
|
7 |
|
|
|
5.14
|
% |
Federal Funds
Sold
|
|
|
6,984 |
|
|
|
52 |
|
|
|
2.99
|
% |
|
|
2,337 |
|
|
|
29 |
|
|
|
5.03
|
% |
Total
Interest Earning Assets
|
|
|
2,053,954 |
|
|
|
33,158 |
|
|
|
6.49
|
% |
|
|
1,768,987 |
|
|
|
25,961 |
|
|
|
5.95
|
% |
NONINTEREST
EARNING ASSETS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and Due
From Banks
|
|
|
48,081 |
|
|
|
|
|
|
|
|
|
|
|
45,106 |
|
|
|
|
|
|
|
|
|
Bank Premises
and Equipment
|
|
|
39,991 |
|
|
|
|
|
|
|
|
|
|
|
32,547 |
|
|
|
|
|
|
|
|
|
Other
Assets
|
|
|
88,781 |
|
|
|
|
|
|
|
|
|
|
|
43,813 |
|
|
|
|
|
|
|
|
|
Less: Allowance
for Loan Loss
|
|
|
(10,020
|
) |
|
|
|
|
|
|
|
|
|
|
(7,236
|
) |
|
|
|
|
|
|
|
|
Total
Assets
|
|
$ |
2,220,787 |
|
|
|
|
|
|
|
|
|
|
$ |
1,883,217 |
|
|
|
|
|
|
|
|
|
LIABILITIES
AND SHAREHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INTEREST
BEARING LIABILITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings
Deposits
|
|
$ |
53,927 |
|
|
|
172 |
|
|
|
1.28
|
% |
|
$ |
51,168 |
|
|
|
164 |
|
|
|
1.30
|
% |
Time
Deposits
|
|
|
597,942 |
|
|
|
7,482 |
|
|
|
5.03
|
% |
|
|
532,308 |
|
|
|
6,361 |
|
|
|
4.85
|
% |
Interest
Bearing Demand Deposits
|
|
|
476,241 |
|
|
|
3,101 |
|
|
|
2.62
|
% |
|
|
389,542 |
|
|
|
3,040 |
|
|
|
3.16
|
% |
Total
Interest Bearing Deposits
|
|
|
1,128,110 |
|
|
|
10,755 |
|
|
|
3.83
|
% |
|
|
973,018 |
|
|
|
9,565 |
|
|
|
3.99
|
% |
Short-term
Interest Bearing Liabilities
|
|
|
360,011 |
|
|
|
3,300 |
|
|
|
3.69
|
% |
|
|
330,037 |
|
|
|
3,946 |
|
|
|
4.85
|
% |
Long-term
Interest Bearing Liabilities – FHLB Dallas
|
|
|
157,085 |
|
|
|
1,586 |
|
|
|
4.06
|
% |
|
|
113,053 |
|
|
|
1,232 |
|
|
|
4.42
|
% |
Long-term
Debt (5)
|
|
|
60,311 |
|
|
|
1,085 |
|
|
|
7.24
|
% |
|
|
20,619 |
|
|
|
428 |
|
|
|
8.30
|
% |
Total
Interest Bearing Liabilities
|
|
|
1,705,517 |
|
|
|
16,726 |
|
|
|
3.94
|
% |
|
|
1,436,727 |
|
|
|
15,171 |
|
|
|
4.28
|
% |
NONINTEREST
BEARING LIABILITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand
Deposits
|
|
|
351,686 |
|
|
|
|
|
|
|
|
|
|
|
315,381 |
|
|
|
|
|
|
|
|
|
Other
Liabilities
|
|
|
24,728 |
|
|
|
|
|
|
|
|
|
|
|
18,460 |
|
|
|
|
|
|
|
|
|
Total
Liabilities
|
|
|
2,081,931 |
|
|
|
|
|
|
|
|
|
|
|
1,770,568 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority
Interest in SFG
|
|
|
679 |
|
|
|
|
|
|
|
|
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SHAREHOLDERS’
EQUITY
|
|
|
138,177 |
|
|
|
|
|
|
|
|
|
|
|
112,649 |
|
|
|
|
|
|
|
|
|
Total
Liabilities and Shareholders’ Equity
|
|
$ |
2,220,787 |
|
|
|
|
|
|
|
|
|
|
$ |
1,883,217 |
|
|
|
|
|
|
|
|
|
NET INTEREST
INCOME
|
|
|
|
|
|
$ |
16,432 |
|
|
|
|
|
|
|
|
|
|
$ |
10,790 |
|
|
|
|
|
NET YIELD ON
AVERAGE EARNING ASSETS
|
|
|
|
|
|
|
|
|
|
|
3.22
|
% |
|
|
|
|
|
|
|
|
|
|
2.47
|
% |
NET INTEREST
SPREAD
|
|
|
|
|
|
|
|
|
|
|
2.55
|
% |
|
|
|
|
|
|
|
|
|
|
1.67
|
% |
(1) Interest
on loans includes fees on loans that are not material in amount.
(2) Interest
income includes taxable-equivalent adjustments of $590 and $548 for the three
months ended March 31, 2008 and 2007, respectively.
(3) Interest
income includes taxable-equivalent adjustments of $472 and $216 for the three
months ended March 31, 2008 and 2007, 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 us to Southside Statutory Trust III,
IV, and V in connection with the issuance by Southside Statutory Trust III of
$20 million of trust preferred securities, Southside Statutory Trust IV of $22.5
million of trust preferred securities, Southside Statutory Trust V of $12.5
million of trust preferred securities and junior subordinated debentures issued
by Fort Worth Bancshares, Inc. to Magnolia Trust Company I in connection with
the issuance by Magnolia Trust Company I of $3.5 million of trust preferred
securities.
|
Note: As of
March 31, 2008 and 2007, loans totaling $6,565 and $1,261, 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 that 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, brokerage services, and other fee generating programs that we either
provide or participate in.
Noninterest income
was $8.7 million for the three months ended March 31, 2008 compared to $6.1
million for the same period in 2007, an increase of $2.6 million, or
41.8%. During the three months ended March 31, 2008, we had gains on
the sale of AFS securities of $2.1 million compared to gains of $429,000 for the
same period in 2007. The market value of the AFS securities portfolio
at March 31, 2008 was $882.4 million with a net unrealized gain on that date of
$14.7 million. The net unrealized gain is comprised of $16.2 million
in unrealized gains and $1.5 million in unrealized losses. The market
value of the HTM securities portfolio at March 31, 2008 was $186.4 million with
a net unrealized gain on that date of $2.4 million. The net
unrealized gain is comprised of $2.4 million in unrealized gains and $56,000 in
unrealized losses. During the three months ended March 31, 2008, we
primarily sold specific lower coupon mortgage-backed securities where the risk
reward profile had changed. A lesser amount of specific higher coupon
mortgage-backed securities were sold due to prepayment concerns or the risk
reward profile based on price.
Deposit services
income increased $489,000, or 12.4%, for the three months ended March 31,
2008, when compared to the same period in 2007, primarily as a result of
increases in overdraft income, increased numbers of deposit accounts and an
increase in debit card income.
Trust income
increased $129,000, or 27.8%, for the three months ended March 31, 2008,
when compared to the same period in 2007 due to growth experienced in our trust
department.
Gain on sale of
loans increased $120,000, or 34.8%, for the three months ended March 31, 2008,
when compared to the same period in 2007. The increase was due
primarily to increases in mortgage loans sold during 2008 and the sale of
selected loans from a pool of automobile loans purchased by SFG at a gain of
$100,000.
Bank owned life
insurance income (“BOLI”) increased $46,000, or 17.4%, for the three months
ended March 31, 2008, when compared to the same period in 2007 primarily as a
result of an increase in the average balance of cash surrender value associated
with our BOLI.
Other noninterest
income increased $117,000, or 16.5%, for the three months ended March 31,
2008, when compared to the same period in 2007. The increases for the
three months ended March 31, 2008 were primarily a result of increases in
brokerage services income, credit card fee income, and merchant banking income
combined with increases associated with the Fort Worth National Bank
acquisition.
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 $14.4 million for the three months ended March 31, 2008, compared to
$11.2 million for the same period in 2007, representing an increase of $3.1
million, or 27.7%.
Salaries and
employee benefits expense increased $1.6 million, or 22.6%, during the three
months ended March 31, 2008, when compared to the same period in 2007. Direct salary
expense and payroll taxes increased $1.4 million, or 23.9%, during the three
months ended March 31, 2008, respectively, when compared to the same period in
2007. The
increase for the three months ended March 31, 2008, was primarily the result of
salary expense associated with the addition of Fort Worth National Bank and SFG
and normal salary increases for Southside
Bank.
Retirement expense,
included in salary and benefits, decreased $43,000, or 8.7%, for the three
months ended March 31, 2008, when compared to the same period in 2007, 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 2008 when compared
to 2007. Specifically, the assumed long-term rate of return was 7.50%
and the assumed discount rate was increased to 6.25%. 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 $211,000, or
36.7%, for the three months ended March 31, 2008, when compared to the same
period in 2007 primarily 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 2008.
Occupancy expense
increased $220,000, or 18.8%, for the three months ended March 31, 2008, when
compared to the same period in 2007 due primarily to the acquisition of Fort
Worth National Bank and SFG combined with two de novo branches opened during
2007.
Equipment expense
increased $84,000, or 36.8%, for the three months ended March 31, 2008, compared
to the same period in 2007 as a result of various increases on equipment service
contracts, two new branches during 2007 and the acquisition of Fort Worth
National Bank.
ATM and debit card
expense increased $34,000, or 13.4%, for the three months ended March 31, 2008,
compared to the same period in 2007 primarily as a result of the acquisition of
Fort Worth National Bank combined with overall growth in Southside’s
usage.
Director fees
increased $17,000, or 13.4%, for the three months ended March 31, 2008, compared
to the same period in 2007 as a result of the addition of two new advisory
directors at Southside Bank, director fees at Fort Worth National Bank and
additional meetings during the comparable periods.
Professional fees
increased $123,000, or 39.5%, for the three months ended March 31, 2008,
compared to the same period in 2007 as a result of increases in legal
fees.
When comparing the
three months ended March 31 2008 to the same period in 2007, the following
expense categories experienced increases as a direct result of the acquisition
of Fort Worth National Bank and investment in SFG: advertising,
travel and entertainment increased $43,000, or 10.2%; supplies increased
$29,000, or 19.6%; postage increased $36,000, or 24.3% and telephone and
communications increased $67,000, or 35.1%.
Other expense
increased $853,000, or 75.1%, for the three months ended March 31, 2008,
compared to the same period in 2007. The increase occurred primarily
due to increases in computer fees, FDIC insurance, computer supplies, brokerage
services expense and student loan origination and lender fee expense and the
acquisition of Fort Worth National Bank and investment in SFG.
Income
Taxes
Pre-tax income for
the three months ended March 31, 2008 was $7.5 million, compared to $4.8
million, for the same period in 2007.
Income tax expense
was $1.9 million for the three months ended March 31, 2008, compared to $1.0
million for the three months ended March 31, 2007. The effective tax
rate as a percentage of pre-tax income was 25.9% for the three months ended
March 31, 2008, compared to 21.8% for the three months ended March 31,
2007.
The increase in the
effective tax rate and income tax expense for the three months ended March 31,
2008 was due to a decrease in tax-exempt income as a percentage of taxable
income as compared to the same period in 2007.
Capital
Resources
Our total
shareholders' equity at March 31, 2008, was $142.1 million, representing an
increase of $9.8 million from December 31, 2007, and represented 6.3% of total
assets at March 31, 2008 compared to 6.0% of total assets at December 31,
2007.
Increases to
shareholders’ equity consisted of net income of $5.5 million, the issuance of
$264,000 in common stock (18,634 shares) through our incentive stock option and
dividend reinvestment plans and an increase in accumulated other comprehensive
income of $5.9 million, which more than offset $1.6 million in dividends
paid.
On March 19, 2008,
our board of directors declared a 5% stock dividend to common stock shareholders
of record April 10, 2008, payable on April 28, 2008.
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, $22.5 million, $12.5 million and $3.5 million of
trust preferred securities issued by our subsidiaries, Southside Statutory Trust
III, IV, V and Magnolia Trust Company I, respectively, are considered Tier 1
capital by the Federal Reserve Board. Due to uncertainty in the
credit markets with respect to issuing trust preferred securities, it is
uncertain if the Company could currently issue additional trust preferred
securities and, if so, at what price. The Company cannot predict if
or when general market conditions might change. 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 March 31, 2008, 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 March
31, 2008:
|
|
(dollars in
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Capital
(to Risk Weighted Assets)
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
186,413
|
|
16.85
|
%
|
$
|
88,518
|
8.00
|
%
|
|
N/A
|
N/A
|
|
Southside
Bank Only
|
|
$
|
164,501
|
|
16.44
|
%
|
$
|
80,048
|
8.00
|
%
|
$
|
100,060
|
10.00
|
%
|
Fort Worth
National Bank Only
|
|
$
|
16,627
|
|
15.64
|
%
|
$
|
8,504
|
8.00
|
%
|
$
|
10,631
|
10.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier 1
Capital (to Risk Weighted Assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
164,298
|
|
14.85
|
%
|
$
|
44,259
|
4.00
|
%
|
|
N/A
|
N/A
|
|
Southside
Bank Only
|
|
$
|
155,029
|
|
15.49
|
%
|
$
|
40,024
|
4.00
|
%
|
$
|
60,036
|
6.00
|
%
|
Fort Worth
National Bank Only
|
|
$
|
15,417
|
|
14.50
|
%
|
$
|
4,252
|
4.00
|
%
|
$
|
6,378
|
6.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier 1
Capital (to Average Assets) (1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
164,298
|
|
7.52
|
%
|
$
|
87,403
|
4.00
|
%
|
|
N/A
|
N/A
|
|
Southside
Bank Only
|
|
$
|
155,029
|
|
7.58
|
%
|
$
|
81,851
|
4.00
|
%
|
$
|
102,314
|
5.00
|
%
|
Fort Worth
National Bank Only
|
|
$
|
15,417
|
|
11.21
|
%
|
$
|
5,499
|
4.00
|
%
|
$
|
6,874
|
5.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March
31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Capital
(to Risk Weighted Assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
154,977
|
|
18.51
|
%
|
$
|
66,988
|
8.00
|
%
|
|
N/A
|
N/A
|
|
Southside
Bank Only
|
|
$
|
150,742
|
|
18.00
|
%
|
$
|
66,985
|
8.00
|
%
|
$
|
83,732
|
10.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier 1
Capital (to Risk Weighted Assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
147,716
|
|
17.64
|
%
|
$
|
33,494
|
4.00
|
%
|
|
N/A
|
N/A
|
|
Southside
Bank Only
|
|
$
|
143,481
|
|
17.14
|
%
|
$
|
33,493
|
4.00
|
%
|
$
|
50,239
|
6.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier 1
Capital (to Average Assets) (1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
147,716
|
|
7.85
|
%
|
$
|
75,295
|
4.00
|
%
|
|
N/A
|
N/A
|
|
Southside
Bank Only
|
|
$
|
143,481
|
|
7.63
|
%
|
$
|
75,267
|
4.00
|
%
|
$
|
94,084
|
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 March 31, 2008, these
investments were 17.7%
of total assets
compared to 15.8% at March 31, 2007. Liquidity is further provided
through the matching, by time period, of rate sensitive interest earning assets
with rate sensitive interest bearing liabilities. Southside Bank has
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 Bankers Bank, respectively. Fort Worth National Bank
has one unsecured line of credit for the
purchase of federal funds of $2.5 million with Frost Bank. At March
31, 2008, there were no federal funds purchased. At March 31, 2008,
the amount of additional funding Southside Bank and Fort Worth National Bank
could obtain from FHLB using unpledged securities at FHLB was approximately $226
million and $45 million, respectively, net of FHLB stock purchases
required. Southside Bank 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. The ALCO performs interest rate
simulation tests that apply 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 on 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 loan
originations 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 and
purchases of automobile loan portfolios throughout the United
States. Municipal loans are made to municipalities, counties, school
districts and colleges throughout the state of Texas. Through
Southside Financial Group, LLC (“SFG”), we purchase portfolios of automobile
loans from a variety of lenders throughout the United States. These
high yield loans represent existing subprime automobile loans with payment
histories that are primarily collateralized by used automobiles.
The following table
sets forth loan totals by category for the periods presented (in
thousands):
|
At
|
|
|
At
|
|
At
|
|
|
March
31,
|
|
|
December
31,
|
|
March
31,
|
|
|
2008
|
|
|
2007
|
|
2007
|
|
|
|
|
|
|
|
|
|
Real Estate
Loans:
|
|
|
|
|
|
|
|
Construction
|
|
$ |
101,574 |
|
|
$ |
96,356 |
|
|
$ |
44,256 |
|
1-4
Family Residential
|
|
|
240,856 |
|
|
|
237,888 |
|
|
|
225,843 |
|
Other
|
|
|
205,513 |
|
|
|
211,280 |
|
|
|
180,321 |
|
Commercial
Loans
|
|
|
156,137 |
|
|
|
154,171 |
|
|
|
120,420 |
|
Municipal
Loans
|
|
|
119,015 |
|
|
|
112,523 |
|
|
|
107,080 |
|
Loans to
Individuals
|
|
|
157,784 |
|
|
|
149,012 |
|
|
|
88,454 |
|
Total
Loans
|
|
$ |
980,879 |
|
|
$ |
961,230 |
|
|
$ |
766,374 |
|
Construction loans
increased $5.2 million, or 5.4%, to $101.6 million for the three month period
ended March 31, 2008 from $96.4 million at December 31, 2007, and $57.3 million,
or 129.5%, from $44.3 million at March 31, 2007. The increase in
construction loans during the period ended March 31, 2008 over the same period
in 2007 is primarily due to advances on commercial construction loans in our
market areas and the acquisition of Fort Worth National Bank. Our 1-4
family residential mortgage loans increased $3.0 million, or 1.2%, to $240.9
million for the three month period ended March 31, 2008 from $237.9 million at
December 31, 2007, and $15.0 million, or 6.6%, from $225.8 million at March 31,
2007. Commercial loans increased $2.0 million, or 1.3%, to $156.1 million
for the three month period ended March 31, 2008 from $154.2 million at December
31, 2007, and $35.7 million, or 29.7%, from $120.4 million at March 31,
2007. Municipal loans increased $6.5 million, or 5.8%, to $119.0 million
for the three month period ended March 31, 2008 from $112.5 million at December
31, 2007, and $11.9 million, or 11.1%, from $107.1 million at March 31,
2007. Loans to individuals, which includes SFG loans, increased $8.8
million, or 5.9%, to $157.8 million for the three month period ended March 31,
2008 from $149.0 million at December 31, 2007, and $69.3 million, or 78.4%, from
$88.5 million at March 31, 2007, primarily as a result of pools of automobile
loans purchased by SFG.
Commercial real
estate loans decreased $5.8 million, or 2.7% to $205.5 million for the three
month period ended March 31, 2008 from $211.3 million at December 31, 2007, and
increased $25.2 million, or 14.0%, from $180.3 million at March 31,
2007.
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. In addition, a list of loans 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 March 31,
2008, our review of the loan portfolio indicated that a loan loss allowance of
$10.6 million was adequate to cover probable losses in the
portfolio.
For the three
months ended March 31, 2008, loan charge-offs were $1.9 million and recoveries
were $477,000, resulting in net charge-offs of $1.4 million. For the
three months ended March 31, 2007, loan charge-offs were $593,000 and recoveries
were $544,000, resulting in net charge-offs of $49,000. The increase
in net charge-offs was primarily related to the SFG automobile loans
purchased. The necessary provision expense was estimated at $2.2
million for the three months ended March 31, 2008, compared to $117,000 for the
comparable period in 2007. The increase in provision expense for the three
months ended March 31, 2008 compared to the same period in 2007 was primarily a
result of the increase in the loan portfolio, including the investment in the
automobile loan portfolios of SFG. Please see “Note 13 – Variable
Interest Entities” in our financial statements included in this
report.
Nonperforming
Assets
Nonperforming
assets consist of delinquent loans 90 days or more past due, nonaccrual loans,
other real estate owned (“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
March
31,
2008
|
|
|
At
December
31,
2007
|
|
|
At
March
31,
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonaccrual loans
|
|
$
|
6,565
|
|
|
$
|
2,913
|
|
|
$
|
1,261
|
|
Loans 90 days
past due
|
|
|
859
|
|
|
|
400
|
|
|
|
173
|
|
Restructured loans
|
|
|
182
|
|
|
|
225
|
|
|
|
193
|
|
Other real
estate owned
|
|
|
121
|
|
|
|
153
|
|
|
|
35
|
|
Repossessed
assets
|
|
|
406
|
|
|
|
255
|
|
|
|
54
|
|
Total
Nonperforming Assets
|
|
$
|
8,133
|
|
|
$
|
3,946
|
|
|
$
|
1,716
|
|
Total nonperforming
assets at March 31, 2008 were $8.1 million, an increase of $4.2 million, or
106.1%, from $3.9 million at December 31, 2007 and an increase of $6.4 million,
or 374.0%, from $1.7 million at March 31, 2007. Approximately $3.8
million of the nonperforming assets at March 31, 2008, represented one
commercial loan relationship and one commercial real estate loan relationship
placed on nonaccrual during the quarter. Approximately $621,000 of the
nonperforming assets at March 31, 2008 represented one commercial real estate
loan relationship 90 days past due. Based on information currently
available, we do not believe we will have any significant nonreserved
losses. From December 31, 2007 to March 31, 2008, nonaccrual loans
increased $3.7 million, or 125.4%, to $6.6 million and from March 31, 2007,
increased $5.3 million, or 420.6%. Of the total nonaccrual
loans at March 31, 2008, 2.4% are residential real estate loans, 36.0% are
commercial real estate loans, 30.0% are commercial loans, 31.5% are loans to
individuals and 0.1% are construction loans. OREO decreased $32,000,
or 20.9%, to $121,000 at March 31, 2008 from $153,000 at December 31, 2007 and
increased $86,000, or 245.7%, from $35,000 at March 31, 2007. All of the OREO at
March 31, 2008, consisted of residential dwellings. We actively
market all properties and none are held for investment
purposes. Loans 90 days or more past due increased $459,000, or
114.8%, to $859,000 at March 31, 2008 from $400,000 at December 31, 2007 and
$686,000, or 396.5%, from $173,000 at March 31, 2007. Repossessed
assets increased $151,000, or 59.2%, to $406,000 at March 31, 2008 from $255,000
at December 31, 2007 and $352,000, or 651.9%, from $54,000 at March 31,
2007. The increase in repossessed assets at March 31, 2008 was
attributable to SFG automobile loan pools. Restructured loans
decreased $43,000, or 19.1%, to $182,000 at March 31, 2008 from $225,000 at
December 31, 2007 and $11,000, or 5.7%, from $193,000 at March 31,
2007.
Expansion
We
did not open any new locations during the three months ended March 31,
2008.
Accounting
Pronouncements
See “Note 11 -
Accounting Pronouncements” in our financial statements included in this
report.
ITEM 3. QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
The disclosures set
forth in this item are qualified by the section captioned “Forward-Looking
Statements and Factors that Could Affect Future Results” included in “Item 2
Management’s Discussion and Analysis of Financial Condition and Results of
Operations” of this report and other cautionary statements set forth elsewhere
in this report.
Refer to the
discussion of market risks included in “Item 7A. Quantitative and
Qualitative Disclosures About Market Risks” in the 2007 Form
10-K. There have been no significant changes in the types of market
risks faced by the Company since December 31, 2007.
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. The Company utilizes an earnings simulation model as the
primary quantitative tool in measuring the amount of interest rate risk
associated with changing market rates. The model quantifies the
effects of various interest rate scenarios on projected net interest income and
net income over the next twelve months. The model was used to measure
the impact on net interest income relative to a base case scenario of rates
increasing 100 and 200 basis points or decreasing 100 and 200 basis points over
the next twelve months. These simulations incorporate assumptions
regarding balance sheet growth and mix, pricing and the repricing and maturity
characteristics of the existing and projected balance sheet. The
impact of interest rate-related risks such as prepayment, basis and option risk
are also considered. As of March 31, 2008, the model simulations
projected that 100 and 200 basis point increases in interest rates would result
in positive variances on net interest income of 3.99% and 3.30%, respectively,
relative to the base case over the next twelve months, while decreases in
interest rates of 100 and 200 basis points would result in negative variances in
net interest income of 1.7% and 3.9%, respectively, relative to the base case
over the next twelve moths. As of March 31, 2007, the model
simulations projected that 100 and 200 basis point increases in interest rates
would result in positive variances in net interest income of 7.18% and 9.54%,
respectively, relative to the base case over twelve months, while decreases in
interest rates of 100 and 200 basis points would result in negative variances in
net interest income of 4.09% and 3.81%, respectively, relative to the base case
over the next twelve months. 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.
ITEM 4. CONTROLS AND
PROCEDURES
Our management,
including our Chief Executive Officer (“CEO”) and our Chief Financial Officer
(“CFO”) 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 the CEO and CFO
concluded that our disclosure controls and procedures were effective as of the
end of the period covered by this report, in recording, processing, summarizing
and reporting in a timely manner the information that the Company is required to
disclose in its reports under the Securities Exchange Act of 1934 and in
accumulating and communicating to the Company’s management, including the
Company’s CEO and CFO, such information as appropriate to allow timely decisions
regarding required disclosure.
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.
PART II. OTHER INFORMATION
ITEM
1. LEGAL
PROCEEDINGS
We are a party to
legal proceedings arising in the normal course of
business. Management believes that at March 31, 2008 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, 2007. 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
Not
Applicable.
ITEM
3. DEFAULTS UPON SENIOR
SECURITIES
Not
Applicable.
ITEM
4. SUBMISSION OF MATTERS TO A
VOTE OF SECURITY HOLDERS
Not
Applicable.
ITEM
5. OTHER
INFORMATION
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
reference).
|
|
|
|
|
|
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
reference).
|
|
|
|
|
|
3
(b)
|
–
|
Amended and
Restated Bylaws of Southside Bancshares, Inc. (filed as Exhibit
3(b)
to the
Registrant’s Form 8-K, filed March 5, 2008, and incorporated herein by
reference).
|
|
|
|
|
|
10(a)
|
–
|
Agreement and
Plan of Merger, dated May 17, 2007, as amended, by and among Southside
Bancshares, Inc. Southside Merger Sub, Inc. and Fort Worth Bancshares,
Inc. (filed as exhibit 10(a) to the Registrant’s Form 10-Q for the period
ended September 30, 2007, and incorporated herein by
reference).
|
|
|
|
|
|
*10(n)
|
–
|
Master
Software License Maintenance and Services Agreement dated February 4,
2008, by and between Southside Bank and Jack Henry & Associates,
Inc.
|
|
|
|
|
|
*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.
|
|
|
|
|
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: May 8,
2008
|
|
|
|
|
|
|
|
|
|
/s/ LEE R.
GIBSON
|
|
|
Lee R.
Gibson, Executive Vice President
|
|
|
and Chief
Financial Officer (Principal Financial
|
|
|
and
Accounting Officer)
|
|
|
|
|
DATE: May 8,
2008
|
|
Exhibit
Number Description
|
|
|
|
10(n)
|
Master
Software License Maintenance and Services Agreement dated February 4,
2008, by and between Southside Bank and Jack Henry & Associates,
Inc.
|
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.
|
*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.
|
35