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 June 30, 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
|
(Do not check
if a smaller reporting company)
|
|
Indicate by check
mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Act). Yes o No
x
The number of
shares of the issuer's common stock, par value $1.25, outstanding as of July 25,
2008 was 13,892,083 shares.
PART I. FINANCIAL INFORMATION
SOUTHSIDE
BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
(UNAUDITED)
(in thousands,
except share amounts)
|
|
June
30,
|
|
|
December
31,
|
|
ASSETS
|
|
2008
|
|
|
2007
|
|
Cash and due
from banks
|
|
$ |
63,848 |
|
|
$ |
74,040 |
|
Interest
earning deposits
|
|
|
401 |
|
|
|
1,414 |
|
Federal funds
sold
|
|
|
2,150 |
|
|
|
550 |
|
Total cash
and cash equivalents
|
|
|
66,399 |
|
|
|
76,004 |
|
Investment
securities:
|
|
|
|
|
|
|
|
|
Available for
sale, at estimated fair value
|
|
|
110,581 |
|
|
|
109,928 |
|
Held to
maturity, at cost
|
|
|
477 |
|
|
|
475 |
|
Mortgage-backed
and related securities:
|
|
|
|
|
|
|
|
|
Available for
sale, at estimated fair value
|
|
|
851,331 |
|
|
|
727,553 |
|
Held to
maturity, at cost
|
|
|
173,453 |
|
|
|
189,965 |
|
Federal Home
Loan Bank and FRB stock, at cost
|
|
|
28,859 |
|
|
|
19,850 |
|
Other
investments, at cost
|
|
|
2,067 |
|
|
|
2,069 |
|
Loans held
for sale
|
|
|
2,792 |
|
|
|
3,361 |
|
Loans:
|
|
|
|
|
|
|
|
|
Loans
|
|
|
978,269 |
|
|
|
961,230 |
|
Less: allowance
for loan loss
|
|
|
(11,527
|
) |
|
|
(9,753
|
) |
Net
Loans
|
|
|
966,742 |
|
|
|
951,477 |
|
Premises and
equipment, net
|
|
|
39,881 |
|
|
|
40,249 |
|
Goodwill
|
|
|
22,034 |
|
|
|
21,639 |
|
Other
intangible assets, net
|
|
|
1,694 |
|
|
|
1,925 |
|
Interest
receivable
|
|
|
12,363 |
|
|
|
11,784 |
|
Deferred tax
asset
|
|
|
6,227 |
|
|
|
4,320 |
|
Other
assets
|
|
|
38,888 |
|
|
|
35,723 |
|
TOTAL
ASSETS
|
|
$ |
2,323,788 |
|
|
$ |
2,196,322 |
|
LIABILITIES
AND SHAREHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
|
|
|
Noninterest
bearing
|
|
$ |
411,213 |
|
|
$ |
357,083 |
|
Interest
bearing
|
|
|
1,086,859 |
|
|
|
1,173,408 |
|
Total
Deposits
|
|
|
1,498,072 |
|
|
|
1,530,491 |
|
Short-term
obligations:
|
|
|
|
|
|
|
|
|
Federal funds
purchased and repurchase agreements
|
|
|
9,245 |
|
|
|
7,023 |
|
FHLB
advances
|
|
|
212,956 |
|
|
|
353,792 |
|
Other
obligations
|
|
|
2,500 |
|
|
|
2,500 |
|
Total
Short-term obligations
|
|
|
224,701 |
|
|
|
363,315 |
|
Long-term
obligations:
|
|
|
|
|
|
|
|
|
FHLB advances
|
|
|
362,584 |
|
|
|
86,247 |
|
Long-term
debt
|
|
|
60,311 |
|
|
|
60,311 |
|
Total
Long-term obligations
|
|
|
422,895 |
|
|
|
146,558 |
|
Other
liabilities
|
|
|
36,844 |
|
|
|
23,132 |
|
TOTAL
LIABILITIES
|
|
|
2,182,512 |
|
|
|
2,063,496 |
|
|
|
|
|
|
|
|
|
|
Off-Balance-Sheet
Arrangements, Commitments and Contingencies (Note 12)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority
interest in Southside Financial Group
|
|
|
287 |
|
|
|
498 |
|
|
|
|
|
|
|
|
|
|
Shareholders'
equity:
|
|
|
|
|
|
|
|
|
Common stock
- $1.25 par, 20,000,000 shares authorized, 15,623,653
shares
|
|
|
|
|
|
|
|
|
issued
in 2008 and 14,865,134 shares issued in 2007
|
|
|
19,529 |
|
|
|
18,581 |
|
Paid-in
capital
|
|
|
129,620 |
|
|
|
115,250 |
|
Retained
earnings
|
|
|
22,290 |
|
|
|
26,187 |
|
Treasury
stock (1,731,570 and 1,724,857 shares at cost)
|
|
|
(23,115
|
) |
|
|
(22,983
|
) |
Accumulated
other comprehensive loss
|
|
|
(7,335
|
) |
|
|
(4,707
|
) |
TOTAL
SHAREHOLDERS' EQUITY
|
|
|
140,989 |
|
|
|
132,328 |
|
|
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES AND SHAREHOLDERS' EQUITY
|
|
$ |
2,323,788 |
|
|
$ |
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
|
|
|
Six
Months
|
|
|
|
Ended June
30,
|
|
|
Ended June
30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Interest
income
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
$ |
17,767 |
|
|
$ |
12,733 |
|
|
$ |
36,063 |
|
|
$ |
25,247 |
|
Investment
securities – taxable
|
|
|
390 |
|
|
|
616 |
|
|
|
1,070 |
|
|
|
1,452 |
|
Investment
securities – tax-exempt
|
|
|
1,160 |
|
|
|
505 |
|
|
|
1,978 |
|
|
|
1,012 |
|
Mortgage-backed
and related securities
|
|
|
12,020 |
|
|
|
10,163 |
|
|
|
23,993 |
|
|
|
21,097 |
|
Federal Home
Loan Bank stock and other investments
|
|
|
214 |
|
|
|
330 |
|
|
|
476 |
|
|
|
700 |
|
Other
interest earning assets
|
|
|
24 |
|
|
|
33 |
|
|
|
91 |
|
|
|
69 |
|
Total
interest income
|
|
|
31,575 |
|
|
|
24,380 |
|
|
|
63,671 |
|
|
|
49,577 |
|
Interest
expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
7,868 |
|
|
|
10,025 |
|
|
|
18,623 |
|
|
|
19,590 |
|
Short-term
obligations
|
|
|
1,839 |
|
|
|
2,776 |
|
|
|
5,139 |
|
|
|
6,722 |
|
Long-term
obligations
|
|
|
3,973 |
|
|
|
1,518 |
|
|
|
6,644 |
|
|
|
3,178 |
|
Total
interest expense
|
|
|
13,680 |
|
|
|
14,319 |
|
|
|
30,406 |
|
|
|
29,490 |
|
Net interest
income
|
|
|
17,895 |
|
|
|
10,061 |
|
|
|
33,265 |
|
|
|
20,087 |
|
Provision for
loan losses
|
|
|
2,947 |
|
|
|
217 |
|
|
|
5,186 |
|
|
|
334 |
|
Net interest
income after provision for loan losses
|
|
|
14,948 |
|
|
|
9,844 |
|
|
|
28,079 |
|
|
|
19,753 |
|
Noninterest
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposit
services
|
|
|
4,667 |
|
|
|
4,270 |
|
|
|
9,084 |
|
|
|
8,198 |
|
Gain on
securities available for sale
|
|
|
3,660 |
|
|
|
6 |
|
|
|
5,752 |
|
|
|
435 |
|
Gain on sale
of loans
|
|
|
847 |
|
|
|
724 |
|
|
|
1,312 |
|
|
|
1,069 |
|
Trust
income
|
|
|
619 |
|
|
|
576 |
|
|
|
1,212 |
|
|
|
1,040 |
|
Bank owned
life insurance income
|
|
|
758 |
|
|
|
268 |
|
|
|
1,068 |
|
|
|
532 |
|
Other
|
|
|
736 |
|
|
|
818 |
|
|
|
1,561 |
|
|
|
1,526 |
|
Total
noninterest income
|
|
|
11,287 |
|
|
|
6,662 |
|
|
|
19,989 |
|
|
|
12,800 |
|
Noninterest
expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and
employee benefits
|
|
|
8,806 |
|
|
|
7,298 |
|
|
|
17,519 |
|
|
|
14,402 |
|
Occupancy
expense
|
|
|
1,427 |
|
|
|
1,190 |
|
|
|
2,815 |
|
|
|
2,358 |
|
Equipment
expense
|
|
|
329 |
|
|
|
242 |
|
|
|
641 |
|
|
|
470 |
|
Advertising,
travel & entertainment
|
|
|
496 |
|
|
|
449 |
|
|
|
960 |
|
|
|
870 |
|
ATM and debit
card expense
|
|
|
304 |
|
|
|
242 |
|
|
|
592 |
|
|
|
496 |
|
Director
fees
|
|
|
147 |
|
|
|
141 |
|
|
|
291 |
|
|
|
268 |
|
Supplies
|
|
|
206 |
|
|
|
188 |
|
|
|
383 |
|
|
|
336 |
|
Professional
fees
|
|
|
353 |
|
|
|
240 |
|
|
|
787 |
|
|
|
551 |
|
Postage
|
|
|
182 |
|
|
|
155 |
|
|
|
366 |
|
|
|
303 |
|
Telephone and
communications
|
|
|
257 |
|
|
|
193 |
|
|
|
515 |
|
|
|
384 |
|
Other
|
|
|
1,974 |
|
|
|
1,118 |
|
|
|
3,963 |
|
|
|
2,254 |
|
Total
noninterest expense
|
|
|
14,481 |
|
|
|
11,456 |
|
|
|
28,832 |
|
|
|
22,692 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before
income tax expense
|
|
|
11,754 |
|
|
|
5,050 |
|
|
|
19,236 |
|
|
|
9,861 |
|
Provision for
income tax expense
|
|
|
3,223 |
|
|
|
463 |
|
|
|
5,159 |
|
|
|
1,511 |
|
Net
Income
|
|
$ |
8,531 |
|
|
$ |
4,587 |
|
|
$ |
14,077 |
|
|
$ |
8,350 |
|
Earnings per
common share –basic
|
|
$ |
0.62 |
|
|
$ |
0.33 |
|
|
$ |
1.02 |
|
|
$ |
0.61 |
|
Earnings per
common share –diluted
|
|
$ |
0.60 |
|
|
$ |
0.32 |
|
|
$ |
0.99 |
|
|
$ |
0.59 |
|
Dividends
declared per common share
|
|
$ |
0.13 |
|
|
$ |
0.12 |
|
|
$ |
0.25 |
|
|
$ |
0.23 |
|
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
|
|
|
Accumulated
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
|
|
$ |
8,350 |
|
|
|
|
|
|
|
|
|
|
|
8,350 |
|
|
|
|
|
|
|
|
|
|
|
8,350 |
|
Other
comprehensive
income,
net of tax
Unrealized losses on securities,
net of
reclassification
adjustment
(see Note 3)
|
|
|
(1,533
|
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,533
|
) |
|
|
(1,533
|
) |
Adjustment
to net periodic
benefit cost
(see Note 3)
|
|
|
173 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
173 |
|
|
|
173 |
|
Comprehensive
income
|
|
$ |
6,990 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock
issued (108,634 shares)
|
|
|
|
|
|
|
137 |
|
|
|
788 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
925 |
|
Stock
compensation expense
|
|
|
|
|
|
|
|
|
|
|
14 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14 |
|
Tax benefit
of incentive stock options
|
|
|
|
|
|
|
|
|
|
|
21 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21 |
|
Dividends
paid on common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,927
|
) |
|
|
|
|
|
|
|
|
|
|
(2,927
|
) |
Purchase of
6,120 shares of common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(133
|
) |
|
|
|
|
|
|
(133
|
) |
Stock
dividend
|
|
|
|
|
|
|
776 |
|
|
|
12,903 |
|
|
|
(13,679
|
) |
|
|
|
|
|
|
|
|
|
|
- |
|
Balance at
June 30, 2007
|
|
|
|
|
|
$ |
18,507 |
|
|
$ |
114,462 |
|
|
$ |
21,392 |
|
|
$ |
(22,983 |
) |
|
$ |
(15,884 |
) |
|
$ |
115,494 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
December 31, 2007
|
|
|
|
|
|
$ |
18,581 |
|
|
$ |
115,250 |
|
|
$ |
26,187 |
|
|
$ |
(22,983 |
) |
|
$ |
(4,707 |
) |
|
$ |
132,328 |
|
Net
Income
|
|
$ |
14,077 |
|
|
|
|
|
|
|
|
|
|
|
14,077 |
|
|
|
|
|
|
|
|
|
|
|
14,077 |
|
Other
comprehensive income, net
of
tax
Unrealized
losses on
securities, net
of
reclassification
adjustment (see
Note
3)
|
|
|
(2,913
|
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,913
|
) |
|
|
(2,913 |
) |
Adjustment
to net periodic
benefit cost
(see Note 3)
|
|
|
285 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
285 |
|
|
|
285 |
|
Comprehensive
income
|
|
$ |
11,449 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock
issued (99,306 shares)
|
|
|
|
|
|
|
124 |
|
|
|
796 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
920 |
|
Stock
compensation expense
|
|
|
|
|
|
|
|
|
|
|
7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7 |
|
Tax benefit
of incentive stock options
|
|
|
|
|
|
|
|
|
|
|
145 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
145 |
|
Cumulative
effect of adoption of a new accounting principle on January 1, 2008 (see
Note 11)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(351
|
) |
|
|
|
|
|
|
|
|
|
|
(351
|
) |
Dividends
paid on common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,377
|
) |
|
|
|
|
|
|
|
|
|
|
(3,377
|
) |
Purchase of
6,713 shares of common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(132
|
) |
|
|
|
|
|
|
(132
|
) |
Stock
dividend
|
|
|
|
|
|
|
824 |
|
|
|
13,422 |
|
|
|
(14,246
|
) |
|
|
|
|
|
|
|
|
|
|
- |
|
Balance at
June 30, 2008
|
|
|
|
|
|
$ |
19,529 |
|
|
$ |
129,620 |
|
|
$ |
22,290 |
|
|
$ |
(23,115 |
) |
|
$ |
(7,335 |
) |
|
$ |
140,989 |
|
The accompanying
notes are an integral part of these consolidated financial
statements.
SOUTHSIDE
BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(UNAUDITED)
(in
thousands)
|
|
Six Months
Ended
June
30,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
OPERATING
ACTIVITIES:
|
|
|
|
|
|
|
Net
income
|
|
$ |
14,077 |
|
|
$ |
8,350 |
|
Adjustments
to reconcile net income to net cash provided
by operations:
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
1,209 |
|
|
|
1,085 |
|
Amortization
of premium
|
|
|
3,667 |
|
|
|
2,445 |
|
Accretion of
discount and loan fees
|
|
|
(1,900
|
) |
|
|
(1,314
|
) |
Provision for
loan losses
|
|
|
5,186 |
|
|
|
334 |
|
Stock
compensation expense
|
|
|
7 |
|
|
|
14 |
|
(Increase) decrease
in interest receivable
|
|
|
(579
|
) |
|
|
189 |
|
(Increase)
decrease in other assets
|
|
|
(1,457
|
) |
|
|
1,585 |
|
Net change in
deferred taxes
|
|
|
(382
|
) |
|
|
(1,077
|
) |
Decrease in
interest payable
|
|
|
(638
|
) |
|
|
(134
|
) |
Increase
(decrease) in other liabilities
|
|
|
1,886 |
|
|
|
(434
|
) |
Decrease
(increase) in loans held for sale
|
|
|
569 |
|
|
|
(1,133
|
) |
Gain on
securities available-for-sale
|
|
|
(5,752
|
) |
|
|
(435
|
) |
Loss on sale
of assets
|
|
|
18 |
|
|
|
- |
|
Loss on sale
of other real estate owned
|
|
|
86 |
|
|
|
1 |
|
Earnings
allocated to minority interest
|
|
|
196 |
|
|
|
- |
|
Net cash
provided by operating activities
|
|
|
16,193 |
|
|
|
9,476 |
|
|
|
|
|
|
|
|
|
|
INVESTING
ACTIVITIES:
|
|
|
|
|
|
|
|
|
Proceeds from
sales of investment securities available for sale
|
|
|
73,858 |
|
|
|
4,953 |
|
Proceeds from
sales of mortgage-backed securities available for sale
|
|
|
148,645 |
|
|
|
51,430 |
|
Proceeds from
maturities of investment securities available for sale
|
|
|
64,505 |
|
|
|
57,891 |
|
Proceeds from
maturities of mortgage-backed securities available for
sale
|
|
|
62,586 |
|
|
|
50,874 |
|
Proceeds from
maturities of mortgage-backed securities held to maturity
|
|
|
17,776 |
|
|
|
20,596 |
|
Proceeds from
redemption of Federal Home Loan Bank stock
|
|
|
619 |
|
|
|
10,729 |
|
Purchases of
investment securities available for sale
|
|
|
(136,184
|
) |
|
|
(51,789
|
) |
Purchases of
mortgage-backed securities available for sale
|
|
|
(326,961
|
) |
|
|
(60,474
|
) |
Purchases of
mortgage-backed securities held to maturity
|
|
|
(1,664
|
) |
|
|
(2,180
|
) |
Purchases of
Federal Home Loan Bank stock and other investments
|
|
|
(9,626
|
) |
|
|
(654
|
) |
Net increase
in loans
|
|
|
(22,266
|
) |
|
|
(10,048
|
) |
Purchases of
premises and equipment
|
|
|
(1,201
|
) |
|
|
(3,712
|
) |
Proceeds from
sales of premises and equipment
|
|
|
358 |
|
|
|
- |
|
Proceeds from
sales of other real estate owned
|
|
|
139 |
|
|
|
334 |
|
Proceeds from
sales of repossessed assets
|
|
|
2,108 |
|
|
|
191 |
|
Net cash
(used in) provided by investing activities
|
|
|
(127,308
|
) |
|
|
68,141 |
|
The accompanying
notes are an integral part of these consolidated financial
statements.
SOUTHSIDE
BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS (continued)
(UNAUDITED)
(in
thousands)
|
|
Six Months
Ended
|
|
|
|
June
30,
|
|
|
|
2008
|
|
|
2007
|
|
FINANCING
ACTIVITIES:
|
|
|
|
|
|
|
Net
increase in demand and savings accounts
|
|
|
88,978
|
|
|
|
21,773
|
|
Net
(decrease) increase in certificates of deposit
|
|
|
(122,340
|
)
|
|
|
31,944
|
|
Net
increase (decrease) in federal funds purchased and repurchase
agreements
|
|
|
2,222
|
|
|
|
(5,675
|
)
|
Proceeds
from FHLB Advances
|
|
|
9,423,627
|
|
|
|
2,786,999
|
|
Repayment
of FHLB Advances
|
|
|
(9,288,126
|
)
|
|
|
(2,909,400
|
)
|
Net
capital distributions from minority interest investment in consolidated
entities
|
|
|
(407
|
)
|
|
|
-
|
|
Tax
benefit of incentive stock options
|
|
|
145
|
|
|
|
21
|
|
Purchases
of common stock
|
|
|
(132
|
)
|
|
|
(133
|
)
|
Proceeds
from the issuance of common stock
|
|
|
920
|
|
|
|
925
|
|
Dividends
paid
|
|
|
(3,377
|
)
|
|
|
(2,927
|
)
|
Net
cash provided by (used in) financing activities
|
|
|
101,510
|
|
|
|
(76,473
|
)
|
|
|
|
|
|
|
|
|
|
Net
(decrease) increase in cash and cash equivalents
|
|
|
(9,605
|
)
|
|
|
1,144
|
|
Cash and cash
equivalents at beginning of period
|
|
|
76,004
|
|
|
|
55,012
|
|
Cash and cash
equivalents at end of period
|
|
$
|
66,399
|
|
|
$
|
56,156
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL
DISCLOSURES FOR CASH FLOW INFORMATION:
|
|
|
|
|
|
|
|
|
Interest
paid
|
|
$
|
31,044
|
|
|
$
|
29,624
|
|
Income
taxes paid
|
|
|
5,425
|
|
|
|
2,000
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL
DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Acquisition
of other repossessed assets and real estate through
foreclosure
|
|
$
|
3,484
|
|
|
$
|
197
|
|
Payment
of 5% stock dividend
|
|
|
14,246
|
|
|
|
13,679
|
|
Adjustment
to pension liability
|
|
|
(262
|
)
|
|
|
(262
|
)
|
Unsettled
trades to purchase securities
|
|
|
(17,874
|
)
|
|
|
(941
|
)
|
Unsettled
trades to sell securities
|
|
|
725
|
|
|
|
-
|
|
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 June 30, 2008, and the related consolidated statements of
income, shareholders' equity and cash flows and notes to the financial
statements for the three and six month periods ended June 30, 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
|
|
|
Six
Months
|
|
|
|
Ended June
30,
|
|
|
Ended June
30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Basic
Earnings and Shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income
|
|
$
|
8,531
|
|
|
$
|
4,587
|
|
|
$
|
14,077
|
|
|
$
|
8,350
|
|
Weighted-average
basic shares outstanding
|
|
|
13,843
|
|
|
|
13,688
|
|
|
|
13,824
|
|
|
|
13,660
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
Earnings Per Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income
|
|
$
|
0.62
|
|
|
$
|
0.33
|
|
|
$
|
1.02
|
|
|
$
|
0.61
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
Earnings and Shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income
|
|
$
|
8,531
|
|
|
$
|
4,587
|
|
|
$
|
14,077
|
|
|
$
|
8,350
|
|
Weighted-average
basic shares outstanding
|
|
|
13,843
|
|
|
|
13,688
|
|
|
|
13,824
|
|
|
|
13,660
|
|
Add: Stock
options
|
|
|
347
|
|
|
|
421
|
|
|
|
351
|
|
|
|
442
|
|
Weighted-average
diluted shares outstanding
|
|
|
14,190
|
|
|
|
14,109
|
|
|
|
14,175
|
|
|
|
14,102
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
Earnings Per Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income
|
|
$
|
0.60
|
|
|
$
|
0.32
|
|
|
$
|
0.99
|
|
|
$
|
0.59
|
|
For the three and
six month periods ended June 30, 2008 and 2007, there were no antidilutive
options.
3. Comprehensive
Income
(Loss)
The components of
other comprehensive income (loss) are as follows (in thousands):
|
Six Months
Ended June 30, 2008
|
|
|
Before-Tax
|
|
Tax
(Expense)
|
|
Net-of-Tax
|
|
|
Amount
|
|
Benefit
|
|
Amount
|
|
Unrealized
losses on securities:
|
|
|
|
|
|
|
Unrealized
holding gains arising during period
|
|
$ |
1,337 |
|
|
$ |
(511 |
) |
|
$ |
826 |
|
Less: reclassification
adjustment for gains
|
|
|
|
|
|
|
|
|
|
|
|
|
included
in net income
|
|
|
5,752 |
|
|
|
(2,013
|
) |
|
|
3,739 |
|
Net
unrealized losses on securities
|
|
|
(4,415
|
) |
|
|
1,502 |
|
|
|
(2,913
|
) |
Change
in pension plans
|
|
|
262 |
|
|
|
23 |
|
|
|
285 |
|
Other
comprehensive loss
|
|
$ |
(4,153 |
) |
|
$ |
1,525 |
|
|
$ |
(2,628 |
) |
|
Three Months
Ended June 30, 2008
|
|
|
Before-Tax
|
|
Tax
(Expense)
|
|
Net-of-Tax
|
|
|
Amount
|
|
Benefit
|
|
Amount
|
|
Unrealized
losses on securities:
|
|
|
|
|
|
|
Unrealized
holding losses arising during period
|
|
$ |
(9,626 |
) |
|
$ |
3,369 |
|
|
$ |
(6,257 |
) |
Less: reclassification
adjustment for gains
|
|
|
|
|
|
|
|
|
|
|
|
|
included
in net income
|
|
|
3,660 |
|
|
|
(1,281
|
) |
|
|
2,379 |
|
Net
unrealized losses on securities
|
|
|
(13,286
|
) |
|
|
4,650 |
|
|
|
(8,636
|
) |
Change
in pension plans
|
|
|
141 |
|
|
|
(49
|
) |
|
|
92 |
|
Other
comprehensive loss
|
|
$ |
(13,145 |
) |
|
$ |
4,601 |
|
|
$ |
(8,544 |
) |
|
Six Months
Ended June 30, 2007
|
|
|
Before-Tax
|
|
Tax
(Expense)
|
|
Net-of-Tax
|
|
|
Amount
|
|
Benefit
|
|
Amount
|
|
Unrealized
losses on securities:
|
|
|
|
|
|
|
Unrealized
holding losses arising during period
|
|
$ |
(1,888 |
) |
|
$ |
642 |
|
|
$ |
(1,246 |
) |
Less: reclassification
adjustment for gains
|
|
|
|
|
|
|
|
|
|
|
|
|
included
in net income
|
|
|
435 |
|
|
|
(148
|
) |
|
|
287 |
|
Net
unrealized losses on securities
|
|
|
(2,323
|
) |
|
|
790 |
|
|
|
(1,533
|
) |
Change in
pension plans
|
|
|
262 |
|
|
|
(89
|
) |
|
|
173 |
|
Other
comprehensive loss
|
|
$ |
(2,061 |
) |
|
$ |
701 |
|
|
$ |
(1,360 |
) |
|
Three Months
Ended June 30, 2007
|
|
|
Before-Tax
|
|
Tax
(Expense)
|
|
Net-of-Tax
|
|
|
Amount
|
|
Benefit
|
|
Amount
|
|
Unrealized
losses on securities:
|
|
|
|
|
|
|
Unrealized
holding losses arising during period
|
|
$ |
(5,556 |
) |
|
$ |
1,889 |
|
|
$ |
(3,667 |
) |
Less: reclassification
adjustment for gains
|
|
|
|
|
|
|
|
|
|
|
|
|
included
in net income
|
|
|
6 |
|
|
|
(2 |
) |
|
|
4 |
|
Net
unrealized losses on securities
|
|
|
(5,562
|
) |
|
|
1,891 |
|
|
|
(3,671
|
) |
Change
in pension plans
|
|
|
104 |
|
|
|
(35
|
) |
|
|
69 |
|
Other
comprehensive loss
|
|
$ |
(5,458 |
) |
|
$ |
1,856 |
|
|
$ |
(3,602 |
) |
4. Securities
The amortized cost
and estimated market value of investment and mortgage-backed securities as of
June 30, 2008 and December 31, 2007, are reflected in the tables below (in
thousands):
|
|
June 30,
2008
|
|
AVAILABLE FOR
SALE:
|
|
Amortized
Cost
|
|
|
Gross
Unrealized Gains
|
|
|
Gross
Unrealized Losses
|
|
|
Estimated
Market Value
|
|
Investment
Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Treasury
|
|
$ |
4,865 |
|
|
$ |
- |
|
|
$ |
3 |
|
|
$ |
4,862 |
|
Government
Sponsored Enterprise Debentures
|
|
|
16,367 |
|
|
|
- |
|
|
|
18 |
|
|
|
16,349 |
|
State
and Political Subdivisions
|
|
|
83,144 |
|
|
|
1,334 |
|
|
|
944 |
|
|
|
83,534 |
|
Other
Stocks and Bonds
|
|
|
6,711 |
|
|
|
- |
|
|
|
875 |
|
|
|
5,836 |
|
Mortgage-backed
Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Government Agencies
|
|
|
96,447 |
|
|
|
1,202 |
|
|
|
576 |
|
|
|
97,073 |
|
Government
Sponsored Enterprises
|
|
|
753,126 |
|
|
|
4,810 |
|
|
|
3,678 |
|
|
|
754,258 |
|
Total
|
|
$ |
960,660 |
|
|
$ |
7,346 |
|
|
$ |
6,094 |
|
|
$ |
961,912 |
|
|
|
June 30,
2008
|
|
HELD TO
MATURITY:
|
|
Amortized
Cost
|
|
|
Gross
Unrealized Gains
|
|
|
Gross
Unrealized Losses
|
|
|
Estimated
Market Value
|
|
Investment
Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
Stocks and Bonds
|
|
$ |
477 |
|
|
$ |
9 |
|
|
$ |
- |
|
|
$ |
486 |
|
Mortgage-backed
Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Government Agencies
|
|
|
24,346 |
|
|
|
76 |
|
|
|
63 |
|
|
|
24,359 |
|
Government
Sponsored Enterprises
|
|
|
149,107 |
|
|
|
607 |
|
|
|
352 |
|
|
|
149,362 |
|
Total
|
|
$ |
173,930 |
|
|
$ |
692 |
|
|
$ |
415 |
|
|
$ |
174,207 |
|
|
|
December 31,
2007
|
|
AVAILABLE FOR
SALE:
|
|
Amortized
Cost
|
|
|
Gross
Unrealized Gains
|
|
|
Gross
Unrealized Losses
|
|
|
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 Losses
|
|
|
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 $620.4 million at June 30,
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
|
|
|
June
30,
|
|
|
December
31,
|
|
|
2008
|
|
|
2007
|
|
Real Estate
Loans:
|
|
|
|
|
|
Construction
|
|
$ |
97,083 |
|
|
$ |
96,356 |
|
1-4
Family Residential
|
|
|
240,149 |
|
|
|
237,888 |
|
Other
|
|
|
203,109 |
|
|
|
211,280 |
|
Commercial
Loans
|
|
|
167,963 |
|
|
|
154,171 |
|
Municipal
Loans
|
|
|
120,194 |
|
|
|
112,523 |
|
Loans to
Individuals
|
|
|
149,771 |
|
|
|
149,012 |
|
Total
Loans
|
|
$ |
978,269 |
|
|
$ |
961,230 |
|
The summaries of
the Allowance for Loan Losses and Reserve for Unfunded Loan Commitments are as
follows (in thousands):
|
|
Three
Months
Ended June
30,
|
|
|
Six
Months
Ended June
30,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Allowance
for Loan Losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
beginning of period
|
|
$
|
10,611
|
|
|
$
|
7,261
|
|
|
$
|
9,753
|
|
|
$
|
7,193
|
|
Provision for
loan losses
|
|
|
2,947
|
|
|
|
217
|
|
|
|
5,186
|
|
|
|
334
|
|
Loans charged
off
|
|
|
(2,542
|
)
|
|
|
(616
|
)
|
|
|
(4,400
|
)
|
|
|
(1,209
|
)
|
Recoveries of
loans charged off
|
|
|
511
|
|
|
|
505
|
|
|
|
988
|
|
|
|
1,049
|
|
Balance at
end of period
|
|
$
|
11,527
|
|
|
$
|
7,367
|
|
|
$
|
11,527
|
|
|
$
|
7,367
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserve for
Unfunded Loan Commitments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
beginning of period
|
|
$
|
70
|
|
|
$
|
–
|
|
|
$
|
50
|
|
|
$
|
–
|
|
Provision
for losses on unfunded loan
commitments
|
|
|
(64
|
)
|
|
|
–
|
|
|
|
(44
|
)
|
|
|
–
|
|
Balance
at end of period
|
|
$
|
6
|
|
|
$
|
–
|
|
|
$
|
6
|
|
|
$
|
–
|
|
6. Goodwill and Core Deposit
Intangible Assets
Goodwill. Goodwill
totaled $22.0 million at June 30, 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 $1.7
million at June 30, 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 and
six months ended June 30, 2008, amortization expense related to intangible
assets totaled $114,000 and $231,000, respectively. The estimated
aggregate future amortization expense for intangible assets remaining as of June
30, 2008 is as follows (in thousands):
Remainder of
2008
|
|
$ |
215 |
|
2009
|
|
|
383 |
|
2010
|
|
|
319 |
|
2011
|
|
|
255 |
|
2012
|
|
|
198 |
|
Thereafter
|
|
|
324 |
|
|
|
$ |
1,694 |
|
Long-term
obligations are summarized as follows:
|
|
June
30,
|
|
|
December
31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(dollars in
thousands)
|
|
Federal Home
Loan Bank Advances (1)
|
|
|
|
|
|
|
Varying
maturities to 2028
|
|
$ |
362,584 |
|
|
$ |
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
|
|
$ |
422,895 |
|
|
$ |
146,558 |
|
(1) At
June 30, 2008, the weighted average cost of these advances was
3.76%.
|
(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 5.74063% through September 29, 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 4.43813% through August 24, 2008 and adjust
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):
|
|
Six Months
Ended June 30,
|
|
|
|
Defined
Benefit
|
|
|
|
|
|
|
|
|
|
Pension
Plan
|
|
|
Restoration
Plan
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Service
cost
|
|
$
|
620
|
|
|
$
|
665
|
|
|
$
|
43
|
|
|
$
|
31
|
|
Interest
cost
|
|
|
1,212
|
|
|
|
1,156
|
|
|
|
114
|
|
|
|
84
|
|
Expected
return on assets
|
|
|
(1,495
|
)
|
|
|
(1,264
|
)
|
|
|
–
|
|
|
|
–
|
|
Transition
obligation recognition
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
1
|
|
Net loss
recognition
|
|
|
208
|
|
|
|
241
|
|
|
|
76
|
|
|
|
42
|
|
Prior service
credit amortization
|
|
|
(21
|
)
|
|
|
(21
|
)
|
|
|
(1
|
)
|
|
|
(1
|
)
|
Net periodic
benefit cost
|
|
$
|
524
|
|
|
$
|
777
|
|
|
$
|
232
|
|
|
$
|
157
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
Ended June 30,
|
|
|
|
Defined
Benefit
|
|
|
|
|
|
|
|
|
|
Pension
Plan
|
|
|
Restoration
Plan
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Service
cost
|
|
$
|
293
|
|
|
$
|
356
|
|
|
$
|
28
|
|
|
$
|
16
|
|
Interest
cost
|
|
|
594
|
|
|
|
566
|
|
|
|
69
|
|
|
|
39
|
|
Expected
return on assets
|
|
|
(763
|
)
|
|
|
(631
|
)
|
|
|
–
|
|
|
|
–
|
|
Transition
obligation recognition
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
Net loss
recognition
|
|
|
95
|
|
|
|
105
|
|
|
|
57
|
|
|
|
10
|
|
Prior service
credit amortization
|
|
|
(11
|
)
|
|
|
(11
|
)
|
|
|
–
|
|
|
|
–
|
|
Net periodic
benefit cost
|
|
$
|
208
|
|
|
$
|
385
|
|
|
$
|
154
|
|
|
$
|
65
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 June 30,
2008, we had contributed $1.5 million to the defined benefit pension plan, and
contributions of $ 40,000 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 June 30, 2008 is as
follows:
|
|
Six Months
Ended
June 30,
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 six months
ended June 30, 2008 and 2007, we recorded approximately $7,000 and $14,000,
respectively, of stock-based compensation expense. As of June 30,
2008, there was no unrecognized compensation cost related to the ISO Plan for
nonvested options granted in March 2003. At June 30, 2007, there was
$20,000 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 stock-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 June 30, 2008 and the changes during the six
months ended on those dates is presented below:
|
Number of
Options
|
|
Weighted
Average Exercise Prices
|
Weighted
Average Remaining Contract Life (Years)
|
|
Aggregate
Intrinsic Value
(in
thousands)
|
|
|
|
|
|
|
|
|
|
Outstanding
at December 31, 2007
|
500,510
|
|
$
|
5.52
|
–
|
|
|
–
|
|
Exercised
|
(78,334
|
)
|
$
|
6.05
|
–
|
|
|
–
|
|
Cancelled
|
–
|
|
$
|
–
|
–
|
|
|
–
|
|
Outstanding
at June 30, 2008
|
422,176
|
|
$
|
5.42
|
1.75
|
|
$
|
5,694
|
|
Exercisable
at June 30, 2008
|
422,176
|
|
$
|
5.42
|
1.75
|
|
$
|
5,694
|
|
The total intrinsic
value (i.e., the amount by which the fair value of the underlying common stock
exceeds the exercise price of a stock option on exercise date) of stock options
exercised during the six months ended June 30, 2008 and 2007 were $1.2 million
and $1.5 million, respectively.
Cash received from
stock option exercises for the six months ended June 30, 2008 and 2007 was
$342,000 and $360,000, respectively. The tax benefit realized for the
deductions related to the stock option exercises were $145,000 and $21,000 for
the six months ended June 30, 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 June 30, 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
|
|
$ |
5,364 |
|
|
$ |
956,548 |
|
|
$ |
- |
|
|
$ |
961,912 |
|
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 $145.7 million and $118.0 million at June
30, 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 at June 30, 2008 and 2007 were
$8.7 million and $9.3 million, respectively, and are reflected in the due after
one year category. We had outstanding standby letters of credit of
$4.9 million and $3.9 million at June 30, 2008 and 2007,
respectively.
The scheduled
maturities of unused commitments as of June 30, 2008 and 2007 were as follows
(in thousands):
|
|
June
30,
|
|
|
|
2008
|
|
|
2007
|
|
Unused
commitments:
|
|
|
|
|
|
|
Due in one
year or less
|
|
$
|
84,096
|
|
|
$
|
87,271
|
|
Due after one
year
|
|
|
61,578
|
|
|
|
30,691
|
|
Total
|
|
$
|
145,674
|
|
|
$
|
117,962
|
|
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 $17.9
million of unsettled trades to purchase and $725,000 of unsettled trades to sell
securities at June 30, 2008. At December 31, 2007, there were $6.1
million unsettled trades to purchase securities. There were no
unsettled trades to sell 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, 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 June 30, 2008, SFG had purchased
approximately $63.0 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 and six months ended June 30, 2008
compared to the same period in 2007. Net income for the three and six
months ended June 30, 2008 was $8.5 million and $14.1 million, respectively,
compared to $4.6 million and $8.4 million, respectively, for the same periods 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, or a decline in the value of the Company’s
assets, which could result in realized losses;
·
|
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, and the costs associated with, existing or new litigation
involving us;
|
·
|
changes
impacting the leverage strategy;
|
·
|
our ability
to monitor interest rate risk;
|
·
|
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;
|
·
|
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 June 30,
2008, our review of the loan portfolio indicated that a loan loss allowance of
$11.5 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 June
30, 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 June 30,
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, when determined appropriate, issuing brokered
certificates of deposit (“CDs”). These funds are invested primarily in U. S.
Agency mortgage-backed securities, and to a lesser extent, long-term municipal
securities. Although U. S. 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 U. S. Agency mortgage-backed securities and to a lesser extent
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 and the first half of 2008,
the Federal Reserve decreased the overnight federal funds rate by 325 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 and the first half of 2008 resulted in a positively sloped U. S.
Treasury yield curve at June 30, 2008. Our asset structure, net
interest spread and net interest margin require us to closely 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.
Determining the
appropriate size of the balance sheet is one of the critical decisions any bank
makes. Our balance sheet is not merely the result of a series of
micro-decisions, but rather the size is controlled based on the economics of
assets compared to the economics of funding. The management of our
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 June 30, 2008, credit
and volatility spreads remained wide which, combined with the steeper yield
curve, led to buying opportunities primarily in U. S. Agency mortgage-backed
securities. While we experienced modest loan growth during the first
half of 2008, we took advantage of buying opportunities for securities which
resulted in an increase in securities as a percentage of assets. At
June 30, 2008, the securities portfolio as a percentage of total assets
increased to 50.2% from 47.8% at December 31, 2007 as the increase in investment
securities exceeded the growth in loans during the first six months of
2008. 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 the availability of attractive investment
opportunities and funding options as well as changes in our loan and deposit
levels during the third quarter of 2008. During the six months ended
June 30, 2008, we increased our investment and U. S. Agency mortgage-backed
securities approximately $107.9 million as investment and U. S. Agency
mortgage-backed securities increased from $1.028 billion at December 31, 2007 to
$1.136 billion at June 30, 2008. During the first six months of 2008,
the Company restructured a portion of the securities portfolio by selling lower
coupon fixed rate mortgage-backed securities and replacing them with higher
coupon fixed rate mortgage-backed securities. As a result, the coupon
of the Company’s fixed rate mortgage-backed securities has increased
approximately 30 basis points from December 31, 2007 to approximately 6.00% at
June 30, 2008. Our balance sheet management 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 have available to utilize. Our FHLB
borrowings at June 30, 2008 increased 30.8%, or $135.5 million, to $575.5
million from $440.0 million at December 31, 2007 primarily as a result of a
$127.9 million 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 six months of 2008, we called $123.4 million
of the callable brokered CDs. During the first six months, another
$4.5 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 the time of issuance 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 the long-term callable brokered CDs
with long-term FHLB advances. For the six months ended June 30, 2008,
the increase in FHLB borrowings was almost completely offset by the decrease in
brokered CDs while overall deposits, net of brokered deposits, increased which
resulted in a decrease in our total wholesale funding as a percentage of
deposits, not including brokered CDs, from 41.0% at December 31, 2007, to 38.9%
at June 30, 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 six months ended June 30, 2008 was $33.3 million, an increase of $13.2
million, or 65.6%, when compared to the same period in 2007. Average
interest earning assets increased $338.8 million, or 19.6%, to $2.1 billion, the
net interest spread increased from 1.68% for the six months ended June 30, 2007
to 2.80% for the same period in 2008, and the net interest margin increased from
2.52% for the six months ended June 30, 2007 to 3.44% 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
six months of 2008 when compared to the same period in 2007.
Net interest income
increased $7.8 million, or 77.9%, to $17.9 million for the three months ended
June 30, 2008, when compared to $10.1 million for the same period in
2007. This is a result of an increase in the average yield on our
interest earning assets combined with a decrease in the average yield on the
average interest bearing liabilities. The increase in the yield on interest
earning assets is reflective of the purchase of $63.0 million of high yield auto
loans by SFG, the addition of approximately $90.5 million of loans associated
with the acquisition of Fort Worth National Bank, an 11 basis point increase in
the yield on our securities portfolio and an increase in average interest
earning assets of $392.1 million, or 23.2%. The decrease in the
average yield on interest bearing liabilities is a result of an overall decrease
in interest rates and calling $123.4 million of high yield brokered deposits
during 2008. For the three months ended June 30, 2008, our net
interest spread increased to 3.06% from 1.71% and our net interest margin
increased to 3.65% from 2.57% when compared to the same period in
2007. The net interest margin and net interest spread for the three
months ended June 30, 2008, increased to 3.65% and 3.06%, respectively, from
3.22% and 2.55% for the three months ended March 31, 2008.
During the six
months ended June 30, 2008, average loans increased $209.9 million, or 27.4%, to
$977.1 million, compared to $767.2 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 six
months ended June 30, 2007 to 7.65% for the six months ended June 30,
2008. The increase in interest income on loans of $10.8 million, or
42.8%, to $36.1 million for the six months ended June 30, 2008, when compared to
$25.2 million for the same period in 2007, and the increase in interest income
on loans of $5.0 million, or 39.5%, to $17.8 million for the three months ended
June 30, 2008, when compared to $12.7 million for the same period in 2007 was
the result of an increase in average loans and the average yield. For
the three months ended June 30, 2008, average loans increased $209.4 million, or
27.2%, to $978.1 million, compared to $768.7 million for the same period in
2007. The average yield on loans increased from 6.91% for the three
months ended June 30, 2007 to 7.54% for the three months ended June 30,
2008. The increase in the yield on loans was due to the increase in
credit spreads, the repricing characteristics of Southside Bank’s loan portfolio
and the addition of higher yielding subprime automobile loan portfolios
purchased during the second half of 2007 and first six months of
2008. 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 $120.6 million, or 12.9%, to $1.1
billion, for the six months ended June 30, 2008, when compared to $933.4 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 six months and quarter ended June 30, 2008. The
overall yield on average investment and mortgage-backed securities increased to
5.32% during the six months ended June 30, 2008, from 5.18% during the same
period in 2007. Interest income on investment and mortgage-backed
securities for the six months ended June 30, 2008 increased $3.5 million, or
14.8%, to $27.0 million compared to $23.6 million for the same period in
2007. For the three months ended June 30, 2008, average investment
and mortgage-backed securities increased $171.2 million, or 19.1%, to $1.1
billion, when compared to $895.4 million for the same period in
2007. The overall yield on average investment and mortgage-backed
securities increased to 5.26% during the three months ended June 30, 2008, from
5.15% during the same period in 2007. Interest income from investment
and mortgage-backed securities increased $2.3 million, or 20.3%, to $13.6
million for the three months ended June 30, 2008, compared to $11.3 million for
the same period in 2007. The increase in interest income for the
three and six month periods ending June 30, 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 and prepayment 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 increased $5.2 million, or 24.2%, to $26.7 million, for
the six months ended June 30, 2008 when compared to $21.5 million for the same
period in 2007. The average yield on FHLB stock and other investments
decreased to 3.58% for the six months ended June 30, 2008, when compared to
6.56% 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 $224,000, or 32.0%, to $476,000 for the six months ended June 30,
2008, when compared to $700,000 for the same period in 2007 due to a decrease in
the average yield. For the three months ended June 30, 2008, average
FHLB stock and other investments increased $10.7 million, or 60.2%, to $28.5
million, when compared to $17.8 million for the same period in
2007. We are required as a member of FHLB to own a specific amount of
stock that changes as the level of our FHLB advances change. For the
three months ended June 30, 2008, interest income from FHLB stock and other
investments decreased $116,000, or 35.2%, to $214,000, when compared to $330,000
for the same period in 2007 as a result of the decrease in the average yield
from 7.45% in 2007 to 3.02% in 2008.
Average federal
funds sold and other interest earning assets increased $3.9 million, or 143.1%,
to $6.5 million, for the six months ended June 30, 2008, when compared to $2.7
million for the same period in 2007. Interest income from federal
funds sold and other interest earning assets increased $22,000, or 31.9%, for
the six months ended June 30, 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 5.17% in 2007 to 2.80% in
2008. Average federal funds sold and other interest earning assets
increased $2.1 million, or 82.9%, to $4.6 million, for the three months ended
June 30, 2008, when compared to $2.5 million for the same period in
2007. Interest income from federal funds sold and other interest
earning assets decreased $9,000, or 27.3%, for the three months ended June 30,
2008, when compared to the same period in 2007, as a result of the decrease in
the average yield from 5.31% in 2007 to 2.12% in 2008.
Total interest
expense increased $ 916,000, or 3.1%, to $30.4 million during the six months
ended June 30, 2008 as compared to $29.5 million during the same period in
2007. The increase in interest expense was 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 six months ended June
30, 2007 to 3.59% for the six months ended June 30, 2008. Average
interest bearing liabilities increased $315.3 million, or 22.7%, for the six
months ended June 30, 2008 as compared to the same period in
2007. For the three months ended June 30, 2008, total interest
expense decreased $639,000, or 4.5%, to $13.7 million, compared to $14.3 million
for the same period in 2007 as a result of a decrease in the average yield on
interest bearing liabilities which more than offset the increase in average
interest bearing liabilities. Average interest bearing liabilities
increased $361.2 million, or 26.9%, while the average yield decreased from 4.27%
for the three months ended June 30, 2007 as compared to 3.23% for the three
months ended June 30, 2008.
Average interest
bearing deposits increased $111.2 million, or 11.3%, to $1.1 billion during the
six months ended June 30, 2008, when compared to $985.1 million for the same
period in 2007, while the average rate paid decreased from 4.01% for the six
month period ended June 30, 2007 to 3.42% for the same period in
2008. For the three months ended June 30, 2008, average interest
bearing deposits increased $67.3 million, or 6.8%, to $1.1 billion, when
compared to $997.1 million for the same period in 2007 while the average rate
paid decreased from 4.03% for the three month period ended June 30, 2007 to
2.97% for the three month period ended June 30, 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 which more than
offset the brokered CDs called during 2008. Interest expense for
interest bearing deposits for the three and six months ended June 30, 2008
decreased $2.2 million, or 21.5%, and $967,000, or 4.9%, when compared to the
same periods in 2007 due to the decrease in the average rate paid which more
than offset the increase in the average balance.
Average short-term
interest bearing liabilities, consisting primarily of FHLB advances, federal
funds purchased and repurchase agreements, increased $28.4 million, or 10.1%, to
$309.0 million for the six months ended June 30, 2008, when compared to $280.7
million for the same period in 2007. Interest expense associated with
short-term interest bearing liabilities decreased $1.6 million, or 23.5%, and
the average rate paid decreased 149 basis points to 3.34% for the six month
period ended June 30, 2008 when compared to 4.83% for the same period in
2007. For the three months ended June 30, 2008, average short-term
interest bearing liabilities increased $26.3 million, or 11.3%, when compared to
the same period in 2007. Interest expense associated with short-term
interest bearing liabilities decreased $937,000, or 33.8%, and the average rate
paid decreased 193 basis points to 2.87% for the three month period ended June
30, 2008 when compared to 4.80% for the same period in 2007. The
decrease in the interest expense for the three month period ended June 30, 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 $136.0
million, or 131.4%, during the six months ended June 30, 2008 to $239.5 million
as compared to $103.5 million for the six months ended June 30,
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 them with long-term FHLB borrowings. Interest expense
associated with long-term FHLB advances increased $2.3 million, or 98.3%, while
the average rate paid decreased 66 basis points to 3.86% for the six months
ended June 30, 2008 when compared to 4.52% for the same period in
2007. For the three months ended June 30, 2008, long-term interest
bearing liabilities increased $227.9 million, or 242.2%, when compared to the
same period in 2007. Interest expense associated with long-term FHLB
advances increased $1.9 million, or 177.3%, while the average rate paid
decreased 87 basis points to 3.76% for the three months ended June 30, 2008 when
compared to 4.63% 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 six months ended June 30, 2008
compared to $20.6 million for the same period in 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 $530,000, or 122.7%, to $962,000 and
$1.2 million, or 138.0%, to $2.0 million for the three and six months ended June
30, 2008, respectively, when compared to $432,000 and $860,000 for the same
periods in 2007, respectively, primarily as a result of the increase in the
average balance during the three and six months ended June 30, 2008 when
compared to the same periods 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)
|
|
|
|
Six Months
Ended
|
|
|
|
June 30,
2008
|
|
|
June 30,
2007
|
|
|
|
AVG
BALANCE
|
|
|
INTEREST
|
|
|
AVG
YIELD
|
|
|
AVG
BALANCE
|
|
|
INTEREST
|
|
|
AVG
YIELD
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INTEREST
EARNING ASSETS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans(1)
(2)
|
|
$ |
977,105 |
|
|
$ |
37,188 |
|
|
|
7.65
|
% |
|
$ |
767,168 |
|
|
$ |
26,259 |
|
|
|
6.90
|
% |
Loans Held
For Sale
|
|
|
3,055 |
|
|
|
70 |
|
|
|
4.61
|
% |
|
|
3,884 |
|
|
|
96 |
|
|
|
4.98
|
% |
Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
Securities (Taxable)(4)
|
|
|
51,795 |
|
|
|
1,070 |
|
|
|
4.15
|
% |
|
|
59,374 |
|
|
|
1,452 |
|
|
|
4.93
|
% |
Investment
Securities (Tax-Exempt)(3)(4)
|
|
|
86,750 |
|
|
|
2,833 |
|
|
|
6.57
|
% |
|
|
40,893 |
|
|
|
1,449 |
|
|
|
7.15
|
% |
Mortgage-backed
and Related Securities (4)
|
|
|
915,471 |
|
|
|
23,993 |
|
|
|
5.27
|
% |
|
|
833,161 |
|
|
|
21,097 |
|
|
|
5.11
|
% |
Total
Securities
|
|
|
1,054,016 |
|
|
|
27,896 |
|
|
|
5.32
|
% |
|
|
933,428 |
|
|
|
23,998 |
|
|
|
5.18
|
% |
FHLB stock
and other investments, at cost
|
|
|
26,731 |
|
|
|
476 |
|
|
|
3.58
|
% |
|
|
21,517 |
|
|
|
700 |
|
|
|
6.56
|
% |
Interest
Earning Deposits
|
|
|
1,129 |
|
|
|
20 |
|
|
|
3.56
|
% |
|
|
551 |
|
|
|
17 |
|
|
|
6.22
|
% |
Federal Funds
Sold
|
|
|
5,412 |
|
|
|
71 |
|
|
|
2.64
|
% |
|
|
2,140 |
|
|
|
52 |
|
|
|
4.90
|
% |
Total
Interest Earning Assets
|
|
|
2,067,448 |
|
|
|
65,721 |
|
|
|
6.39
|
% |
|
|
1,728,688 |
|
|
|
51,122 |
|
|
|
5.96
|
% |
NONINTEREST
EARNING ASSETS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and Due
From Banks
|
|
|
45,858 |
|
|
|
|
|
|
|
|
|
|
|
42,669 |
|
|
|
|
|
|
|
|
|
Bank Premises
and Equipment
|
|
|
39,964 |
|
|
|
|
|
|
|
|
|
|
|
33,952 |
|
|
|
|
|
|
|
|
|
Other
Assets
|
|
|
87,214 |
|
|
|
|
|
|
|
|
|
|
|
43,359 |
|
|
|
|
|
|
|
|
|
Less: Allowance
for Loan Loss
|
|
|
(10,189
|
) |
|
|
|
|
|
|
|
|
|
|
(7,298
|
) |
|
|
|
|
|
|
|
|
Total
Assets
|
|
$ |
2,230,295 |
|
|
|
|
|
|
|
|
|
|
$ |
1,841,370 |
|
|
|
|
|
|
|
|
|
LIABILITIES
AND SHAREHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INTEREST
BEARING LIABILITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings
Deposits
|
|
$ |
55,961 |
|
|
|
357 |
|
|
|
1.28
|
% |
|
$ |
51,815 |
|
|
|
334 |
|
|
|
1.30
|
% |
Time
Deposits
|
|
|
558,133 |
|
|
|
12,701 |
|
|
|
4.58
|
% |
|
|
540,684 |
|
|
|
13,072 |
|
|
|
4.88
|
% |
Interest
Bearing Demand Deposits
|
|
|
482,170 |
|
|
|
5,565 |
|
|
|
2.32
|
% |
|
|
392,614 |
|
|
|
6,184 |
|
|
|
3.18
|
% |
Total
Interest Bearing Deposits
|
|
|
1,096,264 |
|
|
|
18,623 |
|
|
|
3.42
|
% |
|
|
985,113 |
|
|
|
19,590 |
|
|
|
4.01
|
% |
Short-term
Interest Bearing Liabilities
|
|
|
309,044 |
|
|
|
5,139 |
|
|
|
3.34
|
% |
|
|
280,657 |
|
|
|
6,722 |
|
|
|
4.83
|
% |
Long-term
Interest Bearing Liabilities – FHLB Dallas
|
|
|
239,541 |
|
|
|
4,597 |
|
|
|
3.86
|
% |
|
|
103,515 |
|
|
|
2,318 |
|
|
|
4.52
|
% |
Long-term
Debt (5)
|
|
|
60,311 |
|
|
|
2,047 |
|
|
|
6.83
|
% |
|
|
20,619 |
|
|
|
860 |
|
|
|
8.30
|
% |
Total
Interest Bearing Liabilities
|
|
|
1,705,160 |
|
|
|
30,406 |
|
|
|
3.59
|
% |
|
|
1,389,904 |
|
|
|
29,490 |
|
|
|
4.28
|
% |
NONINTEREST
BEARING LIABILITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand
Deposits
|
|
|
360,125 |
|
|
|
|
|
|
|
|
|
|
|
318,189 |
|
|
|
|
|
|
|
|
|
Other
Liabilities
|
|
|
23,324 |
|
|
|
|
|
|
|
|
|
|
|
18,692 |
|
|
|
|
|
|
|
|
|
Total
Liabilities
|
|
|
2,088,609 |
|
|
|
|
|
|
|
|
|
|
|
1,726,785 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority
Interest in SFG
|
|
|
576 |
|
|
|
|
|
|
|
|
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SHAREHOLDERS’
EQUITY
|
|
|
141,110 |
|
|
|
|
|
|
|
|
|
|
|
114,585 |
|
|
|
|
|
|
|
|
|
Total
Liabilities and Shareholders’ Equity
|
|
$ |
2,230,295 |
|
|
|
|
|
|
|
|
|
|
$ |
1,841,370 |
|
|
|
|
|
|
|
|
|
NET INTEREST
INCOME
|
|
|
|
|
|
$ |
35,315 |
|
|
|
|
|
|
|
|
|
|
$ |
21,632 |
|
|
|
|
|
NET YIELD ON
AVERAGE EARNING ASSETS
|
|
|
|
|
|
|
|
|
|
|
3.44
|
% |
|
|
|
|
|
|
|
|
|
|
2.52
|
% |
NET INTEREST
SPREAD
|
|
|
|
|
|
|
|
|
|
|
2.80
|
% |
|
|
|
|
|
|
|
|
|
|
1.68
|
% |
(1) Interest
on loans includes fees on loans that are not material in amount.
(2) Interest
income includes taxable-equivalent adjustments of $1,195 and $1,108 for the six
months ended June 30, 2008 and 2007, respectively.
(3) Interest
income includes taxable-equivalent adjustments of $855 and $437 for the six
months ended June 30, 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
June 30, 2008 and 2007, loans totaling $5,807 and $1,637, respectively,
were on nonaccrual status. The policy is to reverse previously
accrued but unpaid interest on nonaccrual loans; thereafter, interest
income is recorded to the extent received when
appropriate.
|
|
|
AVERAGE
BALANCES AND YIELDS
|
|
|
|
(dollars in
thousands)
|
|
|
|
(unaudited)
|
|
|
|
Three Months
Ended
|
|
|
|
June 30,
2008
|
|
|
June 30,
2007
|
|
|
|
AVG
BALANCE
|
|
|
INTEREST
|
|
|
AVG
YIELD
|
|
|
AVG
BALANCE
|
|
|
INTEREST
|
|
|
AVG
YIELD
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INTEREST
EARNING ASSETS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans(1)
(2)
|
|
$ |
978,109 |
|
|
$ |
18,333 |
|
|
|
7.54
|
% |
|
$ |
768,744 |
|
|
$ |
13,238 |
|
|
|
6.91
|
% |
Loans Held
For Sale
|
|
|
3,262 |
|
|
|
39 |
|
|
|
4.81
|
% |
|
|
4,458 |
|
|
|
55 |
|
|
|
4.95
|
% |
Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
Securities (Taxable)(4)
|
|
|
42,475 |
|
|
|
390 |
|
|
|
3.69
|
% |
|
|
50,584 |
|
|
|
616 |
|
|
|
4.88
|
% |
Investment
Securities (Tax-Exempt)(3)(4)
|
|
|
96,548 |
|
|
|
1,543 |
|
|
|
6.43
|
% |
|
|
40,747 |
|
|
|
726 |
|
|
|
7.15
|
% |
Mortgage-backed
and Related Securities (4)
|
|
|
927,506 |
|
|
|
12,020 |
|
|
|
5.21
|
% |
|
|
804,026 |
|
|
|
10,163 |
|
|
|
5.07
|
% |
Total
Securities
|
|
|
1,066,529 |
|
|
|
13,953 |
|
|
|
5.26
|
% |
|
|
895,357 |
|
|
|
11,505 |
|
|
|
5.15
|
% |
FHLB stock
and other investments, at cost
|
|
|
28,478 |
|
|
|
214 |
|
|
|
3.02
|
% |
|
|
17,778 |
|
|
|
330 |
|
|
|
7.45
|
% |
Interest
Earning Deposits
|
|
|
725 |
|
|
|
5 |
|
|
|
2.77
|
% |
|
|
550 |
|
|
|
10 |
|
|
|
7.29
|
% |
Federal Funds
Sold
|
|
|
3,838 |
|
|
|
19 |
|
|
|
1.99
|
% |
|
|
1,945 |
|
|
|
23 |
|
|
|
4.74
|
% |
Total
Interest Earning Assets
|
|
|
2,080,941 |
|
|
|
32,563 |
|
|
|
6.29
|
% |
|
|
1,688,832 |
|
|
|
25,161 |
|
|
|
5.98
|
% |
NONINTEREST
EARNING ASSETS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and Due
From Banks
|
|
|
43,634 |
|
|
|
|
|
|
|
|
|
|
|
40,259 |
|
|
|
|
|
|
|
|
|
Bank Premises
and Equipment
|
|
|
39,938 |
|
|
|
|
|
|
|
|
|
|
|
35,342 |
|
|
|
|
|
|
|
|
|
Other
Assets
|
|
|
85,635 |
|
|
|
|
|
|
|
|
|
|
|
42,910 |
|
|
|
|
|
|
|
|
|
Less: Allowance
for Loan Loss
|
|
|
(10,358
|
) |
|
|
|
|
|
|
|
|
|
|
(7,360
|
) |
|
|
|
|
|
|
|
|
Total
Assets
|
|
$ |
2,239,790 |
|
|
|
|
|
|
|
|
|
|
$ |
1,799,983 |
|
|
|
|
|
|
|
|
|
LIABILITIES
AND SHAREHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INTEREST
BEARING LIABILITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings
Deposits
|
|
$ |
57,996 |
|
|
|
185 |
|
|
|
1.28
|
% |
|
$ |
52,454 |
|
|
|
170 |
|
|
|
1.30
|
% |
Time
Deposits
|
|
|
518,324 |
|
|
|
5,219 |
|
|
|
4.05
|
% |
|
|
548,969 |
|
|
|
6,711 |
|
|
|
4.90
|
% |
Interest
Bearing Demand Deposits
|
|
|
488,099 |
|
|
|
2,464 |
|
|
|
2.03
|
% |
|
|
395,653 |
|
|
|
3,144 |
|
|
|
3.19
|
% |
Total
Interest Bearing Deposits
|
|
|
1,064,419 |
|
|
|
7,868 |
|
|
|
2.97
|
% |
|
|
997,076 |
|
|
|
10,025 |
|
|
|
4.03
|
% |
Short-term
Interest Bearing Liabilities
|
|
|
258,078 |
|
|
|
1,839 |
|
|
|
2.87
|
% |
|
|
231,818 |
|
|
|
2,776 |
|
|
|
4.80
|
% |
Long-term
Interest Bearing Liabilities – FHLB Dallas
|
|
|
321,995 |
|
|
|
3,011 |
|
|
|
3.76
|
% |
|
|
94,082 |
|
|
|
1,086 |
|
|
|
4.63
|
% |
Long-term
Debt (5)
|
|
|
60,311 |
|
|
|
962 |
|
|
|
6.42
|
% |
|
|
20,619 |
|
|
|
432 |
|
|
|
8.29
|
% |
Total
Interest Bearing Liabilities
|
|
|
1,704,803 |
|
|
|
13,680 |
|
|
|
3.23
|
% |
|
|
1,343,595 |
|
|
|
14,319 |
|
|
|
4.27
|
% |
NONINTEREST
BEARING LIABILITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand
Deposits
|
|
|
368,564 |
|
|
|
|
|
|
|
|
|
|
|
320,966 |
|
|
|
|
|
|
|
|
|
Other
Liabilities
|
|
|
21,908 |
|
|
|
|
|
|
|
|
|
|
|
18,927 |
|
|
|
|
|
|
|
|
|
Total
Liabilities
|
|
|
2,095,275 |
|
|
|
|
|
|
|
|
|
|
|
1,683,488 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority
Interest in SFG
|
|
|
472 |
|
|
|
|
|
|
|
|
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SHAREHOLDERS’
EQUITY
|
|
|
144,043 |
|
|
|
|
|
|
|
|
|
|
|
116,495 |
|
|
|
|
|
|
|
|
|
Total
Liabilities and Shareholders’ Equity
|
|
$ |
2,239,790 |
|
|
|
|
|
|
|
|
|
|
$ |
1,799,983 |
|
|
|
|
|
|
|
|
|
NET INTEREST
INCOME
|
|
|
|
|
|
$ |
18,883 |
|
|
|
|
|
|
|
|
|
|
$ |
10,842 |
|
|
|
|
|
NET YIELD ON
AVERAGE EARNING ASSETS
|
|
|
|
|
|
|
|
|
|
|
3.65
|
% |
|
|
|
|
|
|
|
|
|
|
2.57
|
% |
NET INTEREST
SPREAD
|
|
|
|
|
|
|
|
|
|
|
3.06
|
% |
|
|
|
|
|
|
|
|
|
|
1.71
|
% |
(1) Interest
on loans includes fees on loans that are not material in amount.
(2) Interest
income includes taxable-equivalent adjustments of $605 and $560 for the three
months ended June 30, 2008 and 2007, respectively.
(3) Interest
income includes taxable-equivalent adjustments of $383 and $221 for the three
months ended June 30, 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
June 30, 2008 and 2007, loans totaling $5,807 and $1,637, 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 $20.0 million for the six months ended June 30, 2008 compared to $12.8
million for the same period in 2007, an increase of $7.2 million, or
56.2%. For the three months ended June 30, 2008, noninterest income
was $11.3 million, compared to $6.7 million for the same period in 2007, an
increase of $4.6 million, or 69.4%. During the six months ended June
30, 2008, we had gains on AFS securities of $5.8 million compared to gains of
$435,000 for the same period in 2007. Gains on AFS securities for the
three months ended June 30, 2008 were $3.7 million compared to $6,000 for the
same period in 2007. The market value of the AFS securities portfolio
at June 30, 2008 was $961.9 million with a net unrealized gain on that date of
$1.3 million. The net unrealized gain is comprised of $7.3 million in
unrealized gains and $6.1 million in unrealized losses. The market
value of the HTM securities portfolio at June 30, 2008 was $174.2 million with a
net unrealized gain on that date of $277,000. The net unrealized gain
is comprised of $692,000 in unrealized gains and $415,000 in unrealized
losses. During the six months ended June 30, 2008, we sold specific
lower coupon mortgage-backed securities where the risk reward profile had
changed and replaced them with higher coupon mortgage-backed securities that
potentially should perform better, as housing has slowed. Selected
long duration municipal securities were sold to lower portfolio duration as
concerns of potential higher interest rates increased. 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 $397,000, or 9.3%, and $886,000, or 10.8% for the three and six
months ended June 30, 2008, respectively, when compared to the same periods 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 $43,000, or 7.5%, and $172,000, or 16.5%, for the three and six months
ended June 30, 2008, respectively, when compared to the same periods in 2007 due
to growth experienced in our trust department.
Gain on sale of
loans increased $123,000, or 17.0%, and $243,000, or 22.7%, for the three and
six months ended June 30, 2008, respectively, when compared to the same periods
in 2007. The increase was due primarily to the sales of selected
loans from pools of automobile loans purchased by SFG at gains of $342,000 which
more than offset the decrease in mortgage loans sold during the three months
ended June 30, 2008. Additionally, approximately $6.2 million of
student loans were sold during the second quarter ended June 30,
2008.
Bank owned life
insurance income (“BOLI”) increased $490,000, or 182.8%, and $536,000, or
100.8%, for the three and six months ended June 30, 2008, respectively, when
compared to the same periods in 2007 primarily as a result of a death benefit
received for a retired covered executive during the three months ended June 30,
2008.
Other noninterest
income decreased $82,000, or 10.0%, for the three months ended June 30, 2008
when compared to the same period in 2007. For the six months ended
June 30, 2008, other noninterest income increased $35,000, or 2.3% when compared
to the same period in 2007. The decreases for the three months ended
June 30, 2008 were primarily a result of decreases in Moneygram income and
brokerage services income.
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 $14.5 million and $28.8 million for the three and six months ended June 30,
2008, respectively, compared to $11.5 million and $22.7 million for the same
periods in 2007, respectively, representing increases of $3.0 million, or 26.4%,
and $6.1 million, or 27.1%, respectively.
Salaries and
employee benefits expense increased $1.5 million, or 20.7%, and $3.1 million, or
21.6%, during the three and six months ended June 30, 2008, respectively, when
compared to the same periods in 2007. Direct salary
expense and payroll taxes increased $1.6 million, or 26.2%, and $3.0 million, or
25.0%, during the three and six months ended June 30, 2008, respectively, when
compared to the same periods in 2007. The increase for
the three and six months ended June 30, 2008, was primarily the result of salary
expense associated with the addition of Fort Worth National Bank and SFG
combined with normal salary increases for Southside
Bank.
Retirement expense,
included in salary and benefits, increased $103,000, or 22.3%, and $60,000, or
6.3%, for the three and six months ended June 30, 2008, respectively, when
compared to the same periods in 2007. The increases in retirement
expense were due to a $150,000 contribution to our Employee Stock Option Plan
which more than offset
decreases related
primarily to 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, decreased $160,000, or
18.6%, for the three months ended June 30, 2008 when compared to the same period
in 2007 primarily due to decreased health claims expense for the comparative
period of time. For the six months ended June 30, 2008, health and
life insurance expense increased $51,000, or 3.6%, when compared to the same
period in 2007 primarily due to increased health plan administrative
costs. 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 $237,000, or 19.9%, and $457,000, or 19.4% for the three and six
months ended June 30, 2008, respectively, when compared to the same periods in
2007 due primarily to the acquisition of Fort Worth National Bank and SFG
combined with two de
novo branches opened during 2007.
ATM and debit card
expense increased $62,000, or 25.6%, and $96,000, or 19.4%, for the
three and six months ended June 30, 2008, respectively, compared to the same
periods in 2007 primarily as a result of the acquisition of Fort Worth National
Bank combined with overall growth in Southside’s usage.
Professional fees
increased $113,000, or 47.1%, and $236,000, or 42.8%, for the three and six
months ended June 30, 2008, respectively, compared to the same periods in 2007
as a result of increases in legal fees.
When comparing the
three and six months ended June 30, 2008 to the same periods in 2007, the
following expense categories experienced increases as a direct result of the
acquisition of Fort Worth National Bank and investment in SFG: equipment expense
increased $87,000, or 36.0%, and $171,000, or 36.4%; advertising, travel and
entertainment increased $47,000, or 10.5%, and $90,000, or 10.3%; supplies
increased $18,000, or 9.6%, and $47,000, or 14.0%; postage increased $27,000, or
17.4%, and $63,000, or 20.8%, and telephone and communications increased
$64,000, or 33.2%, and $131,000, or 34.1%, respectively.
Other expense
increased $856,000, or 76.6%, and $1.7 million, or 75.8%, for the three and six
months ended June 30, 2008, respectively, compared to the same periods in
2007. The increase occurred primarily due to increases in FDIC
insurance, amortization of core deposit intangible, other losses, ORE and repo
asset expense, data processing fees, collection fees, credit card rebate program
and the acquisition of Fort Worth National Bank and investment in
SFG.
Income
Taxes
Pre-tax income for
the three and six months ended June 30, 2008 was $11.8 million and $19.2
million, respectively, compared to $5.1 million and $9.9 million, respectively,
for the same periods in 2007.
Income tax expense
was $3.2 million and $5.2 million, respectively, for the three and six months
ended June 30, 2008, compared to $463,000 and $1.5 million, respectively, for
the three and six months ended June 30, 2007. The effective tax rate
as a percentage of pre-tax income was 27.4% and 26.8% for the three and six
months ended June 30, 2008, compared to 9.2% and 15.3% for the three and six
months ended June 30, 2007. The increase in the effective tax rate
and income tax expense for the three and six months ended June 30, 2008 was due
to a decrease in tax-exempt income as a percentage of taxable income as compared
to the same period in 2007, as well as a one-time state tax credit resulting
from a change in Texas tax law during the three months ended June 30, 2007,
related to the new margin tax. The state tax credit was $770,000,
which was partially offset by an increase in our estimated margin tax of
$109,000, net of tax. Excluding the effect of the state tax credit
and estimated margin tax, the effective tax rate for the three and six months
ended June 30, 2007, would have been 22.3% and 22.0%, respectively.
Capital
Resources
Our total
shareholders' equity at June 30, 2008, was $141.0 million, representing an
increase of $8.7 million from December 31, 2007, and represented 6.1% of total
assets at June 30, 2008 compared to 6.0% of total assets at December 31,
2007.
Increases to
shareholders’ equity consisted of net income of $14.1 million, the issuance of
$920,000 in common stock (99,306 shares) through our incentive stock option and
dividend reinvestment plans which was offset with an increase in accumulated
other comprehensive loss of $2.6 million and $3.4 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 June 30, 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 the Banks, not exceed earnings for that
year. Shareholders should not anticipate a continuation of the cash
dividend simply because of the existence of a dividend reinvestment
program. The payment of dividends is at the discretion of
our board of directors and will depend upon future earnings, our financial
condition, and other related factors.
To be categorized
as well capitalized, we must maintain minimum Total risk-based, Tier 1
risk-based, and Tier 1 leverage ratios as set forth in the following
table:
|
|
Actual
|
|
For
Capital
Adequacy
Purposes
|
|
To Be Well
Capitalized Under Prompt Corrective Actions Provisions
|
|
|
|
Amount
|
|
Ratio
|
|
Amount
|
Ratio
|
|
Amount
|
Ratio
|
|
As of June
30, 2008:
|
|
(dollars in
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Capital
(to Risk Weighted Assets)
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
194,789
|
|
17.36
|
%
|
$
|
89,756
|
8.00
|
%
|
|
N/A
|
N/A
|
|
Southside
Bank Only
|
|
$
|
168,985
|
|
16.50
|
%
|
$
|
81,933
|
8.00
|
%
|
$
|
102,416
|
10.00
|
%
|
Fort Worth
National Bank Only
|
|
$
|
16,585
|
|
17.13
|
%
|
$
|
7,746
|
8.00
|
%
|
$
|
9,683
|
10.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier 1
Capital (to Risk Weighted Assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
174,299
|
|
15.54
|
%
|
$
|
44,878
|
4.00
|
%
|
|
N/A
|
N/A
|
|
Southside
Bank Only
|
|
$
|
158,761
|
|
15.50
|
%
|
$
|
40,966
|
4.00
|
%
|
$
|
61,450
|
6.00
|
%
|
Fort Worth
National Bank Only
|
|
$
|
15,374
|
|
15.88
|
%
|
$
|
3,873
|
4.00
|
%
|
$
|
5,810
|
6.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier 1
Capital (to Average Assets) (1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
174,299
|
|
7.90
|
%
|
$
|
88,199
|
4.00
|
%
|
|
N/A
|
N/A
|
|
Southside
Bank Only
|
|
$
|
158,761
|
|
7.70
|
%
|
$
|
82,456
|
4.00
|
%
|
$
|
103,069
|
5.00
|
%
|
Fort Worth
National Bank Only
|
|
$
|
15,374
|
|
10.77
|
%
|
$
|
5,709
|
4.00
|
%
|
$
|
7,136
|
5.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June
30, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Capital
(to Risk Weighted Assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
158,503
|
|
18.54
|
%
|
$
|
68,387
|
8.00
|
%
|
|
N/A
|
N/A
|
|
Southside
Bank Only
|
|
$
|
151,064
|
|
17.67
|
%
|
$
|
68,385
|
8.00
|
%
|
$
|
85,481
|
10.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier 1
Capital (to Risk Weighted Assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
151,136
|
|
17.68
|
%
|
$
|
34,193
|
4.00
|
%
|
|
N/A
|
N/A
|
|
Southside
Bank Only
|
|
$
|
143,697
|
|
16.81
|
%
|
$
|
34,193
|
4.00
|
%
|
$
|
51,289
|
6.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier 1
Capital (to Average Assets) (1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
151,136
|
|
8.41
|
%
|
$
|
71,924
|
4.00
|
%
|
|
N/A
|
N/A
|
|
Southside
Bank Only
|
|
$
|
143,697
|
|
7.99
|
%
|
$
|
71,896
|
4.00
|
%
|
$
|
89,870
|
5.00
|
%
|
(1) Refers to
quarterly average assets as calculated by bank regulatory agencies.
Liquidity and Interest Rate
Sensitivity
Liquidity
management involves our ability to convert assets to cash with a minimum of loss
to enable us to meet our obligations to our customers at any
time. This means addressing (1) the immediate cash withdrawal
requirements of depositors and other funds providers; (2) the funding
requirements of all lines and letters of credit; and (3) the short-term credit
needs of customers. Liquidity is provided by short-term investments
that can be readily liquidated with a minimum risk of loss. Cash,
interest earning deposits, federal funds sold and short-term investments with
maturities or repricing characteristics of one year or less continue to be a
substantial percentage of total assets. At June 30, 2008, these
investments were 17.4%
of total assets
compared to 14.7% at June 30, 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
four lines of credit for the purchase of overnight federal funds at prevailing
rates. Three $15.0 million and one $10.0 million unsecured lines of
credit have been established with Bank of America, Frost Bank, Sterling 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 June 30, 2008, there were no
federal funds purchased. At June 30, 2008, the amount of additional
funding Southside Bank and Fort Worth National Bank could obtain from FHLB using
unpledged securities at FHLB was approximately $309 million and $51 million,
respectively, net of FHLB stock purchases required. Southside Bank
has 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 primarily throughout the state of
Texas. Through 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 collateralized by new and used automobiles. At June 30,
2008, the SFG loans purchased were approximately $63.0 million.
Our market areas
have not experienced the level of downturn in the economy and real estate prices
that other areas of the country have experienced. However, we have
strengthened our underwriting standards especially related to all aspects of
real estate lending. Our real estate loan portfolio does not have
Alt-A or subprime mortgage exposure.
The following table
sets forth loan totals by category for the periods presented (in
thousands):
|
At
|
|
|
At
|
|
At
|
|
|
June
30,
|
|
|
December
31,
|
|
June
30,
|
|
|
2008
|
|
|
2007
|
|
2007
|
|
|
|
|
|
|
|
|
|
Real Estate
Loans:
|
|
|
|
|
|
|
|
Construction
|
|
$ |
97,083 |
|
|
$ |
96,356 |
|
|
$ |
46,876 |
|
1-4
Family Residential
|
|
|
240,149 |
|
|
|
237,888 |
|
|
|
223,996 |
|
Other
|
|
|
203,109 |
|
|
|
211,280 |
|
|
|
177,918 |
|
Commercial
Loans
|
|
|
167,963 |
|
|
|
154,171 |
|
|
|
125,609 |
|
Municipal
Loans
|
|
|
120,194 |
|
|
|
112,523 |
|
|
|
110,416 |
|
Loans to
Individuals
|
|
|
149,771 |
|
|
|
149,012 |
|
|
|
83,924 |
|
Total
Loans
|
|
$ |
978,269 |
|
|
$ |
961,230 |
|
|
$ |
768,739 |
|
Construction loans
increased $727,000, or 0.8%, to $97.1 million for the six month period ended
June 30, 2008 from $96.4 million at December 31, 2007, and $50.2 million, or
107.1%, from $46.9 million at June 30, 2007. The increase in
construction loans during the period ended June 30, 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 $2.3 million, or 1.0%, to $240.1 million
for the six month period ended June 30, 2008 from $237.9 million at December 31,
2007, and $16.2 million, or 7.2%, from $224.0 million at June 30, 2007 due to
normal growth in this portfolio. Commercial loans increased $13.8 million,
or 8.9%, to $168.0 million for the six month period ended June 30, 2008 from
$154.2 million at December 31, 2007, and $42.4 million, or 33.7%, from $125.6
million at June 30, 2007 due to additional market penetration and continued
emphasis on regional lending. Municipal loans increased $7.7 million, or
6.8%, to $120.2 million for the six month period ended June 30, 2008 from $112.5
million at December 31, 2007, and $9.8 million, or 8.9%, from $110.4 million at
June 30, 2007 due in part to issues in the municipal market related to municipal
insurers. Loans to individuals, which includes SFG loans, increased
$759,000, or 0.5%, to $149.8 million for the six month period ended June 30,
2008 from $149.0 million at December 31, 2007, and $65.8 million, or 78.5%, from
$83.9 million at June 30, 2007, primarily as a result of pools of automobile
loans purchased by SFG.
Commercial real
estate loans decreased $8.2 million, or 3.9% to $203.1 million for the six month
period ended June 30, 2008 from $211.3 million at December 31, 2007, and
increased $25.2 million, or 14.2%, from $177.9 million at June 30, 2007 due
primarily to more rigorous underwriting standards and loan
pricing.
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 June 30,
2008, our review of the loan portfolio indicated that a loan loss allowance of
$11.5 million was adequate to cover probable losses in the
portfolio.
For the three and
six months ended June 30, 2008, loan charge-offs were $2.5 million and $4.4
million and recoveries were $511,000 and $988,000, resulting in net charge-offs
of $2.0 million and $3.4 million, respectively. For the three and six
months ended June 30, 2007, loan charge-offs were $616,000 and $1.2 million and
recoveries were $505,000 and $1.0 million, resulting in net charge-offs of
$111,000 and $160,000, respectively. The increase in net charge-offs
was primarily related to the SFG automobile loans purchased. The
necessary provision expense was estimated at $2.9 million and $5.2 million for
the three and six months ended June 30, 2008, compared to $217,000 and $334,000
for the comparable period in 2007, respectively. The increase in provision
expense for the three and six months ended June 30, 2008 compared to the same
periods 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. The SFG loans are high
yield loans which have a higher than average risk profile. This has
resulted in increased charge-offs and increased provision
expense. These factors are considered prior to SFG purchases of pools
of automobile loans when determining the appropriate purchase
price. These pools are typically purchased at a
discount.
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
June
30,
2008
|
|
|
At
December
31,
2007
|
|
|
At
June
30,
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonaccrual loans
|
|
$
|
5,807
|
|
|
$
|
2,913
|
|
|
$
|
1,637
|
|
Loans 90 days
past due
|
|
|
907
|
|
|
|
400
|
|
|
|
408
|
|
Restructured loans
|
|
|
170
|
|
|
|
225
|
|
|
|
179
|
|
Other real
estate owned
|
|
|
465
|
|
|
|
153
|
|
|
|
23
|
|
Repossessed
assets
|
|
|
297
|
|
|
|
255
|
|
|
|
77
|
|
Total
Nonperforming Assets
|
|
$
|
7,646
|
|
|
$
|
3,946
|
|
|
$
|
2,324
|
|
Total nonperforming
assets at June 30, 2008 were $7.6 million, an increase of $3.7 million, or
93.8%, from $3.9 million at December 31, 2007 and an increase of $5.3 million,
or 229.0%, from $2.3 million at June 30, 2007. Approximately $3.0
million of the nonperforming assets at June 30, 2008, represented one commercial
loan relationship and one commercial real estate loan relationship placed on
nonaccrual during the first quarter. Based on information currently
available, we do not believe we will have any significant nonreserved
losses. From December 31, 2007 to June 30, 2008, nonaccrual loans
increased $2.9 million, or 99.3%, to $5.8 million and from June 30, 2007,
increased $4.2 million, or 254.7%. Of the total nonaccrual loans at
June 30, 2008, 3.2% are residential real estate loans, 37.3% are commercial real
estate loans, 18.2% are commercial loans, 27.2% are loans to individuals and
14.1% are construction loans. OREO increased $312,000, or 203.9%, to
$465,000 at June 30, 2008 from $153,000 at December 31, 2007 and increased
$442,000, or 1,921.7%, from $23,000 at June 30, 2007. OREO at June 30,
2008, consisted of 32.7% of residential dwellings and 67.3% of construction
loans. We actively market all properties and none are held for
investment purposes. Loans 90 days or more past due increased
$507,000, or 126.8%, to $907,000 at June 30, 2008 from $400,000 at December 31,
2007 and $499,000, or 122.3%, from $408,000 at June 30,
2007. Repossessed assets increased $42,000, or 16.5%, to $297,000 at
June 30, 2008 from $255,000 at December 31, 2007 and $220,000, or 285.7%, from
$77,000 at June 30, 2007. The increase in repossessed assets at June
30, 2008 was attributable to SFG automobile loan pools. Restructured loans
decreased $55,000, or 24.4%, to $170,000 at June 30, 2008 from $225,000 at
December 31, 2007 and $9,000, or 5.0%, from $179,000 at June 30,
2007.
Expansion
During the third
quarter ended September 30, 2008, the Company anticipates merging Fort Worth
National Bank along with its branches into Southside Bank. Upon
completion of this merger, we anticipate further synergies in lending and
deposit activities as well as an increase in the economies of
scale.
The Company plans
to open another branch in Fort Worth during the third quarter ended September
30, 2008. We did not open any new locations during the three months
ended June 30, 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” 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 our Annual Report Form 10-K for
the year ended December 31, 2007. 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 June 30, 2008, the model simulations
projected that 100 and 200 basis point increases in interest rates would result
in negative variances on net interest income of 1.47% and 4.32%, respectively,
relative to the base case over the next twelve months, while a decrease in
interest rates of 100 basis points would result in a positive variance in net
interest income of 1.78% and a decrease of 200 basis points would result in a
negative variance in net income of 3.20% relative to the base case over the next
twelve months. As of June 30, 2007, the model simulations projected
that 100 and 200 basis point increases in interest rates would result in
negative 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 positive 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
(the “Exchange Act”) 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 Exchange Act 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 Exchange Act) during our last fiscal
quarter that materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
We are a party to
legal proceedings arising in the normal course of
business. Management believes that at June 30, 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
The following table
provides information with respect to purchases made by or on our behalf, or by
or on behalf of any “affiliated purchaser” (as defined in Rule 10b-18(a)(3)
under the Exchange Act), of our common stock during the three months ended June
30, 2008.
|
|
Total
Number
of Shares
Purchased
|
|
|
|
|
|
Average Price
Paid Per Share
|
|
|
Total Number
of Shares Purchased as Part of Publicly Announced Plan
|
|
|
Maximum
Number of Shares That May Yet Be Purchased Under the Plan at the End of
the Period
|
|
April 1, 2008
to April 30, 2008
|
|
|
– |
|
|
|
|
|
$ |
– |
|
|
|
– |
|
|
|
– |
|
May 1, 2008
to May 31, 2008
|
|
|
– |
|
|
|
|
|
$ |
– |
|
|
|
– |
|
|
|
– |
|
June 1, 2008
to June 30, 2008
|
|
|
6,713 |
|
|
|
(1 |
) |
|
$ |
19.67 |
|
|
|
– |
|
|
|
– |
|
Total
|
|
|
6,713 |
|
|
|
|
|
|
$ |
19.67 |
|
|
|
– |
|
|
|
– |
|
(1) Repurchase
of shares made in connection with the exercise of certain employee stock
options.
ITEM
3. DEFAULTS UPON SENIOR
SECURITIES
Not
Applicable.
ITEM
4. SUBMISSION OF MATTERS TO A
VOTE OF SECURITY HOLDERS
|
(a)
|
An annual
meeting of shareholders was held on April 17,
2008.
|
|
(b)
|
The election
of three directors (terms expiring at the 2011 Annual Meeting) were as
follows:
|
|
|
FOR
|
|
WITHHELD
|
Sam
Dawson
|
|
10,068,779
|
|
1,342,650
|
Melvin B.
Lovelady
|
|
10,059,728
|
|
1,351,701
|
William
Sheehy
|
|
10,047,103
|
|
1,364,326
|
|
The other
directors, whose terms of office continued after the annual meeting, are:
Herbert Buie, Robbie Edmonson, Michael D. Gollob, Joe Norton, Alton Cade,
B.G. Hartley, and Paul W. Powell.
|
(c)
|
To ratify the
selection of PricewaterhouseCoopers LLP to act as independent auditors of
the Company for the fiscal year that began January 1,
2008.
|
|
|
FOR
|
|
AGAINST
|
|
ABSTAIN
|
10,114,631
|
|
1,256,411
|
|
40,387
|
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).
|
|
|
|
|
|
*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: August
4, 2008
|
|
|
|
|
|
|
|
|
|
/s/ LEE R.
GIBSON
|
|
|
Lee R.
Gibson, Executive Vice President
|
|
|
and Chief
Financial Officer (Principal Financial
|
|
|
and
Accounting Officer)
|
|
|
|
|
DATE: August
4, 2008
|
|
Exhibit
Number Description
|
|
|
|
31.1
|
Certification
Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
|
31.2
|
Certification
Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
|
*32
|
Certification
Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
*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.
|
37